Since economic evolution is right up my alley, I thought I would continue the theme of Karl’s recent post on the subject explaining while a plethora of old, small businesses is a sign of market failure, and specifically respond to a comment left by Jazzbumpa, which includes a common sentiment among the left, that is not at all a feature of a market economy:
So the natural evolution of capitalism is for each business segment to ultimately become a near-monopoly. This is economic growth, and it is a good thing.
And Private Equity funds accelerate this process, making it an even better thing.
I’m starting to get it. Who do think will eventually own the whole world – General Electric or Cerberus?
Let me ask you; are you afraid of dominance and market power of British-East India Company? If the above were an actual concern, you would be. B-EIC had the mother of all market positions, and not even just in the 17th and 18th centuries — but a position that would make any company today envious. It was largely horizontally integrated in trade goods, and fully vertically integrated (even featuring its own army and navy). B-EIC had a captive market of nearly 1/5th of the entire population on earth, and had was specifically handy at brutal oppression.
However, despite all of the advantages one could hope for, B-EIC went out of business in 1873. Which highlights what should be a fundamental law of economics (but is not):
All competitive advantage is temporary.
Billions of gallons of ink has been spilled chronicling the rise of giant firms, and detailing how their businesses were run to be “in it for the long haul”. However — and ironically — billions of gallons of ink has also been spilled chronicling the same companies’ fall from grace as quickly as a decade later. In fact, of the original Forbes 100 list of largest US companies, only eighteen sustained their performance to the 50 year mark…and if my memory serves me correctly only two are still there (one being Exxon).
In fact, with an increase in the level of competition, economists Robert Wiggins and Timothy Ruefli find that the ability of a single firm to remain in a position of competitive advantage shortens precipitously. This is just another way of saying that he “S-curve” of deductive tinkering/technological innovation has been compressed.
To sum it up: a healthy market is characterized by relatively easy entry to new participants, a healthy level of competition between firms, and the ability for firms to die gracefully. Large firms will come and go, and some may be quite intimidating (like IBM, Microsoft, or Google, for example)…
…their time, too, shall pass.