“Too Big To Fail” – really?

Supposedly: If some big institution is allowed to go bust, this creates severe damage to the economy because of disruptive shocks that create a sequence of events that brings the entire system to its knees because of how interconnected the different elements of the economy are. 

But let’s think back to what markets do: Distribute resources where they are most desired. In a market, a business that goes bankrupt is a business that was most likely not contributing to real wealth, but rather was destroying value. If a business is not able to sustain itself then this is generally indicative of the fact that it is not creating value, but just consuming value.

So by keeping these losing activities afloat, we’re just doing more damage to our pool of savings and keeping the money away from the people who are generating wealth. So these govt bailouts are specifically keeping money in losing ventures, as opposed to allowing that money to flow freely and move elsewhere.

While it is true that sudden collapses of big businesses can bring a sudden rush of unemployment and confusion – it may still be necessary for that business to go under to allow the economy to recover quickly. Either that, or waste resources that could have otherwise brought more prosperity to the economy.

“Predatory Pricing”

Supposedly if the big corporations (typically along the lines of Wal-Mart or Standard Oil here) were left to their own devices, they’d slash their prices to drive out their competition, and then as soon as all the competition is gone, they’d jack the prices up to take advantage of being a monopoly. That’s how the story goes anyway, so supposedly the govt has to step in and legislate against “predatory pricing”. 

When corporations lower the price of their goods, they have to deal with the increased demand for their products – which generally increases their costs of production too. So it really is very costly to try and engage in predatory pricing. 

The biggest problem with “predatory pricing” reasoning – is that big corporations would be taking a huge risk, for very little reward. They don’t know how long it will take to drive their competitors out of business! It’s not free to cut your prices below cost, and this will eat away at their savings. And if after all their costly predatory pricing, some new competitor enters the market – it will have been for nothing.

If there were any way predatory pricing could work, it would only be due to the existence of the govt making it possible. Such a crazy plan could only work with govt barriers to new entrants in markets – because otherwise as soon as this huge corporation became the last man standing in a market and started to charge a massive price, other corporations would just come in and compete away any gains.

There’s no way anybody can distinguish between a price that is ‘predatory’ and a price that is actually a result of the corporation engaging in normal price competition (which is perfectly fine in a marketplace). 

Lastly, I’ll leave you with a clever, funny comic about the nature of govt regulation regarding pricing: Prosecuting the Free Market