James Frazer: Yes I'm Boring.

The size of a company is reflective of the market conditions at a given time. A company may work under certain conditions but fail under others. It is therefore desirable to structure a business in such a way as to be able to tolerate a certain amount of variation in the environment in which it operates.

When small or medium sized businesses fail nobody seems to notice, and the function of the market is that of "survival of the fittest". This ensures only the strong (or lucky) survive. This is how the market is supposed to work.

The failure of big businesses is a different story however -- as their failure can have many far reaching third party effects. Apart from direct losses, you have massive job losses and political pressure to do something about it. Therefore there is always a tendency (spoken or not) to try to save (or bailout) big businesses.

But is the cure worse than the disease? If you eliminate the market feedback of "hey this business model isn't working any more" and bailout these businesses, then you help fragile businesses continue being fragile -- and encourage more fragility in the future, therefore increasing future liability for sustainment.

If the consequence of a weak business model is that government will bailout with tax payer money, then large businesses will act upon the notion that they don't need to plan for changes in the economic environment. As long as the books work during the boom then future losses during the bust can be blamed on uncontrollable changes in the economy, and certainly warrant a bailout.

This is convenient for extremely large businesses, as they can keep their high position without having to change their business model. The mere fact that they have a lot to lose creates a political environment suitable for tax payer bailout.

And the smaller rivals who might be able to seize some market share and create more competition? -- don't -- because the big dog on top is held up each time its about to fall.

It's a classic case of:

1. The power of special interests to protect a small number of people at the expense of the many;

2. The ignorance of the less favourable long term consequences (increased fragility, less competition, increased future liability) outweighing the more visible short term benefits (saved jobs);

3. Encouraging the seeking of short term profits at the expense of future stability.

The last point should be reiterated -- in that it costs money to plan for the future. Maximum short term profits can always be attained using a business model that ignores the future. Businesses that only think about today deserve to fail tomorrow. Their failure will pave the way to the stronger businesses of the future.

posted at: 13:10 | path: /Ideas | permanent link to this entry