Lessons from the Titanic

“Today the balance of advantage may be shifting…Governments have been rescuing companies they consider too big to fail… The recession is squeezing out smaller and less well-connected firms” says the The Economist in their leading article this week, titled “Big is Back”, The article argues that back in the 1990’s, with the advent of the internet, big companies were under attack by smaller nimbler companies and argues that now big companies are back in the driving seat. To support this notion, the article notes that between 1974 and 1998, GDP produced by big industrial companies fell by half between from 36% to 17%. This statistic is misleading as it has less to do with big companies becoming less dominant during this period and reflects more the shift away from an industrial driven world towards the rise of the knowledge companies such as banks and IT companies. During the same period the GDP contribution from knowledge based companies increased dramatically and today the knowledge sector now contributes 75% and 79% of GDP in the UK and USA respectively.

At the moment though there is a fascination with the BIG and a massive fear of their failure. This is not surprising. Big companies provide large amounts of tax revenues, employ large numbers of people and in many instances are the source of huge national pride. So the motivations and politics behind keeping flailing big companies afloat are huge. Governments are pumping billions into propping up big companies, their investment in them now is so huge that they can’t afford for big companies to fail. The question at hand now though, is this fuelling a virtuous or a vicious cycle. How much longer can this course of action be sustained and at what price will western governments continue to protect big companies? Western governments appear to be behaving more like the captain of the Titanic before it struck an iceberg – stoking the engine to get more power out of it and racing across across an ocean they know is littered with obstacles. There is now a danger of artificially maintaining companies that have become ineffective and inefficient in the new world of work. Let’s not forget that if big is back, a notion the article seems to support as a good development, then why is it that the economies that are rebounding fastest such as China and South Korea are those dominated by small companies?

Rather than continuing to bail out big and potentially ineffective companies, governments need to be removing the burdens and barriers which prevent entrepreneurs from starting businesses and turning small companies into big effective ones. It is on this last point that I do agree with the Economist

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