Do large fortunes tend to grow? Are competitive, free markets unstable? As far as I can see, the answer is yes.
Here are the beginnings of a science fiction story. This is intended as an analog describing how any living organisms interrelate, whether they be plants like maple trees, animals like dogs, or businesses.
As with all science fiction, the background is more important than the foreground. Indeed, this text has almost no foreground.
The analog tells us that large fortunes do tend to maintain themselves, as I also discuss in Opportunity and Estate Taxes.
Moreover, large fortunes tend to grow. In itself this is often good for the rest of us, but at the same time, the action kills off competitors, which is usually bad for the rest of us. Consequently, government regulation is needed.
Incidentally — or perhaps not so incidentally — the presumption in this story is that a company or a fortune can grow and grow indefinitely. There is no no intrinsic upper limit. This is directly contrary to traditional economic theory, which presumed `diminishing returns to scale'.
As far as I remember, the original thesis grew out of observations in Scotland. A farmer would first seek to grow wheat on the rich bottom lands of a valley. There he could grow the most wheat for the least effort. But if he could sell his wheat for a higher price, he would also plant and grow wheat on the less fertile sides of his valley, on the margins of his land. When he sold more wheat the farmer received more. At the same time, he had to work more (or, in the case of a pre-industrial era land lord, employ more tenants or push more on those already attached to his land). However, at some point, the extra effort to grow more wheat cost more than the extra gain from selling that wheat. As economists say, `marginal cost exceeded marginal revenue'. At this point, the farmer would stop trying to grow more.
(Economists figured that some farmers would grow too much and some too little, but that on average, farmers would try to make as much as they could and that the theory, with all its obvious imperfections, would do well enough.)
With the development of new technologies, such as railroads and radios, and with the development of new private governing structures, such as corporations with stocks and bonds that can be purchased publicly, economic entities did not need to limit themselves just to one region or activity, but could do many.
Moreover, fortunes were even less limited. They could be invested in the stocks and bonds of many different companies..
Far away, at a distant time ...
You are exploring a strange planet.
A hundred tentacled entities live on an island. The other members of the expedition persist on calling these entities `Tents'. You came up with a much nicer name, but you have since forgotten it yourself. The `tents' come in all different sizes, from small to very large.
As expedition ecologist, you have found that these `tents' eat various resources around them, more during better conditions, less during poorer conditions. They also eat each other; indeed, some find others delicious. (This is endocannibalism, a fairly rare phenomenon on account of the risk of picking up pre-adapted diseases from the eaten entity.)
`Tents' can grow bigger or smaller. They appear to be immortal, like many bacteria or cancer cells. They die by starvation, or when they are eaten by another. Unlike humans, they do not have any `natural' age of death.
Conditions on the island vary in a quasi-predictable way. There is little to eat during bad seasons and much to eat during good seasons. (You complain about the way language is used since a `good season' is defined as one with lots of food, but no one else pays attention.)
Seasons come and go, with considerable but not utter regularity.
Seasons vary in their severity; some bad seasons are worse than others. Also, locations vary, some parts of the island almost always provide lots of food, other parts are barren even during the best seasons. In some ways, the landscape is not unlike Scotland.
You observe that larger `tents' can survive longer without eating than smaller `tents'. And some `tents', regardless of their size, are better at finding food than others. But none can turn bare rock into a feast.
New `tents' appear every so often. These `new births' appear in various sizes although most are small. None appear as large as some of the old `tents'.
Now for the economics, which in this analog, is modelled by ecology:
Let us presume that the `tents' possess a minimum viable metabolic rate plus a metabolic rate based on mass.
For a business, a minimum metabolic rate makes sense. To survive a business must produce a good or service, find customers, and sell to them. Even if the business does not sell any goods or services, perhaps because of a depression — the equivalent of our tentacled entities' starving during a bad season — the business must support at least a few people to hold it together. Or else it will vanish.
You find that among the tentacled creatures you are studying, the minimum viable mass is one kilogram and the minimum viable metabolic rate reduces a tent's mass by one kilogram per week if it does not eat anything. (Mostly, when it is starving, a tent hibernates. But it does wake up every so often to see whether conditions have grown better.)
In addition, a tent needs to eat one-half kilogram per week for every kilogram it masses at the beginning of that week.
Met_Rate = 1 + 0.5*Mass
Thus, at the end of one week, a starving tent that starts out at 100 kg consumes (1 + 0.5*100) = 51 kg; it ends up weighing 49 kg.
You find a colony of 50 `tents' of 100kg each and 50 of 10kg each. They all follow the metabolism rate described above.
Bad times occur. This is what happens to the individuals in your colony:
mass of each little `tent' mass of each big `tent'
Week one: 10 100
Week two: 4 49
Week three: 1 23.5
Week four: dead 10.75
At the beginning of week five, you find that all the `little tents' have died, but that 50 `big tents' are still alive.
You rediscover the old proverb, that when starving, those with more fat live longer.
Every so often new `tents' are born.
Most start out small, with many one kg `children' and a few ten kg children. There are no one hundred kg children.
Food turns scarce in yet another season. All the youngsters who mass less than 10 kg die of starvation within a month.
Fortunately, the bad times are followed by good times. During the period of plenty, children grow larger.
A colleague notes that in times of plenty, after eating enough to grow that their basic metabolic rate, `tents' eat enough to grow at a rate proportional to their mass.
The basic metabolic rate requires eating one kilogram plus eating eat one-half kilogram per week for every kilogram it masses at the beginning of that week.
Met_Rate = 1 + 0.5*Mass
The growth rate is this plus eating enough such that a `tent' can gain 10% of its mass per week by eating 20% of its mass per week.
The new equation is Met_Rate = 1 + 0.5*Mass + 0.2*Mass
(which is simply Met_Rate = 1 + 0.7*Mass).
In other words, it is harder to grow than to survive.
(Your colleague is a beautiful woman and you would have fallen in love with her except that she intimidates you. Of course, I don't know your sex or your culture, so I don't know whether a romance could occur and if it did, any details.
(Indeed, I don't even know your species, although a xenobiologist might infer that your home sun is a K type star from learning that your multi-faceted `bug' eyes are most sensitive at a nearly 800 nm wavelength rather than at the 560 nm or so wavelength characteristic of human color vision.)
But times of plenty are followed by times of scarcity. Are smaller `tents' more adaptable than larger `tents'? Are they more able to survive a relative short period of scarcity? Or do big `tents' enjoy so much extra fat that they can survive the downturns better?
Worse, what happens when a large `tent' discovers that it can eat a small `tent' and then also eat the smaller entity's former food?
At least you and your colleague can theorize together:
Suppose a big `tent' can easily eat a much smaller `tent', but has a more difficult time catching and eating a similar sized `tent'.
In this case, more or less similar sized `tents' will persist. Few will eat each other. But smaller `tents' will be eaten. The number of smaller `tents' will depend (among other factors) on the birth rate and the time which it takes a larger `tent' to digest a meal
If by some chance or other — perhaps the `tent' grew up in a fertile valley or it figured out how to eat more efficiently — one `tent' becomes bigger than all the others, then it can devour everyone else. The other `tents' will die. The only survivors will be those who have not yet been eaten, either because they are too far away or because the larger one has not gotten to them.
Either one big `tent' survives, or a few. Small `tents' come into being; but all get eaten eventually.
Our bug eyed monsters' fictional expedition is actually an attempt to simulate what happens with corporations in a capitalistic society such as our own.
I hope that most of you agree that the `ecological rules' I postulated are more or less accurate representations of the circumstances in which businesses find themselves.
(If you do not accept the accuracy of these rules, I would like to hear of `rules' you think are realistic, expressed as descriptions of the circumstances in which these tentacled beings find themselves.)
Finally,
This latter issue is perhaps the most controversial question in politics and economics: I have heard some people argue that big companies can never be as efficient as small companies, because big companies are insufficiently agile. But others say that big companies have more resources, and so can do more.
As far as I can see, optimal size depends on circumstance.
For example, Christensen and Raynor 1 claim that large companies do better with what they call `sustainable' technological development, because they can afford the resources. But they also say that small companies do better with `disruptive' innovations.
Big companies lack senior managers who have an interest in the initial markets of a `disruptive' innovation because those markets must be small. Worse, a big company that is successful has created a company culture that filters out ideas that might lead to small markets because the company needs big markets. Success can only come to a big company that creates a new part of itself to avoid the processes and values that benefit the big company elsewhere.
This action is like a large `tent' budding a new, small `tent' that goes off to discover whether it can find any food growing on a recently weathered lava flow.
The political implication of this exercise is that wise anti-trust actions against both monopoly and oligopoly are required even when there are few or no `barriers to entry'. A large, or group of large businesses may keep on growing.
I speak of `wise' action because there are times when sustainable innovation requires the large resources available to a single or to several large companies. But there are other times when one or a few large companies should be broken up into smaller entities so their managers adopt different goals and different processes.
Many say `the market will take care of it', and that is not true in all situations.