Magazine article Regulation

Regulation and Big-Firm Capitalism

Magazine article Regulation

Regulation and Big-Firm Capitalism

Article excerpt

With the U.S. economy growing at a zombie-like pace, we're now hearing whispers that American-style capitalism is passing away. A recent paper by Credit Suisse analysts Michael Mauboussin, Dan Callahan, and Darius Mjad indicates that more than half of all U.S. publicly traded companies have disappeared from stock market listings in the last 20 years. The authors note that the disappearances are not explained statistically by growth in gross domestic product or other relevant independent variables when they model the count of publicly traded firms. The same phenomenon is not seen in other parts of the industrialized world. Put another way, something else is going on in the United States.

In 1997 there were 7,355 exchange-listed firms, according to Mauboussin et al.; today there are less than 3,600. According to their estimates, there's currently a 5,800-firm shortfall, if historical trends had continued. But though the number of market-listed firms has gotten smaller, the firms themselves have gotten much bigger and older; the average market-capitalized value of listed firms has increased 10-fold and the average age of listed firms has risen 80%.

What's going on here? Could the disappearance of exchange-listed firms be evidence of the rise of big-firm capitalism described by William Baumol, Robert Litan, and Carl Schramm in their 2007 Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity, in which they argue that large firms have distinct advantages in global market operations? Or could it be that, among other advantages, large firms benefit from regulatory economies of scale, as Kevin Murphy, Andrei Schleifer, and Robert Vichny described in a 1993 paper and Richard Wagner in a 2016 book?

Big firms, big markets / Baumol, Litan, and Schramm offer a taxonomy as well as a theory of capitalism's evolution. They first describe bad systems in which national economies are formed by way of state-guided capitalism in which national governments pick winning firms, industries, and sectors. By way of subsidies, loans, or other special treatments, governments then seek to give a predetermined advantage to the selected firms or sectors. We see an example of state-guided capitalism in the current U.S. government's support for certain forms of renewable energy (ethanol and solar) and low-emission automobiles, the extensive government management of health care, the regulation of housing finance, and the government direction of agricultural markets.

Oligarchic capitalism, the second bad category identified by Baumol, Litan, and Schramm, is generally observed in countries that lack an independent judiciary as well as predictable definition and enforcement of property rights. In these situations, strong families emerge as the owners and protectors of wealth, sometimes in collusion with government dictators and leaders or through extralegal means, such as with the mafia. In recent years, we have observed oligarchic capitalism emerge as previously socialist countries became transition economies. In those cases, oligarchic capitalism has been termed "crony capitalism." The absence of strongly evolved market-friendly institutions is part and parcel of these capitalistic schemes, where individual ownership of assets and trade in major products and services are dominated by a small number of individuals or families.

Big-firm capitalism is an important third category. It is not necessarily bad; in fact, it is fundamental to the formation of good capitalism. The big firms are large enough to exploit ultimate economies of scale and scope. They operate in fully national and global markets and in doing so take up the production of newly developed products and services, extending them to the four corners of the earth. Baumol, Litan, and Schramm see this category as a principal component of the currently evolving U.S. economy.

In some cases, the big firms are the result of rapidly growing entrepreneurial firms, which represent the three scholars' final category. …

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