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"Big Corporations Almost Never Lose Money"

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That's an actual quote from Galbraith's New Industrial State. And somehow the last two years are supposed to show that Friedman was out of touch with reality? I'm speechless, but fortunately Amar Bhide gives me a rhetorical bail-out in F2P2:

Arnold Kling and Nick Schulz: There was a time in economics and management circles where people believed that large corporations were, in a sense, omnipotent. As John Kenneth Galbraith once put it, "The big corporations do not lose money." But there has been a sea change in the perception of large firms, which were once thought to be so powerful. What are some of the things that have forced that change in perception?

Amar Bhide: Companies are not exactly like human beings, but they do have an inherent tendency to decay and die, and I think Galbraith was looking at these firms in their middle-age. We didn't have three hundred years of history when Galbraith was looking at these firms. The game had not fully played itself out.

In a capitalist society, and particularly the American capitalist society, there is a very strong pressure to either grow or die. You cannot sit still. No matter how large you've become, there's a great deal of pressure from the labor markets, from the capital markets, from your customers, to keep growing. And there's a point in which it is literally impossible to grow, or it's virtually impossible to grow. What I think of as the inevitable mortality induced by this grow-die imperative had not played itself out by the 1950s.

P.S. While we're on the subject of big corporations losing money, check out EW's enlightening cover story on the 50 Biggest Bombs in the history of television. People don't buy stuff just because it's in stores, and they don't watch it just because it's on the air. The bigger they are... you know the rest.

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david writes:

A quote from the forward of the 2007 edition, written by (James) Galbraith:

Forty years later, the main charge against The New Industrial State is that it did not anticipate the thrashing that American business received over the decades since 1970. [...]
Galbraith wrote of the American corporation at the height of its power, while his critics pretended that corporate power didn't exist. Then they pilloried him for failing to predict the decline of particular firms - the decline somehow proving that the power never actually existed.

Posted January 25, 2010 12:36 AM

Tracy W writes:

David - if the corporations couldn't maintain themselves in their state of power, then were they really powerful?
Yes, the decline is not a definitive disproof of the idea that corporations were powerful in the 1950s. But it should lower one's Bayesian priors about the likelihood of Galbreith's hypothesis being right.

Posted January 25, 2010 8:25 AM

Ryan writes:

The only way powerful corporations can maintain their state of power is through periodic and drastic reinvention of themselves. They then, arguably, are the same in name only. Those that make this type of transformation are the exception, not the rule. Look at the work of Harvard's Clayton Christensen on this subject.

Furthermore, to extrapolate on the fundamental nature of corporations from the relatively small number of ultra-successful survivors while ignoring the countless thousands that have perished seems to be the exact type of innumeracy addressed in Taleb's book Fooled by Randomness.

Posted January 25, 2010 11:44 AM

Bill Conerly writes:

Though I generally agree with your point, it's worth reading what Galbraith actually said. Go to Amazon, search for New Industrial State, then search inside for the phrase "lose money" and you'll find that Galbraith said (on page 103), "...big corporations almost never lose money." The "almost" is a significant difference from the quote cited in the post. Then Galbraith actually cites data on how many of the 100 largest industrial companies, and the 50 largest merchant companies, lost money over several years.

If there's a story here it's either that 1) the incidence of loss among corporations has increased, or 2) aside from major recessions, it's about the same. Better to do some research than jump to a conclusion.

Posted January 25, 2010 10:38 PM

Ryan writes:

Bill Conerly,

This is a textbook example of survivorship bias. You absolutely can not pick the top 100 [anything] and then make generalizations about attributes that would've impacted inclusion in the top 100!

http://en.wikipedia.org/wiki/Survivorship_bias

Posted January 26, 2010 2:08 PM

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