Since they can have so many internal issues, why do we have big companies at all?
Pabst Brewery, Milwaukee, Wisconsin. Source: American Gardening
It’s not a trivial question. In theory, we could all be independent contractors, offering our labor in a great big market, with no bureaucracy. But we would have to devote a lot of time to finding markets for our work, negotiating prices, and getting paid—administrative tasks that aren’t productive. Those kind of transaction costs are like sand in the gears of an economy, and companies can reduce them to a minimum through their organization.
Still, it’s a paradox that big companies exist. After all, big government organizations can be massively inefficient. But big companies often pride themselves on their efficiency, with just-in-time manufacturing and modular shipping reducing costs to a minimum. So why are big companies effective, while big government is frequently a joke?
Long run average costs, across company size. Public Domain. Source: Wikipedia
The answer has to do with goals and accountability. In the U.S. our corporations have one explicit goal: to maximize the long-term financial return due to their owners. Their performance is constantly monitored, and if they fail to produce a return, their owners can reorganize or just shut down the enterprise and sell off the pieces. There’s a Darwinian process to eliminate inefficiency: it’s economize, or die.
By contrast, governments have multiple goals: law and order, national defense, enforcing contracts, regulation, education, maintaining a social safety net, and so on. With so many disparate goals, inefficiency is endemic to the enterprise. And finding more efficient ways to deliver services isn’t usually the highest priority.
That’s why people usually aren’t surprised by bureaucratic waste in government. And why we need to be careful with government-sponsored enterprises. Because what government gives, it can easily take away.
Douglas R. Tengdin, CFA