“Too Big to Fail” is Un-American

Eric Hippeau,  managing partner of Softbank Capital, has an opinion piece in today’s Huffington Post titled: “Too Big to Fail” is Un-American-in which he proceeds to berate our government for bailing out banks and corporations because it is anti-free market and anti-capitalistic. I actually agree with the title of what he said, but to me, most of his article is misguided and demonstrates that he neither understands the value of free markets and capitalism, nor how to preserve them. He seems to be more interested in making a political statement that suggests leaving the corporate monsters alone.

In reply, let me suggest that large companies with more than 10% market share are intrinsically anti-free market and anti-capitalistic. Two key benefits of free markets are that competitors succeed or fail based on competitive merits of their products, tactics and strategies and decision making and risk taking are sufficiently distributed to develop and identify an adequate supply of leaders from generation to generation to sustain a meritocracy. In order for the free-market to filter the weak and reward the strong with statistical confidence, there must be at least 12 relatively equal players in it.

However, the economies of scale enable poorly run large companies to succeed at the expense of better run small ones; and large companies continue to scale up until their dominance is based on sheer size. They maintain dominance by buying the support of government… the only viable strategy for large companies, so it should be expected. In a nutshell, small players in a market survive by adapting, large players survive by controlling market expectations.

Our social and legal institutions must make it difficult for large companies to grow ever larger… so that they may succeed or fail without requiring government intervention or destroying the free market in the process. What we are doing now is trying to close the barn door after the horses got out. Nature limits the advantages of size in the web of life by effectively imposing term limits on all individuals and upon all species. We have created “corporations” with unlimited lives (early corporate charters for banks and corporations were limited to 21 years, but successful lobbying by corporate boards in the Netherlands, England and the USA eventually made their charters eternal).

We will not solve the problem of “too big to fail” until we impose term limits on large corporations (probably 60 years), and size restrictions (effectively imposed by multiple layers of soft regulations) that effectively require companies to sell off parts of themselves as they reach national market share limits. Anything short of these measures will simply fail with time as management of large companies will have the capacity to lobby public opinion and governments to give them a free hand; and survival instincts will compel them to do so. Enacting size and duration limits requires a deep understanding of what makes the free market so desirable.