One strand of the new antitrust is the notion that bigness is fragile: concentrate wealth and power in a single firm and you put all your eggs in one basket. If the firm fails, the economy is done. Better to break up your behemoths to give the economy resilience in the face of crises.
It turns out, however, that the lesson of Japan’s millenarian firms is quite the opposite: the best way to last a thousand years is to cultivate a monopoly position.
At least according to the Times, which reports that “the Japanese companies that have endured the longest have often been defined by . . . an accumulation of large cash reserves,” which economics teaches is only possible for firms that have market power, and consequently the ability to raise prices above costs and stash the difference.
Indeed, according to the Times, many long-lived firms “started during the 200-year period, beginning in the 17th century, when Japan largely sealed itself off from the outside world, providing a stable business environment.” Read: when the government limited competition.
But wait. Aren’t Japan’s old firms small businesses? Today’s antitrust movement is all for giving small businesses their own mini-monopolies. Possibly because when a small business fails the economy won’t come down with it. (But more likely because this isn’t really about antitrust, but about wealth redistribution.)
So doesn’t the longevity of Japan’s businesses actually support the view that small is resilient? It turns out no. Japan counts big companies like Nintendo among its long-lived firms.
But America doesn’t need medieval Japanese business wisdom to understand that it’s competition, and not monopoly, that’s fragile. We have Schumpeter, who made the resilience of the big the centerpiece of his theory of creative destruction.
He argued that in a world that is more like a stormy sea than the water cooler at the Chicago Board of Trade, the apparent excesses of monopoly are in fact mostly examples of redundancy, the mainmast’s apparently unnecessary girth useful when the big storm hits.
If for instance a war risk is insurable, nobody objects to a firm’s collecting the cost of this insurance from the buyers of its products. But that risk is no less an element in long-run costs, if there are no facilities for insuring against it, in which case a price strategy aiming at the same end will seem to involve unnecessary restriction and to be productive of excess profits. . . . In analyzing such business strategy ex visu for a given point of time, the investigating economist or government agent sees price policies that seem to him predatory and restrictions of output that seemed to him synonymous with loss of opportunities to produce. He does not see that restrictions of this type are, in the conditions of the perennial gale [of creative destruction], incidents, often unavoidable incidents, of a long-run process of expansion which they protect rather than impede.Joseph A. Schumpeter, Capitalism, Socialism and Democracy 88 (Harper & Row 1975).
When the Times writes of Japan’s long-lived firms that “[l]arge enterprises in particular keep substantial reserves to ensure that they can continue issuing paychecks and meet their other financial obligations in the event of an economic downturn or a crisis,” it’s hard not to see these firms’ business philosophy as fundamentally Schumpeterian.
Of course, there’s a limit to this kind of thinking. Business longevity and economic growth are two different things. I really am glad we’re not still using fax machines. But although there are plenty of problems with monopoly, fragility is not one of them.