July 5, 2016 Reading Time: 3 minutes

In my brief “Small Businesses Leverage Their Size,” released today, I explore the benefits to businesses of being small, nimble and close to customer and market information on the ground. My discussion reflects a line of thinking in economics that touts the benefits of many small, decentralized entities as opposed to fewer larger ones. This point of view has been shared by many thinkers in the field, both classic and modern.

A look at economic thinkers who have advanced these ideas shows that free-market proponents are not necessarily advocates of “big business,” and free-market critics do not necessarily rely on “big government.”

Adam Smith’s classic conception of the free market and invisible hand is based fully on small, decentralized consumers and firms with the power to make their own decisions. Smith’s disdain for government laws that restrain these decisions is well known, but he also makes clear that such harmful meddling can come from big business:

“The pretense that corporations are necessary for the better government of the trade, is without any foundation.  The real and effectual discipline which is exercised over a workman is not that of his corporation, but that of his customers.  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.”

As noted in the brief, libertarian economist Friedrich Hayek also recognized the value of small, decentralized decision makers, especially as they pertain to gathering and responding to information that is also decentralized.

“Circumstances of time and place,” in Hayek’s view, cannot be fully understood by central planners, and decisions based on such information should be left to the “man on the spot.”

Economist E.F. Schumacher, author of the 1973 book “Small Is Beautiful,” (and namesake of AIER’s neighbor, the Schumacher Center for a New Economics) came from a vastly different point of view than Smith and Hayek, harshly criticizing the excesses of the unfettered free market and profit motive. But Schumacher’s view of social organization, like Smith and Hayek, hinged on small decentralized groups:

“There is no such thing as the viability of states or of nations, there is only a problem of viability of people: people, actual persons like you and me, are viable when they can stand on their own feet and earn their keep. You do not make non-viable people viable by putting large numbers of them into one huge community, and you do not make viable people non-viable by splitting a large community into a number of smaller, more intimate, more coherent and more manageable groups.” 

While Schumacher would emphasize motivations other than profit, there are notable parallels to Smith’s quote above: centralized, top-down organization impedes the positive outcomes that happen when people or small groups make their own decisions.

This view, along with the specific discussion of today’s small businesses in the brief, is echoed in today’s local movement. Restauranteur Judy Wicks, a pioneer in the use of ingredients from local farmers, touted the benefits of being small in nearly identical terms to the businesses owners with whom I spoke: “I realized that when we grow in physical size, we give up something very important-authentic relationships with the people around us and those we do business with,” she said during a lecture to the Schumacher Center. Such a small or local business is a modern embodiment of Hayek’s “man on the spot” or Schumacher’s more intimate and manageable group.

The thinkers discussed above focused mainly on how small and decentralized entities benefit society. In my new brief, I discuss how small businesses can leverage their size to reap the same benefits competitively for themselves against larger firms. Whether in politics, economics, or competitive strategy, bigger is not always better.

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Max Gulker

Max Gulker

Max Gulker is a former Senior Research Fellow at the American Institute for Economic Research. He is currently a Senior Fellow with the Reason Foundation. At AIER his research focused on two main areas: policy and technology. On the policy side, Gulker looked at how issues like poverty and access to education can be addressed with voluntary, decentralized approaches that don’t interfere with free markets. On technology, Gulker was interested in emerging fields like blockchain and cryptocurrencies, competitive issues raised by tech giants such as Facebook and Google, and the sharing economy.

Gulker frequently appears at conferences, on podcasts, and on television. Gulker holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxg_econ.

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