Entry 1195, on 2010-06-01 at 22:04:26 (Rating 3, Comments)
I have heard a lot recently about private companies which are too big to fail. In many cases these have had to be rescued by governments because if they had failed it would have caused significant problems for the country's economy as a whole. The banks in America are an obvious example but there have been many instances in other countries as well.
Maybe the biggest problem with this was that many of the rescued corporations just continued on as if nothing had happened. They seemed to believe that they deserved to be rescued through corporate welfare although I'm sure in many cases the same people would be totally against welfare for individuals. So they continued paying their senior managers huge salaries even though they had been shown to be both incompetent and corrupt. Is this really the way that capitalism is supposed to work?
I heard the answer to this problem on a recent podcast. If the problem is that some corporations are too big to fail then just stop them from getting too big. The free market is supposed to work on a system where failure is OK. It's through the failure of organisations which don't compete well and the survival of those who do that things improve. So if there are organisations which cannot fail then the system itself fails.
I should say at this point that I'm not a great supporter of free markets or pure capitalism but I am realistic enough to realise we don't have any great alternatives and that the status quo isn't going to change in the near future. But if we are going to use this economic model let's make sure it works.
There are plenty of cases where single big corporations have been broken up into smaller ones. In the US a major example would be Bell phone company. Similar things have happened elsewhere, especially when previous government monopolies have been turned into private companies. So we know that breaking up big organisations works and I think we should do more of it.
If there were 10 small banks for every one large one currently then having some of them fail wouldn't have been a total disaster to the economy as a whole. Maybe governments would have needed to help out people who invested with those banks but they could have helped with that by seizing the assets of the managers and shareholders of the failed bank. That sort of result would encourage the management of banks still in existence to be more careful too!
Maybe another problem is that the US is too influential in the world economy. It's like the "too big" problem also extends to countries. In some ways it helps with Europe being more like a single economic block and China becoming more influential but somehow I think these facts don't really change the underlying problem.
With the US being so influential and US politics being controlled by corporate interests (whether the Democrats or Republicans are theoretically in charge) there is unlikely to be any real change for the better in the foreseeable future. So I guess we should just get used to corporate incompetence to continue to be rewarded.
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