Centralization Causes Problems

Nobel prize winning economist Ed Prescott believes that centralization is a problem wherever it be located. Whenever we have too few competitors (too-big-to fail banks), or if a single organization gets too large (the government), things become less efficient. In these situations, more time is spent sticking to the status quo instead of innovating. Public or private, centralization leads to a bureaucratic mess.

Moreover, the larger an organization, the more centralization and less diversity.   True, numerous business books have touted more of a decentralized “team” attitude in the last decade or so. But many large organizations are still very hierarchical, allowing little diversity of viewpoint.  Groupthink also commonly occurs. 

More importantly, when you have a couple of giant organizations in a given market, it means that there are less competitors.  In the banking space, for example, we have extensively documented that breaking up the giant banks would allow small banks to thrive. 

So – by definition – organizations that are too big decrease diversity in competition.

Decentralization and competition introduce solutions to many of our problems. Before making large corporations or the government bigger, we should consider other options to problems.