A wise person once told me that evolution is not the story of life but of death. The vast, overwhelming majority of species are extinct. The dominant theme of evolution is death, not life. If those less fit organisms don’t die, the species doesn’t adapt. Death is a necessary component of evolution by allowing the ingredients that make up less-fit organisms to be redistributed to others.
The same is true when it comes to economies. The heart and soul of free-market capitalism is competition — for customers, to offer a better product or service, and so on. Failure is a necessary component of competition. Companies, large and small, must fail to make room for their better fit competitors to grow. The resources they consume and tie up in their orbit by their less-than-efficient existence are wasted the longer they are allowed to artificially persist.
Unfortunately, governments are more than happy to get involved, propping up corporate corpses. And because the government derives its funding from us, the taxpayers, this puts us in the delightful position of paying the government to prop up inefficient companies — which means we’re paying more for the products they produce, the services they provide, and the managers that operate them. Nothing like getting screwed at both ends at the same time.
Why do governments do this? Why do we accept it? And what’s the alternative?
The whys are relatively straightforward. The first, clearest, and loudest mantra is that some businesses are Too Big to Fail. This sort of rhetoric makes the case that the damage these companies would do in their death throes are Too Much to Bear. Although, rarely is it the case that these companies failing would tank the entire economy: more often, the idea is that it would be unfair and leave too many people in a lurch. Yes, it is said, the economy will recover and maybe those people eventually find work again, but in the meantime they’re struggling because the government wouldn’t intervene, and that’s not fair. We should help them.
This isn’t an unreasonable perspective. The problem is that the conversation usually stops there. The simple fact is that propping up these companies is more unfair to more people for more time — dispersing the costs across everyone for the benefit of lesser numbers of people. It’s just that the pain is less acute. As humans, we are very sensitive to acute pain; it’s why you howl when you stub your toe but a person can suffer through even severe illnesses like cancer without much complaint.
But a stubbed toe isn’t fatal, and cancer often is. Our brains weren’t built to categorize things directly according to importance but we rely on cues to rank them. If we rely on our instincts, avoiding the clear and present pain of laying hundreds or even thousands of people off makes sense. It’s why this rhetoric tends to get grumbled about when the discussion is about small business but grudgingly acknowledged otherwise, or even sometimes at the tail end of the same conversation. “What are you gonna do?” After all, that many people can’t just lose their jobs all at once.
But this perspective only accounts for what is seen. It does not account for what is unseen: The entrepreneurs eager to start their own businesses who could put some of those resources (office space, trained employees, etc.) to better use; the competitors who aren’t big enough to break through the entrenched advantage of the Big Corporation who continue to flounder even when the market says they shouldn’t; the consumers, the taxpayers, paying a company to charge them more for worse products or services. It’s like having to tip a bylaw officer after they finish writing your parking ticket.
The fact humans are sensitive to acute pain plays out in our politics. Politicians are often thought of as being somehow inhuman, which is of course nonsense. They are subject to the same pressures and incentives as everyone else. Imagine if, at work, making a safer, longer term investment for your company meant that a couple of your colleagues would miss out on their raises. Now imagine that you need their recommendation to get your own raise. All of a sudden, making the best call for the company overall costs you money.
That’s the calculus politicians face. Letting the big company fail means costing jobs, creates acute pain that not only costs them votes directly from the laid-off people, but feeds into a narrative that can cost them jobs elsewhere. Families of those laid-off people won’t vote for them, for one; their competitors have an easy target to hit when an election comes around as well.
It would of course be remiss of me not to acknowledge the often close relationship between business and government. Big business can bankroll campaigns (or at least have the ears of the right politicians) creating a direct incentive for politicians to preserve them.
But even small businesses can be the recipients of government — read our — inadvertent — charity. In those cases, the calculus is often even easier: It’s usually cheaper for the politician, it wins votes locally, and nobody’s going to grumble about a local business getting a boost. The only complaint might be that they didn’t fund any business in your area, but we all understand that politicians tend to boost businesses in their own ridings, for obvious reasons.
So why do we accept it? Well, for one thing, we accept the rhetoric. Too Big to Fail businesses really do seem that way. Often enormous, longstanding businesses that employ huge numbers of people and have tied themselves in with a sense of national identity, the concept of them going down threatens our conception of ourselves as a successful country. It’s a threat, a reminder of uncertainty. If they can fail, who can’t?
And for all that we grumble about around the dinner table, almost inevitably we all come back to “what can you do?” This sentence says it plainly: We have no choice. If that company goes down, it’ll cause more suffering than we can reasonably accept. We have the means and the opportunity to do something about it, so we should.
But that only makes sense if we do the right thing, and propping up failing companies is not. Imagine if the government intervened on behalf of business during every single paradigm shift of the last century. Imagine driving down a country road and seeing not a tractor or combine rolling through a field but a team of a dozen horses; the government intervened and saved the largest stables that supplied horses for agriculture, and has been propping them up ever since. “What can you do? If the government hadn’t stepped in, all those stable workers would be out of work.” Imagine typewriter vending still being big business, rather than contracting to their current size where they supply novelties to hipsters and aspiring novelists.
But the greatest strength of liberalism has always been its understanding of the importance of systems, not particular situations, and its understanding of the benefits from spontaneous order. If we create a system that encourages entrepreneurship and free exchange, we don’t need to fall into the conservative trap of conservation. We can let the stables fail, sure in the knowledge that those stable workers will largely be able to find other work or retrain themselves to participate in other industries (heck, even paying them to retrain would be an improvement to saving their industry).
Yes, there will be hardship, and some will fail. But that is an inevitable consequence of being alive. The only choice is when and how we seek to alleviate suffering. Trading an opportunity for growth to preserve a failing business is prolonging pain, and, just as interest makes your savings grow, so too it does for suffering. Prolong a cancer and it grows or metastisizes. Preserve a species that is going extinct and it unbalances the adjusting ecosystem. Prop up a failing business and force consumers to pick up the tab twice.
The other great vulnerability generated by government propping up losers is that it changes the game for business. All businesses have to market themselves. But if the government has demonstrated that it’s willing and able to intervene if a persuasive case can be made (save us, we’re a sweet little mom-and-pop; save us, we employ the better part of the Eastern Seaboard), then businesses will understand that they can survive by other means than providing a good or service for a competitive price. Market yourselves to the government; they have more money than brains (owing to a surplus of cash, not a deficiency of brains, nevermind what your uncle says) and even the tiniest fraction is likely enough to keep you going.
This all makes for an unhealthy market environment, with the average person picking up the tab as both taxpayer and consumer. Losing out on opportunities for new, better businesses might seem like just the terrible frosting on an awful cake.
But it’s significantly worse than that. Getting screwed on both ends isn’t just happening in real time anymore, with consumers picking up the tab for worse goods and services by subsidizing failing industries. We get screwed in a temporal sense as well: losing out not just in the present but in the future. The entrepreneurial space chewed up by these bloated corpses costs us advances and innovations we’ll never know. How many Bill Gates, Steve Jobs or others are at work right now, toiling away in obscurity? How many just need a bit of space to breathe to launch the Next Big Thing?
This is the key reason that building a market-based environment for innovation is more important than any one company. We lose more than we could ever know when we trade the future for the present. It’s a recipe for stagnation, and in an evolution-driven world, stagnation rhymes with extinction.