Do We Really Need Big Corporations?

Do We Really Need Big Corporations?

Big tech. Big pharma. Big food. Big banks. Big oil. We’ve got questions about all of them. Big tech is surveilling us and stealing our privacy. Big pharma is exploiting us and poisoning us. Big food is compromising our health and fitness. Big banks are destabilizing boom-and-bust machines. Big oil is destroying the planet.

Do we need them? In the past, they were necessary to tackle problems of scale – the accumulation and control of sufficient capital to undertake massive industrial-era projects like building railroads or oil fields or pipelines or energy grids or fleets of ocean-going ships, or airplanes, or supplying every household in America with 1.88 vehicles.

These achievements – and many, many more – have delivered tremendous benefits and improvements in productivity and in the quality of life. They’ve opened up the globe to trade and eliminated most poverty. They were part of what Professor Deirdre McCloskey calls The Great Enrichment, the flowering of opportunity and economic growth since the 19th century that is unparalleled in human history.

But capital accumulation is not needed in the same way in the digital age as in the Industrial age. To a large degree, scale can be downloaded from the internet and capital can be controlled by renting it by the minute. Amazon Web Services (AWS) is the epitome of capital rental. Companies don’t need their own server farms and specialized software to run their digital operations – they rent from AWS. Their storefronts and fulfillment and customer service run on AWS.

According to Wikipedia, as of 2021, AWS comprises over 200 products and services including computing, storage, networking, database, analytics, application services, deployment, management, machine learning, mobile, developer tools, RobOps, and tools for the Internet of Things.

As an even more specific example of distributed control over capital, consider AWS Ground Station. Do you need satellite capability to collect data? Check the website:

AWS Ground Station is a fully managed service that lets you control satellite communications, process data, and scale your operations without having to worry about building or managing your own ground station infrastructure. 

…..you can use Amazon S3 to store the downloaded data, Amazon Kinesis Data Streams for managing data ingestion from satellites, and Amazon SageMaker for building custom machine learning applications that apply to your data sets. You can save up to 80% on the cost of your ground station operations by paying only for the actual antenna time used, and relying on the global footprint of ground stations to download data when and where you need it. There are no long-term commitments, and you gain the ability to rapidly scale your satellite communications on-demand when your business needs it.

This is the new age: capital on demand. Who needs big corporations?

This realization frees some brain capacity to think about some of the bad things that come with big corporations. There are plenty.

Bureaucracy

We want our corporations to create value, and to improve people’s lives through innovation and service. Parts of them do. But those parts are surrounded by, and sometimes suffocated by, bureaucracy. Bureaucracy was developed by corporations not for purposes of innovation, but for the opposite. It’s an engine of control, to limit the autonomy and creativity of people who work in the corporation, and to impose rules, guidelines, methods, and processes. Compliance is a big word for corporate bureaucracies. 

Loss of speed

Big corporations are structured. They have hierarchies and layers, divisions, functional departments, regions, and subsidiaries. Structure is the enemy of speed. When any individual or team has to seek approval, ask for funding, submit for compliance and check for authority before acting, time is used and wasted. Speed of action and speed of responsiveness to marketplace and competitive changes are imperative in the digital era. Losing speed is losing productivity. It’s a loss imposed on the firm and the economy. 

Regulation

Big corporations attract regulation, and in many cases initiate it. It’s called crony capitalism. By agreeing with government how to regulate their industry, they achieve three things: (1) a known environment in which to operate (the opposite of systems innovation); (2) employment for an expanding bureaucracy (big banks, for example, have huge compliance bureaucracies); and, consequently, (3) competitive insulation, since smaller entities can’t afford to divert resources into their own compliance bureaucracies. 

Regulation, of course, is a huge drain on productivity and a huge barrier to innovation. It’s one of the major ways government undermines the economy, and big corporations are complicit.

Financial engineering

The creation, maintenance, and profitability of big corporations often have more to do with financial engineering than serving customers and innovating. This term includes all activities that appear to strengthen financial reporting on paper without improving customer value. Stock buybacks are a perfect example. There is no customer purpose in stock buybacks. The activity is purely for changing proforma “per share” ratios. The same is often true for M&A – most acquisitions do not improve customer value because they are not executed with customers in mind.

Generally, the financial engineering mentality of today’s big corporation is not customer-favorable.

Defensiveness

Once corporations get big, they have something to defend: their size (investors insist they must grow), their revenues (the topline, as it is called, must slope upwards), their market share (they must not “lose” share), and their influence (more lobbyists). Their focus is diverted from innovation and improved customer service to maintenance and “sustainability”. Defensiveness does not generate growth.

Contra-capitalist

Big corporations are not anti-capitalist. But they often get capitalism a bad name. Robert Bradley Jr. created the term contra-capitalist when describing the corporate behavior of Enron (for whom he once worked). This company abandoned and subverted capitalist practices, often with the support of institutions like the Ex-Im Bank, and mostly stayed within the law. Freewheeling accounting practices, contorted debt structures, hyped projections, and hubristic imprudence all contributed to Bradley’s realization that his former employer practiced contra-capitalism. 

Do we need big corporations in the interconnected digital era of distributed control over capital? Not really. We should certainly never use big corporations as good examples of capitalism and free markets; they are far too often contra-capitalist.

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Hunter Hastings, Jan 24, 2022

Source

https://mises.org/power-market/do-we-really-need-big-corporations