AT&T has completed its acquisition of Time Warner, in a $81 billion M&A transaction. The deal creates a behemoth dealing in fundamental telecommunications and in both the creation and distribution of popular content. It is quite typical for us to be suspicious of the creation of new corporations of huge size, but why?
There is nothing inherently bad about scale. If scale is a necessary attribute for the efficient delivery of consumer value in telecommunications and content markets, we should welcome the financial engineering that makes efficiency possible.
Unfortunately, efficiency is not all that scale delivers, if it delivers it at all. There are four fundamental anti-capitalist and anti-liberty characteristics of huge corporations.
Drinking From The Government Money Firehose.
The money and credit that government creates in vast quantities does not enter every citizen’s pocket in equal amounts at the same time. It enters the financial system at the point where entities closest to government, with sufficient scale to absorb newly-created money in industrial quantities, have set up mechanisms to receive and process it. These are banks, Wall Street institutions, hedge funds and capital pools eager and willing to be the first recipients of the new money. Having obtained it in vast amounts at extremely low cost, they are eager to redeploy it quickly and profitably. One way is to buy stock and lend M&A funds to the largest corporations. The stock market in large company equities is funded by this huge pool of money, as are M&A deals of the size of the AT&T Time Warner merger. Smaller businesses can only access this money later in the cycle at much higher interest rates. By the time the money reaches consumers, it costs up to 24% on credit cards and more than that on small business working capital loans and consumer payday lending. Giant corporations have, and use, a major competitive advantage in preferred access to the government printing press.
Organizing For Authoritarian Management.
We often refer to these giant entities as organizations. An organization is a transmission device for authority, and specifically for an authority that has its own set of rules. Loyalty to an organization builds up a power hierarchy for the application of those rules. People who work in hierarchical organizations tend to be insulated from the workings of the free market; they deal only in the power politics of the organization they inhabit. A characteristic of those power politics is that there are non-market incentives to grow the size of the internal organization – for example, the number of people reporting to a departmental executive or the size of the departmental budget become sources of prestige. More and more resources are devoted to the administration of the internal organization, and proportionately fewer to serving the customers and consumers on the outside, and to innovation and consumer value creation. The big company can become unresponsive and unaware of changes in market needs. In the worst cases, they can lose sight of their consumer mission altogether – as when United Airlines personnel dragged a passenger kicking and screaming off one of their planes so that they could use the seat to ferry an employee for organizational travel.
The Managerial Function Is Anti-Entrepreneurial.
One of the functions of the internal bureaucracy at large corporations is management. This term refers to activities aimed at efficiently extracting economic returns from the resources created and assembled by original entrepreneurs. The company founders and original entrepreneurs were the ones who identified a problem in the marketplace that consumers wanted solved, and who either created new resources or re-assembled existing resources, or some combination of both to solve that problem. Henry Ford created a new resource in the affordable automobile, and recombined existing resources of steel and rubber and leather in new ways to implement it. Since then, managers in the automobile industry have done some minor further recombination, but the idea of the internal combustion engine, 4 wheels, seats and a steering wheel has not been innovated out of existence. The job of managers is to consistently extract financial returns from the original innovation. This is a process-based activity, with a focus on accounting, procurement, design, manufacturing efficiencies marketing and sales. It aims at stability and predictability. Innovation and creativity are anathema to management teams because they lead to unpredictability and uncertainty. So they’d prefer not to innovate.
Perceptively, Ludwig von Mises pointed out that the capitalist system is not a managerial system, it is an entrepreneurial system. The emergence of a managerial class was aimed at eliminating the influence of owners and shareholders. The managerial function is entirely different from the entrepreneurial function. Most of what managers do has no cash value in the marketplace. Much of the industry that has grown up around managerial processes, “strategy”, consulting and business school studies is just an accumulation of additional managerial costs and expanded managerial staffing. It’s not particularly profit-oriented. It’s a luxury that original entrepreneurs like Henry Ford would probably eschew.
Merging Corporate And Government Bureaucracies.
The final insult to consumers from the large corporations is the merger of corporate bureaucracies and government bureaucracies in shared activities designed to extend the power of both. Government bureaucracies design forms that require filling and regulatory demands that require an informational response. Corporate bureaucracies love this, because it gives them something to do and justifies their existence. They get to hire more bureaucrats to fill in the forms and more data engineers to provide the information flow to the government, and more supervisors and managers to oversee the activity. Large corporations are happy to hire and add bureaucratic staff in this field of compliance with government regulation, because their large size makes it relatively easier for them to do so, and their market power enables them to pass on the costs to their customers and consumers. Smaller firms in the same industry are highly disadvantaged under these circumstances. They can’t afford the compliance costs because they have less customer revenue across which to amortize. They either exit compliance-heavy businesses or decline to invest in more profitable operations.
In effect, the government is offloading the cost of its internal bureaucracy and regulation to the corporate sector, and the bigger companies are happily embracing the deal because it gives them a crony relation with the government, a more entrenched bureaucracy, and an unfair advantage versus smaller and potentially more nimble competitors.
Should we be suspicious of large corporations on principle? Yes. They gulp from the government money spigot, they crony up to regulation to gain competitive insulation, and they grow bureaucratic and managerial staff at the expense of innovation and entrepreneurship.