[negligible91]

Hi, I was talking to a friend about how State policies encourage ‘bigness’ in the marketplace due to the fact that lobbyists who are able to get special government privileges can create regulations that benefit themselves at the expense of their competitors.

He made an argument using an analogy to all specialized skills. If one company is better than another in some task, then they’ll be able to get big because of it.

Obviously, even in the free market, some firms would be big due to 1) how good they are at it, and 2)what type of product they are selling. But the point I was trying to make is that the State encourages bigness with some of its policies (so more bigness than would have occurred on the free market).

Intuitively, I think I still have a point, but I’m not sure how to explain that government is different in a sense that matters for my argument. Am I even correct about this? Also, is there any way that Fed policy encourages bigness?

Thanks,
Bharat

[jmherbener]

You are correct that government regulation is used by politically-connected businesses to hobble their competition. There is a large literature on this. Tom DiLorenzo has done a lot of work in this area.

http://www.lewrockwell.com/dilorenzo/dilorenzo173.html

The Fed is a massive cartelization device for banks. Murray Rothbard has written about this:

http://library.mises.org/books/Murray%20N%20Rothbard/The%20Origins%20of%20the%20Federal%20Reserve.pdf

Bigness of business, however, is a red herring. The real issue is whether an enterprise is efficient or inefficient. Private enterprise is constrained by profit and loss to serve consumers efficiently. Government intervention allows enterprises to receive profit and avoid loss while not economizing resources for consumers.

[negligible91]

Thank you for the sources, Dr. Herbener. I completely agree size of business is a red herring and what is important is whether they are satisfying consumer desires or not.

However, just to focus for a moment on this red herring: do you agree it might be incorrect to say that in this current market hampered by the State, business, ceteris paribus, is bigger than it would be on the free market?

The reason my friend said this statement was incorrect is because lobbying is a skill like all other specialized talents. Individuals skilled at lobbying government to create regulations that outlaw competition could very well be skilled at satisfying consumer desires instead (in a sense, there is an opportunity cost to developing lobbying skills). Do you agree with this logic? Or do you think there is something I am missing here?

[jmherbener]

If your friend is saying that the overall extent of bigness of business in society is insensitive to government intervention because it merely shifts entrepreneurs from attending to their enterprises, in which case they would be bigger, to lobbying for intervention, in which case they would also be bigger, then I’d say he’s mistaken. The number of entrepreneurs in society is not fixed or even a fixed portion of the population, but responds to the configuration of people’s preferences and the objective features of the chosen techniques of production and management. Moreover, the self-selection process of the market means that the characteristics that make for superior entrepreneurs (anticipating consumer demands, etc.) and not the same as those that make for superior lobbyists (bribing, etc.).

[Chad.e.nelson.1]

This is a very interesting piece on the topic with the provocative title of Let the Free Market Eat the Rich: http://socialmemorycomplex.net/features/let-the-free-market-eat-the-rich/

I found it compelling from a basic economics standpoint.

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