Small is Beautiful… Can Big Be, Too?

uneven-scales

Recently I’ve noticed economic observers engaging in something of a backlash against the idea that small businesses are the key to economic prosperity. And as much as I hate nearly every feature of large corporations, I have to agree that the fetishization of small business is blind to the very important matters of stability and productivity.

In one important contribution to this emerging counter-trend, Jared Bernstein of the progressive Center on Budget and Policy Priorities wrote an op-ed that appeared in the New York Times under the title “Small Isn’t Always Beautiful”. Bernstein is primarily concerned with job growth, and while he seems to tacitly admit he’s ignoring the rest of the big vs. small picture, that picture is by no means black and white.

Think Progress’s Matt Yglesias picked up on the Bernstein piece, praising purported evolutionary characteristics of the growth of firms. This prompted Karl Smith at Modeled Behavior to wax positively apoplectic about this “market selection” process that weeds out the little guys and yields benevolent giants.

Perhaps most readably, The New Yorker financial writer James Surowiecki made a series of astute, essentially undeniable points about large vs. small businesses vis a vis economic growth, under the title “Big is Beautiful”. He followed up these statements (which I’ll get to in a minute) with a conclusion that only makes sense in a world where all economic writing in the American liberal press has to somehow uphold the absurd notion that capitalism is not utter lunacy. In the end, Surowiecki conspicuously does not uphold the title assertion about big being beautiful, but rather just exposes one of capitalism’s many critical contradictions: that big and small are often both bad and good simultaneously.

Let’s look at some of Suroweicki’s unassailable truths, all building the case that large companies are good for the economy because “greater productivity is the main driver of long-term economic growth and higher living standards”:

small businesses are, on the whole, less productive than big businesses, and though they do create most jobs, they also destroy most jobs, since, while starting a business is easy, keeping it going is hard.

True enough (though I think semantically it should say small businesses create and destroy the most jobs, not most jobs).

In part, this is because big businesses are able to enjoy economies of scale and scope. Big businesses are also better able to make investments in productivity-enhancing technologies and systems;

Another truism. And these are big matters. Productivity and employment stability are huge factors in any economy.

But let’s look at some of the more qualitative assessments of the large-small break.

A recent study by the economists Erik Hurst and Benjamin Pugsley shows that only a tiny fraction of small-business owners have any interest in becoming big-business owners, or even in bringing a new idea to market. Most are people who simply want to run a small company, do work they enjoy, and have some control over their own financial lives.

Now that’s curious: most small-business owners (thus almost certainly most business owners) are in it not for empire or wealth so much as for self-management and fulfillment.

Some of the [political] support [for small businesses] derives from real virtues that small companies offer—diversity of choice, connection to local communities.

Surowiecki doesn’t take this further, but it’s also true that large businesses have an incredibly difficult time meeting the challenges of diversity and community. He’s tacitly arguing for the loss of these things.

The conclusion?

Small may be beautiful. It’s just not all that prosperous.

Think about that. The more qualitatively appreciable way of doing business doesn’t provide as many stable jobs or as much growth as the approach that is inferior in qualitative terms. Shouldn’t such a glaring contradiction be considered a fundamental flaw of capitalism, rather than treated as a natural law of economics that we all just have to accept? In order for it to be a law, it would have to extend across systems and not be particular to just some, like market capitalism.

Let’s examine scale by looking at some of the relevant factors that inhibit small businesses from being more productive in raw economistic terms. It’s not too complicated; mainly, we’re talking about the ability to pool resources, carry out common tasks in-house vs. using vendors, and the advantages mass-oriented branding and reach.

  • wholesaling & resources – This is the most common element we think of when the term “economies of scale” is raised. The more you buy, the less you pay per unit, thus the higher the margin. Each item you stock in your corner grocery cost you more from the wholesaler than it did the giant chain that has a retailer competing with you across the street. If you custom-build motorcycles, you’re going to pay way more per tire than a big manufacturer does when it puts in an order for 100,000 at a time.
  • distribution – Whether you own your own trucks like many groceries, department stores, and other chains, or you simply have a huge contract with a major trucking company (and other shippers), you’re paying less per unit to ship the goods you sell if you’ve got a massive network and are shipping huge quantities around the clock.
  • R&D – Research and development is resource intensive, and in most industries it doesn’t make a lot of sense for the “little guy” to buck up against concentrated capital. Consider even that many (if not most) terrific inventions and innovations that arise from independent minds (rather than big R&D departments) get licensed and gobbled up by major operators, and also that rolling out innovations can often be costlier than developing them, and it’s easy to see why this area is dominated by big guns, with wonderfully notable exceptions.
  • labor – Payroll processing, benefit packages, human resources overhead, and numerous other costs of employing workers are cheaper per-unit for large companies with thousands of employees than for small businesses.
  • marketing – In a capitalist economy, massive advantage is accrued by firms that can leverage advanced or large-scale marketing campaigns. National companies can afford to create higher-end ads for multiple markets, and they can do ad buys in bulk.
  • market access – That larger companies can reach more potential customers is obvious, but consider that it also more likely includes overseas markets, and we see another fundamental advantage to scale.
  • capital and credit access – As a rule, big companies can more easily raise fundamentally more operating funds.
  • administrative overhead – Sure McDonald’s spends more on accountants than Joe’s Burger Joint, but probably not as a share of gross revenues. Big businesses concentrate and compartmentalize management and secretarial functions in ways that small operations simply cannot.
  • environmental impact – (This isn’t a productivity factor, for the most part, but I’m including it so we can assess and understand the fuller advantages of scale.) Environmental impact is a mixed matter, but generally speaking fewer facilities doing more concentrated production means less pollution, duplication, waste, and greenhouse gas emissions. However, it can also mean concentrated pollution that is fundamentally worse than distributed pollution (such as with factory farm waste). It can also mean more alienation between decision makers and the habitats they affect, which encourages careless policies. And it can lead to increased shipping activity. But overall, like it or not, fewer facilities would be more environmentally friendly than more facilities, assuming the same production output.

All these advantages would seem to uphold Surowiecki’s conclusion that big businesses are the true backbone of growth, and that the more of them we have, the better off everybody is.

Setting the rest of their relative “ugliness” aside for now, let’s first note that an economy heavily reliant on big businesses isn’t without growth- or jobs-related liabilities, not to mention the political threat of conglomerated capital. As unlikely as the corner store may be to innovate or offer a great benefits package, it’s also unlikely to offshore jobs or move overseas at the drop of a dime. And while small businesses can associate to apply generalized pressure on policymakers, rarely can they muster the same kind of concentrated, specialized political influence as giants in fields such as manufacturing, agribusiness, telecom, finance, and so forth (especially compared to the power these sectors wield when they associate). Nor are small businesses so phenomenally distanced from the rest of the population — including their own workers and consumers — as giant corporations inherently wind up, enabling the notorious “faceless corporation” to engage in anti-social policies without having to face the consequences so immediately or directly.

Nevertheless, while he conspicuously fails to paint a complete picture of big vs. small for us to evaluate the merits of each, and by extension consider his thesis that “big is beautiful”, Surowiecki is correct on the matter of productivity advantages of scale and scope, and it’s a very important point that many who romanticize small business tend to want to downplay.

But all this contradiction exposes is how inadequate capitalism is. This isn’t some side feature of the system that naysayers like me can take potshots at. It’s a core attribute: the keys to productivity inherently detract from the quality of economic interactions. As scale increases, workers are alienated from their bosses and the products they make; consumers are alienated from the decision-makers of the businesses they patronize; marketing departments and firms add a whole layer to this mediation.

One of the key ways to grow an economy is to concentrate production processes in order to create greater marginal advantages of scale. This also tends to concentrate capital and to alienate capitalists from consumers, not just within firms (think of the quality of interactions at Barnes and Noble compared to your local independent bookseller), but also in the economy as a whole as more and more small businesses give way to big competitors, leaving fewer producer-consumer interfaces available.

A sane economic system would harness the opportunities of scale without losing the advantages of more intimate enterprises. But how could this be done? What is keeping firms from doing this in a market capitalist system?

The key problem is propriety. In order to achieve scale in a competitive market system, a company has to grow itself. Want a spiffy ad campaign? You have to be national. Want to do your own shipping? Get vertical.* To take advantage of scale in a market economy, a business has to grow its power base. In doing so, it sacrifices the community connections and personal capacities that make it a quality employer and producer. This is a simplistic generalization, but it’s basically stipulated by reasonable critics of the “small is beautiful” mentality.

The key, then, is to break the bonds of competition so that all producers of all sizes can take advantage of scale. In a participatory economy, scale would be built into every enterprise, no matter the size. While each firm would have to demonstrate its ability to work generally as efficiently with resources as the others in its industry, it would have the freedom to customize and personalize everything from its workplace to its products, within socially agreed norms that maintain the integrity of its output.

Let’s see how a participatory economy fairs on the main productive aspects of scale mentioned earlier.

  • wholesaling – In a “parecon”, all resources are equally accessible by all producers. Without markets, all allocation is merely a logistical matter, with no one looking to take a cut out of being the “middle man” doing the simplest or fewest transactions for the highest relative return.
  • distribution – All firms have equal access to distribution networks with priority managed through participatory planning that seeks equity (fairness) rather than profit in distribution. There is no obvious advantage to a firm being large, except that it might influence location of transportation “hubs”. Locating near such a hub would achieve this advantage for a small producer.
  • R&D — The elimination of patents and intellectual property means the advantages of all inventions and innovations are immediately available to all producers. The advantage of this to the entire economy cannot be overstated.
  • labor – In a parecon, aside from relatively minimal overhead of tracking personnel, the marginal advantages of scale offered to large employers in modern capitalism are all but eliminated. No more bulk health insurance packages or payroll management to tip the scales in favor of big players.
  • marketing – Participatory socialism entirely eliminates the need for marketing, trusting consumers to know what they want and facilitating the acquisition of it without hawking wares through an artificial desire-creation machine that itself constitutes a net drain on the economy, requiring work and spawning waste where there need be none.
  • market access – The entire participatory economy benefits from giving all producers bilateral access to consumers (who are after all participatory planners), but more importantly, a lack of such access on a large scale would not make or break a firm. Parecon facilitates appropriately scaled consumer-producer interactions, and it does so fundamentally better than any capitalist marketing department or firm could ever dream.
  • capital and credit access – All firms have access to the counterparts of these features in a participatory economy, with industry and consumer councils considering all proposals for expansion on their merits. Size would not be a condition for acquiring increased capacity.
  • administrative overhead – This is perhaps the one area where participatory socialism might at first appear weaker than capitalism. No doubt, generally more “man hours” will be spent on managerial tasks inside a given firm or industry, though many administrative tasks would either be eliminated or would lend themselves to concentration with the achievement of scale. In any case, the upside of this distributed (collective) management is the huge advantage of widespread personal empowerment as a byproduct of economic activity. This is that self-management factor Surowiecki noted as an incentive for small business owners to stay small. There’s no concentration of managerial power or overhead at the top… and this is good. Most of us want a nice, comfortable, fair share of management, not a king’s ransom of power.
  • environmental impact – On this matter, there’s really no contest. In a participatory economy, there are in theory essentially no externalities; the environmental effects of production and consumption are built into “prices”. This would likely encourage scaling of at least some aspects of many production operations, all else being equal, but it would only be one factor, and it wouldn’t necessarily effect key elements of an enterprise, such as community interface or worker self-management.

In short, a participatory economy permits firms of various sizes to productively coexist, respecting the needs of each operation and the population it serves (both workers and consumers), be it local, regional, international, and so forth, all while increasing access to most of the advantages currently only associated with large-scale firms. By eliminating the incentive to make those advantages proprietary, society can assure that they don’t get hoarded. If society decides the efficiency enhancements of concentrated administrative activity and softened environmental impact militate toward increased scale, such would be the trend. But if consumers and workers decided smaller is indeed overwhelmingly desirable in terms of workplaces, public interfaces, product outlets, etc, few if any advantages of scale would be lost on smaller firms.

An economic system that offers the advantages of economies of scale and the advantages of small, personalized enterprises would seem to be fundamentally superior than one that poses a trade off. Too bad the very idea of a rational economy is outside the realm of acceptable discourse, where a system rife with contradictions has been pre-ordained.

 

* There are notable exceptions in businesses that pool resources to achieve some advantages of scale, including owner cooperatives and associations. Better known is the franchise model. But these exceptions have weaknesses that prove the rule. To the extent they achieve scale through association, they lose the distinct characteristics that customers and employees appreciate.

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