When I first read about being “too big to fail,” I started eating like Henry VIII. Why not? If businesses can get too big to fail, I figured I could too. Fortunately, I discovered the error in my logic before I had to get a new wardrobe and went back to building my businesses the old-fashioned way–hard work and perseverance.
Let’s think about this. How can a business get too big, much less too big to fail? The answer lies in competition. Specifically, businesses in a free market are constantly subjected to competitive pressure. If I open a business and fail to provide my customers a satisfactory product or service, they will soon find another provider. If enough of them flee to the other guy, I am out of business. That is bad for me (boo hoo) but great for customers, who now get better stuff (hurrah).
What is the best size for a business? The answer is, “Whatever works best.” There is no “right” size other than that determined by the market. Let’s take the example of WalMart. WalMart started out in the early 60’s as a barely-known retail discounter. Sam Walton set his sites on K-Mart and set out to do a better job. It worked. Over a period of years, Walton built stores in places that everyone said were much too small for a big store. He also incorporated computer technology and built an ultra-efficient distribution system.
In the end, Walton was able to offer cheaper goods to more people and K-Mart crumbled. But what about all those small local stores, the so-called Mom and Pops? The truth is, they could not (or perhaps would not) do what was necessary to satisfy their customers. In this case, WalMart’s size was an advantage. Small stores could not bargain as effectively with wholesalers or the people who delivered goods to the store. Size matters, and in this case, it was an advantage.
In some cases, size is a disadvantage. Large companies tend to become stodgy and bureaucratic, which in turn makes them less competitive. They often innovate less and respond more slowly to changes in technology and markets. Eventually, whatever advantages they enjoy from sheer size are outweighed by the disadvantages of being slow and cumbersome. They will be eliminated if the market is allowed to work.
The most obvious example of being sheltered from the market is a government agency. Governmental agencies grow large because their funds come from taxes. Taxes are not voluntary–they are confiscated and then used to pay for whatever it is that agency does. There is no reason for an agency to be reduced in size or eliminated because by law they are the only ones that can do what they do.
Less obvious are the large business entities that are shielded from competition through regulation and licensing laws. Take insurance. A person in State A may have to pay double the amount for health insurance than a person in State B. Current laws prevent some types of insurance companies from competing across state lines. As long as the company in State A does not have to worry about its customers going to the company in State B, it can charge a higher premium.
So why does such an insane system remain in place? Because politicians make sure it does. Their campaigns are funded largely by businesses that do not want to compete fairly in the marketplace. Businesses become “too large to fail” precisely because they were not allowed to fail before they got that big. Now we have financial institutions whose failure could bring down the whole system, insurance companies that can charge exorbitant premiums, and car manufacturers that make impossible promises to union members, knowing taxpayers will bail them out.
What is the solution? No restrictions whatsoever on markets. Outside preventing the initiation of violence or fraud, government should remain completely out of the economy. The companies we love to hate because they are too big to fail only got that way because our government is too big to work.