Big is Ugly—and Fragile

Big is Ugly—and Fragile

Mother Nature does not like anything too big. The largest land animal is the elephant, and there is a reason for that. If I went on a rampage and shot an elephant, I might be put in jail, and get yelled at by my mother, but I would hardly disturb the ecology of Mother Nature. On the other hand, my point about banks in Chapter 14—that if you shot a large bank, I would “shiver at the consequences” and that “if one falls, they all fall”—was subsequently illustrated by events: one bank failure, that of Lehman Brothers, in September 2008, brought down the entire edifice. Mother Nature does not limit the interactions between entities; it just limits the size of its units. (Hence my idea is not to stop globalization and ban the Internet; as we will see, much more stability would be achieved by stopping governments from helping companies when they become large and by giving back advantages to the small guy.)

But there is another reason for man-made structures not to get too large. The notion of “economies of scale”—that companies save money when they become large, hence more efficient—is often, apparently behind company expansions and mergers. It is prevalent in the collective consciousness without evidence for it; in fact, the evidence would suggest the opposite. Yet, for obvious reasons, people keep doing these mergers—they are not good for companies, they are good for Wall Street bonuses; a company getting larger is good for the CEO. Well, I realized that as they become larger, companies appear to be more “efficient,” but they are also much more vulnerable to outside contingencies, those contingencies commonly known as “Black Swans” after a book of that name. All that under the illusion of more stability. Add the fact that when companies are large, they need to optimize so as to satisfy Wall Street analysts. Wall Street analysts (MBA types) will pressure companies to sell the extra kidney and ditch insurance to raise their “earnings per share” and “improve their bottom line”—hence eventually contributing to their bankruptcy.

Charles Tapiero and I have shown mathematically that a certain class of unforeseen errors and random shocks hurts large organisms vastly more than smaller ones. In another paper, we computed the costs to society of such size; don’t forget that companies, when they fall, cost us.

The problem with governments is that they will tend to support these fragile organisms “because they are large employers” and because they have lobbyists, the kind of phony but visible advertised contributions so decried by Bastiat. Large companies get government support and become progressively larger and more fragile, and, in a way, run government, another prophetic view of Karl Marx and Friedrich Engels. Hairdressers and small businesses on the other hand, fail without anyone caring about them; they need to be efficient and to obey the laws of nature.