The big hullabaloo about the latest bank mergers stems from a fundamental misconception about the way the world works. The unions of Citicorp and Travelers, NationsBank and BankAmerica, and Banc One Corp. and First Chicago have to be judged against the fact that we live in a world of uncertainty. That being the case, enterprise needs the freedom to innovate and rearrange things. The alternative is stagnation.
Fear of bigness is misplaced. As James Glassman of the American Enterprise Institute notes, the resulting banks, while big in absolute terms, are not so awesome in comparison with the whole industry. If the mergers go through, the ten biggest banks will have only a third of all banking assets, Glassman writes. There’s a lot of competition.
But to cite that fact implies a potential for concern that shouldn’t exist. It has been shown over and over that concentration in an industry does not signify a lack of competition. The late economist Yale Brozen did exhaustive studies at the University of Chicago demonstrating that firms with high market shares face competitive pressures at every turn. No company has shelter in the market: not Microsoft, not General Motors, and not any banking behemoth.
Unless. The only thing that can permit a firm to find safety from competition is the government. Only it can create legal barriers to entry and harass companies trying to better serve customers. Without that, the competitive process works–even if no other firm is actively competing at the moment. The potential for competition is as sobering as actual competition. Venture capitalists are always looking for profit opportunities, and there’s nothing like a lazy dominant firm to attract their attention.
The practical case for the freedom of firms to merge and otherwise rearrange their assets hinges on our ignorance of the future. The great New York University economist Israel Kirzner has long spun out the implications of this ignorance. The world, he teaches, is open-ended: we don’t know all that there is to be known. In Kirzner’s words, this is utter ignorance, as opposed to “rational ignorance,” where we knowingly choose to remain ignorant of something.
Judging by the past, we can know that much that awaits discovery would make our lives indescribably better. Thus, our interest lies in having the economic process that best encourages discovery. Obviously, it cannot be managed or guided by a central authority. That would require a knowledge unattainable. Therefore, the best way to encourage discovery is to leave people free to notice and respond to opportunities. If we know anything about human beings, it is that the lure of profit is the most effective stimulus to discovery. The best way to improve our lives, then, is to let the free market work.
In thinking about these matters, we must guard against materialism. By that, I mean we must not focus excessively on the physical assets of a company, its equipment and cash. What counts most in human affairs is ideas. An asset in one person’s hands may be worth much more than the same asset in another’s. Why? Because the first has an idea for using the asset in a way that better serves consumers. He will profit, while the second realizes only losses. Ideas rule the world. Ideas–good ones–animate dead matter.
The upshot is that if we as consumers are to get the most out of our world, we need markets free of government control. Entrepreneurs must be free to act on their hunches about the future and to try new things. That includes mergers, buyouts, and the lot. To let the government sit in judgment of these activities is to ignore one of the very reasons we need freedom.
Mergers of financial institutions are no different from any other. The world and our need for financial services are always changing. Businesses, risking their own resources, must be free to attempt to anticipate those changes. Some ventures will fail. Others will succeed and serve us well. We can’t know in advance which will be which. Intelligent trial and error are the market’s ways of improving our lives.
The regulators are too ignorant to have a say. That’s not an insult. It’s a fact.
