What is the ideal size of the firm? The question has been batted around by economists for a century. On the one hand, the answer should be obvious. The competitive market should determine results. Whether that leads to a vast array of small businesses, or gigantic businesses with massive integration, it should be dictated by profit, loss, and an active market for mergers, acquisitions, and corporate control.
The results don’t need to be gamed or dictated.
On the other hand, the market doesn’t always dictate. Government regulations, privileges, restrictions, and protections can cause every manner of distortion. And despite some efforts at deregulation, these have more recently been matched by new restrictions on trade and hiring with the emergence of a papers-pleasure culture of employee vetting.
Adam Smith put the issue plainly. “The real and effectual discipline which is exercised over a workman is not that of his corporation, but that of his customers,” he wrote. “It is the fear of losing their employment which restrains his frauds and corrects his negligence. An exclusive corporation necessarily weakens the force of this discipline.”
What did Smith mean by “exclusive corporation?” He was referencing the old-world habit of government to give privileges to some and place restrictions on others. These always intervene in the capacity of firms, of whatever size, to serve the customer, who should be the final source of control in an enterprising economy.
Rise of the Indebted Giants
In light of this, consider the wave of consolidation now affecting the communications industry. The trend is striking. AT&T has been approved to buy Time Warner. Comcast has made a bid to purchase 21st Century Fox. According to the Wall Street Journal, these two giants alone “will carry a combined $350 billion of bonds and loans.” And this might just be the beginning; there are rumblings of additional mergers and actions affecting CBS, Verizon and Viacom.
It’s not just communications. It’s airlines, tech companies, retailers, banks, shipping companies, hospitals, and manufacturing of all sorts. The trend is toward big as far as the eye can see. And this is happening at a time when technological availability should be favoring small, because the costs of core operations keep falling. Technology was supposed to give us decentralization; every trend we are seeing is showing the opposite.
In a normal market, no one should be concerned but this is not a normal market. Communications is highly regulated at all levels, and competition is not taking its normal course. The compliance costs of regulations, taxation, licensing, issues of intellectual property, restrictions on trade, all covering hundreds of thousands of pages, and requiring the service of an army of attorneys, causes a bias in favor of big over small. The same is true in all industries.
A curious David Leonhardt of the New York Times had a simple question about this trend. What have been the trends in average firm size over the last 25 years (just to choose an arbitrary figure)? So far as he could tell, no one had really put together this data, so he decided to do the research himself. The results are extremely interesting.
The share of Americans working for small companies fell to 27.4 percent in 2014, the most recent year for which data exists, down from 32.4 in 1989. And big companies have grown by almost an identical amount. Today, companies with at least 10,000 workers employ more people than companies with fewer than 50 workers.
Here is a chart to put a nice visual on the trend.
Market economists have always believed that bigness deserves a defense when the results are driven by market considerations. It is not up to government to decide, which is why Leonhardt’s conclusion is just wrong. “A government that wanted to reduce the power of big business,” he writes, “could do so. Here’s hoping we get such a government sometime soon.”
What Leonhardt suggests is that the very government that is gaming the system in a way that promotes bigness reverse course and do the opposite: disallow mergers, break up companies, regulate firm size. This is pointless.
If we are concerned about the rise of the ginormous corporation, and perhaps we should be, why not start with lowering barriers to entry, removing regulations, cutting more taxes, blasting away expensive mandates and litigation landmines? If we work toward a truly laissez-faire environment for business, we could let the market discover the right combination of big, medium, and small that serves consumers best. Piling interventions upon interventions takes us in exactly the wrong direction.