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Source link: http://archive.mises.org/5346/the-great-circle-of-intervention/

The great circle of intervention

July 19, 2006 by

Dr. DiLorenzo’s article “Should Wal-Mart be Broken Up?” is a good example of how government interventions in the economy are like bacteria: you only need to start with one, and before long, you have another, and another, and another, until there are more than you can count (though there are limits on how much bacteria can reproduce themselves. I see no such limits with government). In effect, antitrust is the intervention to fix the problem that intervention created. In a free market, large companies can reap the advantages of economies of scale. But the potential growth of a firm in the market is not infinite. At some point companies can grow so large that they encounter diseconomies of scale (a point made by Roderick Long in his recent seminar). These can include internal calculation problems, similar to those that take place in a socialist economy where there is a lack of monetary prices that make calculation possible. In a free market, these problems can limit the size to which companies can grow. However, the current market is distorted by government intervention in the form of subsidies and tax breaks (which lower the cost of business for some companies but not others), regulations (the costs of which are more easily absorbed by large firms than small ones) and other restrictions on entry and competition. Government intervention on behalf of corporations can stifle competition and insulate certain companies from competitive forces. In such an environment, it may be possible for such a company, facing fewer penalties for inefficiency, to grow in size beyond what it might achieve in a truly free, competitive market.
I do not know if this is the case specifically with Wal-Mart, but it is a possibility. If so, this is another example of how one intervention begets another and another and another: by intervening in the economy for the benefit of large corporations, the government allows them to grow beyond what they would in the free market. Once they reach a size people find somehow threatening, it spurs calls (probably from competing businesses) for the state to intervene again, this time to “encourage competition” and “benefit the consumer” by breaking them up. Once they’re broken up, it can make room for their growing competitors to get in on the lucrative business of lobbying the government for special favors. Once they’re on the receiving end of government favoritism, they start growing and growing. And the cycle begins again…

{ 7 comments }

Nick Bradley July 19, 2006 at 10:15 pm

Great comment on the role of “diseconomies of scale” when a firm gets too large. Which lecture was Long giving when he referred to “diseconomies”? The link you provided merely brought me to a list of his speeches.

brian gray July 20, 2006 at 6:59 am

of course wal-mart’s business model has been a great success, but i haven’t shopped there in years because of the stories of racial and gender discrimination. i find it hard to believe that this type of discrimination would be the case, but it’s very difficult to know who to trust on the issue. of course, civil rights laws are as wrong as any others, but i still believe that the philosophy behind them is essentially correct. what is the perspective of mises readers on the subject?

Curt Howland July 20, 2006 at 1:04 pm

Certainly one way that Government has subsidized WalMart is highways. WalMart has leveraged an advantage in distribution to cut costs, by utilizing roads built at taxpayer expense. Were roads private, at least this distortion would not be there even if WalMart could still ship their stuff more efficiently.

Brian, your belief that the philosophy of non-discrimination is correct is why civil rights laws are not required. Any business that wants your money would therefore not discriminate.

Oh, and by not discriminating, their possible market increases, their pool of possible workers increases, a genius (woman,orange,broken) will not be passed over for a lesser (man,green,able) so their actual laborers will be that much more capable.

But this is like arguing that because chattel slavery was less efficient than free laborers, it would have gone out on its own without a war. Oh well, we had the war and we have civil rights laws and we have copyright and patent regulations. Such is life.

Reactionary July 20, 2006 at 2:51 pm

Has anybody ever studied the effect of the anti-trust laws on the corporate form? I recall a comment by somebody that this particular intervention allowed the purportedly evil trusts to be replaced by the current publicly traded companies so large and unresponsive to shareholders as J.P. Morgan or Rockefeller could only dream of commanding.

I don’t know if, in fact, that was the case so I would appreciate any input on this bit of history.

M E Hoffer July 21, 2006 at 1:41 am

Lisa,

Your article was well done. Cogent, easily readable, and succinct. Obvious evidence of organization applied to sound learning.

Marco July 21, 2006 at 8:59 am

A problem with this is that in many European countries there are private monopolies which obtained their privileged position because they are former state monopolies. In these cases their monopoly position has got nothing to do with customer choice or economies of scale. A few years ago the former Italian state phone company, Telecom Italia, was privatised and most of the shares were bought by a consortium of government-friendly Italian banks. Even though prices have gone down significantly, there are still problems due to TI’s dominant position in the market. For example, when my parents in Rome decided to switch to a cheaper phone company, TI took months to disconnect them, using one excuse, then another. One day there was a problem when suddenly several people in their building found their phones had been disconnected, which was due to a fault in TI’s local infrastructure. The tenants who were clients of TI had their lines back on within 24 hours, but it took a week or so for those who were using other companies. Given these abuses, it’s very difficult to convince Italians (even the ones who support free trade) that there is no need for competition authorities. It’s a similar situation in other European countries in which large state utilities have recently been privatised.
So there are two important questions here. First, how do you privatise a huge state monopoly? Second, what do you do if the state monopoly has already been privatised and this has resulted in the creation of a powerful, inefficient private monopoly?

Kevin Hodgkins July 22, 2006 at 12:28 pm

To me it is not just the monopoly. I don’t see how any large company could exist without the implicit aid of the government. Microsoft would have never grown to its current size if not for its government licenses. Wal-mart would have had a much slower growth curve if left on equal footing with all other business tax-wise (of course no business should have to pay these taxes anyhow). I cannot think of a single company in the Fortune 100 that could exist as it does today without implicit government aid through contracts, subsidies, and anti-competitive aid to the corporation.

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