Monday, March 16, 2009

The Economic Risk of Consolidated Wealth

Along with the issues of executives who ran their companies into the ground keeping their jobs and managing hundreds of billions of dollars of taxpayer relief money, and of stock holders who invested in those companies capturing the billions of dollars in breaks through rescued stock value, there is another issue with the corporate bailout that I ant to consider.

It is the thesis that it is foolish of us to allow a company to get so big that it cannot fail.

One of the ways that we can interpret these current events – such as the fact that AID has decided to award bonuses in spite of the fact that the people getting the bonus destroyed the company, is that they get to hold the United States itself hostage.

It holds a dagger to the throat of the American economy and says, “One false move and the economy gets it.”

Just before the government produced its most recent bailout package, AIG sent a report showing how much economic destruction will be done if the company is allowed to go under. So, the company collects another few billion dollars of taxpayer money, which is then used to keep those who did so much harm to the country in their current positions following business as usual.

A payment, in economic terms, is a vote that whatever one is paying for is something that one wants to encourage and promote – to make it more common than it would have otherwise been. Nearly $200 billion in bailout money to AIG says that this is something we wish to encourage and promote. It is a market signal that says, “If you can make your company so large that you can hold the United States hostage, you do not have to worry about bankruptcy and failure.”

Of course, not worrying about bankruptcy and failure means that those business leaders in that position can afford to grow reckless, increasing the chance that future bailouts will be needed. They do not have much of a reason to avoid those bail outs.

So, one of the things we should be asking ourselves as companies grow and wealth (and economic power) gets consolidated into a few hands is, “What would the cost to the country be if that company is mismanaged into bankruptcy?”

It should never be the case that a company grow so large and so important that its bankruptcy cannot be allowed.

This will, as a matter of fact, result in certain inefficiencies. There will be a loss of certain economies of scale. However, we have to compare those costs with the costs of the current financial crisis. We are not only talking about the cost in terms of government expenditure, but costs in terms of millions of people out of work, factories closed, personal savings and home values lost, college educations and other investments foregone.

Considering these costs, the loss of some economic efficiency from requiring companies to remain small enough that none of them would be missed if they failed, the former seems to be the lesser evil. Besides, the latter brings its own economic inefficiency – the inefficiency of businesses whose leaders care less and less about the possibility of failure.


Anonymous said...

I believe that your thesis is based on a false premise.

I would submit that there is no such thing as a company that is too big to fail. The reason that popular myth got started is for corrupt government officials and corporate looters to justify stealing money from people with minimal popular resistance.

To me, the bonuses, however infuriating they may be, aren't the real issue here.

Pompotous Herdman said...

Having retired from a Fortune 500 technology company last year, I can honestly say that the benefits of economies of scale are overrated, and are often detrimental to innovation.

The problem, of course, is how to limit the consolidation of wealth.

The driving force behind a corporation is the evasion of risk. Within the corporate world, the evasion of risk, the sloughing off of responsibility and exporting of repercussions is second nature. Short term personal goals and influencing short term market results are the goals driving management and executives at corporations, and these motives are often justified using anthropomorphic fallacies. These reifications have come to be accepted as the norm.

Consider Greenspan, who said he had made a mistake in believing that banks would operate in their self-interest, and that this would be sufficient to protect their shareholders and the equity in their institutions. This requires intention on the part of "banks," which do not possess that trait, being mere accumulations of capital and labor operating within certain legal boundaries. The self-interest of the individuals responsible for making decisions that might be harmful to shareholders' value is all that Greenspan actually had to rely upon. The two problems there start with the fact that human beings aren't very rational. The second problem is that the kind of person that rises to the top of an organization dedicated to avoiding all risk and responsibility tends to be very good at evading responsibility and farming repercussions out upon others.

Kipling's "Gods of the Copybook Headings" will keep visiting us until some method is found to reinsert personal responsibility into the organizing structures of corporations. If this crisis is not enough impetus to accomplish that, then I don't see any way to avoid the abuses of power concentrated in the hands of a small minority of people.

Salazar said...

If I understand the message here:
"we cannot allow x" means that you are endorsing violence to stop the possibility of the natural uncoercive emergence of a colossal market player, whose failure would be felt as disastrous.

As a libertarian, a person that essentially believes other people are not your property, and that violence can only be justified in retaliation, I can't agree with this apparent message.

And yes, any government, or preemptive initiative by a government to distort the realities of people's free choices in terms of needs and wants, is only possible if they are backed up by force, by enforcing top-down regulation instead of acknowledging the realities of emergence under a framework of freedom.

And it is desirable that people suffer the consequences. Not just the companies, but the individuals whose consumption choices allowed for such consolidations.

Also, in a more positive note, there is nothing too big to fail in a truly FREE market, and giants like AIG, GM, etc are only possible, if one understands economy, because of a state capitalist system whose most distinctive working dynamics is a network of collusion between big business and political power.

Be cool, everyone.