The Economics of Big Business | Basic Economics by Thomas Sowell | Ch. 7
There are a lot of different, and often negative, connotations with big businesses. In this chapter, Sowell addresses the true realities behind big businesses, and their economic effects.
If you want to look at my previous chapter summaries of this book, please click here.
Big has different definitions in business, depending on who you ask, and what markets you're looking at. But typically, a big business must be run through a corporation, rather than individuals, families, or small partnerships.
Corporations are defined by their limited liability. This means that the owners' assets and other personal property cannot be seized in the event a corporation cannot meet its financial obligations. Because of this, corporations are allowed to be owned by thousands or millions of people, through shares and stocks, and those people would not need to worry about whether that business' debts will affect their personal assets and property.
As discussed in the previous chapter, the larger the reach of a business, the more it can reduce its prices in competition with other enterprises. Large corporations can achieve an even greater degree of this. But of course, those that loan money to these corporations need to be warned of their greater risk, since the investors are no longer liable personally. Thus, these corporations all have something like “Inc.” or “Ltd” included in their titles.
Since many corporations are owned by far too many people for it to be led by them all, a management team is hired and filtered through a board of directors. In this arrangement, ownership and management have been separated. Due to this separation, an argument is often made that management doesn't run corporations for the interests of its stockholders.
However, these complaints often miss the point. Most shareholders of a corporation don't want to micromanage the companies they hold stock of. Furthermore, they may not necessarily care about the corporation itself, and with such a massive count of owners, it's unlikely these stockholders have a good idea of what's best for running the company.
This can be seen in the UK, where shareholders of British corporations can force the board to accept anything from firing directors to taking certain actions. The result has been that the vast majority of its largest corporations aren't actually British, but foreign (i.e. American, German, Dutch, etc.). Turns out that the instability of requiring management to adhere to the interest of such a large group of people actually chases these businesses away.
Another criticism lobbed at big corporations is the compensation the executives often give themselves—namely, that it is far too much for what they do. What's interesting is that companies owned by a smaller number of financiers on average pay more to their executives than but public corporations. This is despite these private companies have more incentive to be frugal in their spending (since they are personally obligated to owe when that company goes bankrupt). What we must understand is that the cost to hold onto a good CEO is often much less than to have a bad CEO of a giant company ruin that company, and thus costing billions of dollars for the company, rather than paying a few million (which is still often less than many entertainers and professional sports players, to boot).
Monopolies and Cartels
It's important to understand that monopolies and oligopolies are not synonymous with free markets, though many conjoin them together today. Monopolies exist when only a single seller of some product or service exists in a society, while oligopolies are when a number of sellers work together in such a way that there is essentially only one seller. A cartel is an organization in an industry that sets prices and how it sells, and so often has the same results as monopolies. In this way, monopolies (as descriptive of all the above categories) don't really have to be big businesses, and not all big businesses are monopolies.
In a typical free market, few people have the time to learn just how much work and effort goes into the production and distribution of a single product. This is because competition, which drives down prices, makes that knowledge unnecessary. But when there's a monopoly, there's no incentive for that business to lower their prices, and thus profits.
But that isn't the only problem. Since monopolies tend to charge higher prices (they have no reason not to), consumers buy less of their products. With less products selling, there is less use of the same raw materials, which is a reduction of efficiency.
These issues are often easily solved without government protection for the monopolies, since investors are often look for the cheapest places to put their money, while getting a bigger return. Thus, it's often in the interest of investors to look for competition in any industry.
But what about when governments intervene to try to make sure monopolies don't take over society? A problem with government intervention in this way is that governments are often slow to bring cases to court, whereas private companies can often come up with solutions to fight big corporations much faster. As an example, a small company can collaborate with others (who are in competition with a big business) to sell their products for a lower price, and slowly grow to compete from there. Even in industries where the barrier to entry is high (i.e. the computer industry before the advent of the microchip), unhindered future innovations will often bring big companies back into competition with new ones that spring up to take advantage of what those big companies cannot.
Given the previous chapters, most of this chapter, though dealing with the new topic of big businesses and concerns monopolies, could very much be easily surmised and understood. So I don't have much to comment on that.
But in regards to cryptocurrency, there is something to be said here, I think, especially along the lines of what Sowell mentions for investors, stock-, and shareholders, as well as governance of companies.
I think it's important for crypto companies to be aware of the history of failure for when the masses get to determine how a company functions, especially in the example of the UK. Currently, many developers are building into their blockchains the ability to govern how these chains develop. Often, this ability to govern comes in the form of tokens or coins people can use to vote on proposals to change or enhance the blockchain.
Given the above, we can see quite a few problems heading into the future. First, it is probable that the majority of people who can vote on an issue don't necessarily have the knowledge to vote correctly. For example, if you have a Maker coin or Kava coin today, you can vote on the various governance proposals from each respective companies behind those projects. However, I don't know of many people who would be able to look through the code of what is being proposed on these blockchains, and be able to see the ramifications of what is being proposed, let alone detect bugs and glitches that may bring the entire system to a halt.
But the second problem is interesting: we all seem to want the projects that we're personally invested in to succeed. The crypto community seems to be divided into the Bitcoin camp versus the Ethereum DeFi camp versus the XRP community camp, versus even others beyond. From what I've seen, it's become almost a religious fight between different communities, each hoping their project takes over the world.
But, as we know, and especially given the reasoning being laid out by Sowell here, a monopolistic entity will never be efficient enough to meet everyone's needs. Scarcity—or in my definition, limited access—is an unavoidable reality, as long as time and space exist. We need competition to spur us forward, and we need to keep innovating, rather than religiously clinging onto old technologies or obsolete ideals.
These problems aren't yet showing up, since most of the current crypto projects are still quite small. But it is a sort of warning sign for blockchain enthusiasts. It's quite obvious (at least to me) that the next phase of blockchain is governance. Whether and how blockchain will learn from past mistakes of governance, both from the political sector as well as the financial/economic sector, remains to be seen.