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Free Enterprise versus Big Business

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Key Points

By Joe Duffus

Milton Friedman often said, “I’m not pro-business. I’m pro- free enterprise.” What did the famed economist and Nobel Prize winner mean by that?

Friedman was getting at something that isn’t obvious to most people who don’t run their own business. Specifically, he wanted the marketplace to be open to competition from both large and small businesses. Friedman knew that the biggest killer of small business was not competition from bigger rivals, but from not being able to comply with vast government regulations.

As Peter says in the latest episode of The Drill Down podcast, “One of the ways a big company gets bigger is by driving smaller weaker competitors out of business. The easiest way to do that is by creating onerous regulations.”

Why? Because big businesses have the lobbyists to help write those regulations. They have the money to contribute to the politicians who advocate for those regulations. And they already have the huge compliance departments set up to deal with the regulations. Small companies don’t. And this is what led to the failure of smaller banks and financial firms and also grew the larger players, such as Goldman Sachs and BlackRock, into the enormous, powerful behemoths they are today.

The Dodd-Frank legislation, passed after the 2008 financial crisis, illustrates this pattern. As Tom Hoenig (then President of the Federal Reserve Bank of Kansas City and now a Director of the Federal Deposit Insurance Corp. (FDIC) said, “Dodd-Frank has raised the cost of financial transactions in America and that encourages consolidation because it’s the only way you can spread the costs over larger assets.

Financial industry lobbyists representing the largest firms actually helped write the bill’s provisions. As Peter notes in the podcast, “Large companies love regulation and that’s what happened with Dodd-Frank.”

This is “the dark underside of how big businesses really like regulations.”

Eric raises a more recent example. During COVID govt imposed regulations, the fifty largest companies experienced a 2 percent revenue growth during the pandemic, while small businesses’ revenues shrank by 12 percent.  As many as 20 percent of small businesses may not be coming back at all. And who will be the winner then? The big businesses that were able to handle the regulations imposed by the government during the lockdowns that devastated their smaller competitors.