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Question
Mr. Raza

Should there be any legal limits on the size of business or organizations in the U.S.?

Thanks

Answer
Hi Sam,

Thanks for posing a crucially important, yet overly general, question on business that has life-and-death significance for millions of Americans, if not somewhat remotely for the world at large. Your question rests to a great extent on positive-economics analysis. To arrive at any reasonably acceptable answer to your question, however, involves a normative analysis. So the question, rooted as it is in scientifically explicable variables and parameters, draws on judgmental conclusions about policy initiatives that come against a backdrop of existing American economic landscape.

THE LEGAL LIMIT: HOW BIG SHOULD BE BIG BUSINESS?
There cannot be any dry-as-dust, cut-and-dried answer to this profound question. The possible enumeration, or less probably determination, of the legal limit to the size of business or organization in the U.S. points immediately to the very foundation U.S. society is based on. Why?

HISTORICAL PERSPECTIVE
My view is based on American historical economic dynamics. I am inclined to the view that, to get a correct preview of the existing scenario, we have to hark back to the socioeconomic and political condition that existed on the heels of American war of independence. That far-reaching condition, as our analysis is going to show presently, has shaped, almost ineluctably, the economic paradigm of the country. There have been some swings from the core of the economic paradigm, necessitated from time to time by economic expediencies, social disquietude, and political patchwork, but the wheels of the economy basically run on the rails of that well-set paradigm.
  
THE FOUNDATION OF BUSINESS; HISTORICAL DYNAMICS OF CAPITALISTIC NATURE
American history tells us that the main reason for the Americans to break away from the British hegemony was economic considerations. Americans wanted free business enterprise. There was Boston Tea Party, something like we hear of Tea Party today, against British economic rule. Washington, John Adams, Jefferson, Madison, Franklin, and others gave lead for a free economy where freedom of enterprise was to play a great role. This freedom of enterprise was buttressed, even if unethically, by utilization of slave labour. The utilization of slave labour continued, initially at tacit approval of the leaders, till the days of Lincoln, Andrew Johnson, and others. There was some diminution, but it was still there till the time of Kennedy, Lyndon Johnson, and others, who ultimately put an end to overt discriminating mentality in society and in business. This very process of using others’ labour for making as great profit as possible resulted in a deeply embedded culture of expanding business on economic profit or surplus value.

THE NINETEENTH-CENTURY ROBBER BARONS AND AMERICAN BIG BUSINESS
The legacy of big business continued well into the nineteenth century when businesses of large sizes of began to sprout with a vengeance on U.S. economic turf. There were great entrepreneurs who built business empires. They were called the robber barons. There were Rockefeller (oil titan), Jay Gould railroad titan), J. P. Morgan (banking titan), Vanderbilt (shipping and railroad), Carnegie (steel industry), Stanford (railroad tycoon), and others. Rockefeller controlled 95 percent of the pipelines and oil refineries, raising and stabilizing prices and establishing monopoly by bringing about an end to ruinous competition. Gould used wiles, bribes, and “watered stocks,” to build the greatest railroad system in the world. In fact they built the capitalistic big-business economic structure. J. P. Morgan dominated corporate finance and industrial consolidation during his time.

THE GREAT CRASH
Unbridled business ventures led to burst of speculative bubbles in “black October” of 1929. Even the robber barons and President Hoover were caught. The bottom fell out of the market. The great depression was overcome at a very great cost to big businesses and organizations.  
There came the New Deal of President F. D. Roosevelt to get the economy out of the doldrums.  The people were voting in favour of the New Deal as if they were repudiating big business. There was a break on big business, but only temporarily.

BIG BUSINESS AND THE SEEDS OF FINANCIAL CRISIS
Then America prospered unprecedentedly after World War II. Producing some war goods and some civilian goods, it had taken up the slack in the war years, and the economy thrived on big businesses and big organizations. As Paul Krugman tells us,  "The new guys in town are knee-jerk conservatives; they view too much government as the root of all evil, believe that what's good for big business is always good for America and think that the answer to every problem is to cut taxes and allow more pollution." At the same time, "big business" just across the river in Virginia was ramping up its campaign for a tax increase, and Enron was lobbying Bush's closest advisers to support the Kyoto Protocol on climate change. Months later, when Enron collapsed, writers attributed the company's corruption and obscene profits to "anarchic capitalism" and asserted that "the Enron scandal makes it clear that the unfettered free market does not work."

Soon after the burst of the internet bubble there was the housing bubble. Every American wanted to have a home, whether he could afford it or not, and the big financial organization went on a binge of subprime lending. The housing bubble burst, foreclosures came in torrents, and home-owners dream turned into nightmares. There were huge ponzi schemes.

All that happened because there was no legal limit to business or organization in the U.S. Moreover, economists, financiers, and policy-makers thought unimpeded big businesses were good for American economy. This came as Americans were fed on success after vacuous success of artificially bloated profits of large organizations. That was the heyday of deregulation, supported by Allen Greenspan of the Fed, Summers, and others.  The second most powerful guy in the U.S., Allen Greenspan, later agreed he was at fault, and now economists believe Brooksley Born’s excoriation of Greenspan was right.

GREED IS GOOD OR BIG BUSINESS IS FAILURE?
The financial meltdown was an outcome of belief in the U.S. that “Greed Is Good.” Now that so many businesses fell, and government bailout is required [you may also refer to my answer on bailout on this website], people are of the opinion that big businesses and organizations need be restricted. They also believe employment will increase if there are more small businesses.

WHAT SHOULD BE THE LEGAL LIMIT ON BIG BUSINESS?
To tell the truth, American economy is set on an economic paradigm, with democracy and freedom of enterprise. There is not likely to be any clearly enunciated legal limit to be imposed on the size a business or organization can grow into. Neither the government nor the general masses can be clear about any limit. To be sure, big businesses are going to stay, and they may even wax bigger. Since the public opinion is not against big business but against big business battening on ordinary people, there should be some limit in order that they cannot belittle the role of the government which is essential for combating market failure.

One thing is for sure, no business can grow too much out of proportion in the U.S., because it is oligopoly that dominates the economic scene. It has also been seen that big businesses, when unwieldy, face legal limit. History shows that industries after industries imitated the Standard Oil Trust –in kerosene, sugar, whiskey, lead, salt, and steel.  Agrarians and populists got the antitrust laws passed. The dissolution of the Standard Oil Corporation was the first great victory of the progressives against “Big Business.” The trend, however, is slightly different today. Big business is already embedded in the economic fabric. There will always be crackdown on wrongdoings on big business. It is, however, unlikely that there will ever be any law passed as to the legal limit to the size of business or corporation. But, whenever, some such crackdown ensues, the size of the business or corporation is automatically cramped.

CONCLUSION
As far as my humble understanding of the macrodynamics of U.S. economy goes, I don’t think there should be any legal limit on the size of the business or organization in the U.S. After all, great strides forward in the economic arena are to a very large extent due to success of the big businesses. Whenever possible, it is better to treat an organ rather than to amputate part of it. Needless to mention, there should always be government oversight to prevent or mitigate market failure, and when action is called for, there should be no room for kicking the can down the road. Or else -- as now the government has already learnt it the hard way -- deep-seated recession will repeat. Putting a legal clamp on the size of the organization or business is no answer.

I hope, Sam, I have been able to put my opinion across to you. I will be happy if this serves to satisfy your query.

Best of wishes.  

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Eklimur Raza

Expertise

It appears some students in this website are confused about elasticity of demand and the slope of the demand curve when they are trying to figure out why rectangular hyperbola comes up in case of unitary demand curve. First, they don't know that RH can be depicted in a positive quadrant of price,quantity plane. Secondly, they make the mistake that the slope of RH is constant at -1. Two points could help them: first, e=1 at each and every point of the RH, because the tangent at any point shows lower segment=upper segment (another geometric definition of e); yet slopes at different points,dQ/dP, are different; second, e is not slope but [(Slope)(P/Q)]in absolute terms. Caveat: only if we measure (log P) along the horizontal axis and (log Q) up the vertical axis, can we then say slope equals elasticity --in which case RH on P,Q plane is transformed into a straight-line demand curve [with slope= -tan 45 deg] on (log Q),(logP) plane, and e= -d(log Q)/d(log P). [By the way, logs are not used in college textbooks --although that is helpful in econometric estimation of elasticity viewed as an exponent of P, when demand equation is transformed into log-linear form.] I have not found the geometrical explanation I have given in any textbook followed in undergraduate and college classes in Canada (including the book followed in a university where I taught for a short time and in the book followed in George Brown College, Toronto, where I teach.

Experience

About 11 years' teaching economics and business studies, and also English, history and elementary French.Practical experience in a development bank, working with international donor agencies like the World Bank and the ADB. Experience in free-lance journalism, including Canada's "National Post."

Organizations
I teach micro- and macroeconomics at George Brown College (continuing education), Toronto, ON, Canada.

Publications
Many articles and editorials, on different subjects, in English newspapers. Recently an applied Major Research Paper, based on a synthesis of the Solow growth model and the Lewis two-sector model, has be accepted by Ryerson University, Toronto. Professors Thomas Barbiero and Eric Cam, Ryerson University, accepted the paper.

Education/Credentials
Master degree in Interantional Economics and Finance and diploma with honours in Business Administration from Canada.

Awards and Honors
Received First Prize in an inter-university Literary Contest.

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