Too Big to Fail and the Problem of Bigness

Keep it up folks and see how bad it gets . . .

For any industry and technological conditions (which are constantly changing) there is an optimum size. What that size is can't be known except by the process of trial and error by those who have invested their own money in the project. Someone outside (a regulator) doesn't have the proper set of incentives or information to be able to make these decisions. Since it isn't his work product (wealth) at risk he really has no legitimate authority to demand how the business organize itself, either.  There are no costs to him for being wrong commensurate with the amount of damage he does when he is wrong. There are all sorts of motivations for him to indulge in experiments with other people's lives.

If the owners don't care enough to watch their managers then they deserve to lose their investment. This is another bad consequence of mandated low interest rates -- savers have to go into the stock market, something they are generally unprepared for, in order to keep their savings from being eaten by inflation. This makes them company owners when they should be bond holders. Employees who see a company being mismanaged should leave it or make appropriate plans, not demand others make up for their lack of care about their own lives.

The automakers also suffered from the UAW's ability to kill the company at any time via a work stoppage. Management caved in to demands it had to know it had no hope of ever being able to meet absent a cartel position restricting foreign competition. I love the UAW members complaining that they were promised these retirement benefits. Yes, they were, and the promise came under their threat of beating up people who broke the picket line to keep the company in business while they striked -- a promise given under threat of violence. The best managers aren't going to be drawn to that sort of environment. The anti-trust laws made GM avoid making cars that were TOO good because then it would gain too much market share and come under scrutiny. And later, they relied on tariffs to protect them from foreign competition since domestic competition (as in fundamentally changing the way things were done) was squelched.

Entrepreneurial profits go to entrepreneurs, not assembly line workers. When the industry was young and unproven there were entrepreneurial profits to be had in the rote labor part. The industry hasn't been young and unproven in a long time, but the pure labor part (the non-risk taking part) demands it keep getting entrepreneurial profits anyway. This means that there are less profits to attract the entrepreneurs to the company to keep it alive long term so they go elsewhere, where their talents will be appreciated more (Japanese auto manufacturers, consulting design firms, software maybe?). Resources are further misallocated away from where they are needed (away from designing superior autos and towards people who do all they can to use as much union labor as possible for a given amount of product).

A large part of the reason auto manufacturers HAVE to be big is the regulations which have to be overcome as well as the economies of scale for getting enough copies built to pay for development. Each hurdle makes it marginally harder for real competition to keep the old players vital because each hurdle provides a protection to the incumbent which doesn't benefit the customer as much as it costs him.

The economy is a huge web which is too complex to centrally plan. Each intervention creates victims who then call for a new intervention to shift the cost of the previous intervention onto someone else, it doesn't matter who, and exactly who can't be known beforehand anyway. Each intervention misallocates resources, shifts goods and services from where they are more valued to where they are less valued, makes us poorer. Since we keep intervening the list of victims eventually includes everyone and voluntary social organization becomes increasingly disorganized (as Bastiat said, each person seeks to live at the expense of every other person), and at each step we get poorer than we would have been, until society collapses, removing the ability of the government to intervene, which then may allow things to start to get better again if the morality of the population hasn't been completely corrupted by the rent seeking behavior.

Good people will forecast incorrectly and have their work destroyed in the free market. This is how it must be. If they aren't good forecasters then they shouldn't be in the business of forecasting and squandering resources better used by others, they should be in the business of providing something other than forecasting. The way to know if you are good at forecasting is turning a profit -- providing more value for your customers than the resources you consume in providing that value. Savings help us weather mistakes. You might have notice American's don't save because the government punishes it. This makes our economy very brittle. Businesses are forced to distribute their profits rather than keep them for lean times by tax laws, unions and the illusion that fiscal policy can overcome any economic problem.

Good people will be hurt when the automakers collapse. The damage will be localized to those who were in the business of knowing what was going on in their industry, but apparently they didn't bother (the nature of the business has been obvious for at least 10 years) or decided to risk it anyway. I have some experience in this since Apple has been far from a sure bet for most of its existence, so I plan accordingly by keeping my costs of living down. Sometimes risks don't pan out. Trying to prop them up spreads much greater damage to the population at large, continues gross resource misallocation (reduced wealth) and encourages more stupid and corrupt behavior (moral hazard). Charities will help them adapt, and charities are voluntary. We may have so tied up our economy that it really CAN'T adapt to these changes. Then the answer isn't to tie it up more by taking from those who are making a profit in the free market (producing wealth) and giving it to those who squander resources (reduce wealth, increase hardship).

Compassion with other people's money isn't compassion -- it is moral preening and self adulation. It is what people who are immoral do instead of actually being moral.