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Small isn’t always best, or even all that beautiful

The problem I often see in left-libertarian writing is the sense that the world of freed markets would look dramatically different from what we have. For example, would large corporations like Walmart exist in a freed market? Left-libertarians are quick to argue no, pointing to the various ways in which the state explicitly and implicitly subsidizes them (e.g., eminent domain, tax breaks, an interstate highway system, and others). They are correct in pointing to those subsidies, and I certainly agree with them that the state should not be favoring particular firms or types of firms. However, to use that as evidence that the overall size of firms in a freed market would be smaller seems to be quite a leap. There are still substantial economies of scale in play here and even if firms had to bear the full costs of, say, finding a new location or transporting goods, I am skeptical that it would significantly dent those advantages. It often feels that desire to make common cause with leftist criticisms of large corporations, leads left-libertarians to say “oh yes, freed markets are the path to eliminating those guys.” Again, I am not so sure. The gains from operating at that scale, especially with consumer basics, are quite real, as are the benefits to consumers.

Steve Horwitz.

(Hat/Tip, Econlog, which has other thoughts here.)

I am all in favour of ending “corporate welfare” – for ALL sizes of firms; I think tariffs, subsidies, “soft loans”, eminent domain property land-grabs, huge extensions to intellectual property such as patents (I think some forms of IP are okay, the more clearly and narrowly defined), and so on, count as such welfare. But none of this means we have to make the error of automatically saying that small firms are somehow less bad than larger ones are. And remember that when a firm, even a brilliantly-run one with no government aid, gets large, that unless it is very lucky, its sheer size can reduce its nimbleness in responding to new challenges to its position. I don’t have the data to hand, but I read somewhere that of the firms in the Dow Jones Industrial Average in 1950, fewer than half are still there.

So the next time you hear someone waxing indignant about WalMart or Tesco’s, bear that sort of thing in mind.

20 comments to Small isn’t always best, or even all that beautiful

  • Alex

    I agree with you both.
    Would freer markets reduce the size of the biggest firms? As long as they are competing fairly I don’t care.
    I suspect it would, for the nimbleness reason, plus
    1. The reduction of regulatory capture
    2. Regulation costs small firms proportionately more than big firms.

  • Surellin

    Of the original companies comprising the Dow Jones Industrial Average in 1896, only General Electric is still a component. Wiki has an interesting historical look at the components of the Dow – I’m pretty sure that most of the companies from back in the earlies don’t even exist any more.

  • Antoine Clarke

    The 1950 list was unchanged since 1939.

    Of these only E. I. du Pont de Nemours and Company, General Electric Company, and Proctor & Gamble remain in the index.

    See here: http://en.wikipedia.org/wiki/Historical_components_of_the_Dow_Jones_Industrial_Average

  • Mose Jefferson

    I’ve never understood the Left’s hatred of one-stop shopping. You’d think they’d relish the opportunity to spend more of their time re-reading “The Grapes of Wrath” and “The Jungle”.

  • aj

    But how many of the companies to leave the Dow went bankrupt and how many were acquired or merged with another or changed their names?

  • Mary Contrary

    Try adding “limited liability for investors” to that list of “subsidies” and you might come out with a different answer.

    Of course, views on the evilness or otherwise of limited liability differ, but in my experience so-called left-libertarians often have it high on their list of ways the State props up Evil MegaCorps

  • Laird

    I agree with Johnathan’s points. There’s nothing inherently wrong with size; it does lead to efficiencies of scale and scope, which can translate into benefits to consumers. Just as long as they compete fairly, as Alex said. I would point out that Walmart got large in the first place because of the value it provided to its customers. Government benefits of various forms may assist it to remain large, but I think it would do so anyway even in the absence of such benefits. (And those benefits are by no means universal: how many towns have you heard about which are hostile to Walmart and are trying to keep it out, to protect small local businesses? Not every place uses eminent domain for Walmart’s benefit.)

    With respect to Mary Contrary’s point, I would argue the limited liability is more beneficial to small firms than to large corporations. The mega-corps have the wherewithall to defend themselves in lawsuits and to pay any judgments which might occur; it’s the small proprietor, whose entire net worth is on the line, who really benefits from that protection. Which isn’t to say the limited liability is either good or bad (that’s a separate discussion), just that it isn’t the boon to mega-corps that left-libertarians seem to think it is.

  • Stonyground

    With regard to large companies having too much inertia to react when times change. Companies that manufacture a product surely have far greater difficulties than retailers. If there is a sudden unexpected shift in the kinds of things that people want to buy, a retailer might be stuck with some stock that has to be sold at a loss in order to get rid of it. But then all they have to do it restock with whatever is now popular and they are back in business. A company that is manufacturing something that is no longer selling has to design something new and re-tool to make it. This takes time and there is no way of knowing, until you have started production, whether the new thing is going to sell.

    When Woolworths went out of business a couple of years ago, the first thought that occurred to me was that I hadn’t been in one of their shops for years. The first names that I think of when it comes to cheap everyday items are Wilkinsons and Boyes. It seemed odd to me that Woolworths’ managers were unaware that Wilco and Boyes were taking most of their former customers and were unable to react.

  • Large companies sometimes have advantages in terms of economies of scale. There is nothing wrong with them (and there came be no shortage of things good with them) as long as they are not protected from competition and as long as they are not stopped from failing when things go wrong. At present, they often ask governments to protect them from competition and prevent them from failing in various ways, which is bad.

    So if you get rid of government (or make it much smaller), I am not sure whether companies will be larger or smaller, but I tend to think big companies will be shorter lasting, at least in that period of their life cycles when they dominate particular industries.

  • Rich Rostrom

    While regulatory capture is usuallly presumed to favor large businesses, coalitions of small businesses often achieve it too. Hairdressers and undertakers (neither very large) have both done it.

    In Japan, retailing was for decades regulated to protect an immense number of small shops, denying consumers lower prices and convenience.

    As to the relative nimbleness of retailers and manufacturers… A retailer has a lot more “sunk assets” than the current stock in the shop. The shop (or shops) themselves are a huge asset. If demographics shift, the old locations become a huge drag.

    Staff can be turned over, but not quickly.

    There is also brand identification. A retailer which is noted for selling products of a particular style, quality, and price range cannot transit overnight into entirely different market segments. For one thing, at any given moment, the old brand still draws in customers who may not go for the new brand, while those who would like the new brand have to be persuaded that this particular retailer can provide it well. A long established market identity is thus both an asset and a handicap.

    And there are also effects of being squashed by outside trends. A retailer specializing in a class of product will die if the product class dies.

  • thefrollickingmole

    Ive just come back from a franchise meeting for my business.

    A few of our problems seem to have cropped up in this article.

    One: Economy of scale. We would get our products about 1/2 the price we are currently charge if we could commit to a fairly huge quantity of them. In theory we could do so.

    But: That would mean we would have to set up a warehouse arm, a step the franchisor has no expertise in. Then theres the possibility of being stuck with a warehouse full of “betamaxes” instead of CD players if the order is wrong/mistakes are made.

    The company currently has 2 areas it is focusing on, franchising, and sales.

    We have gained from government over regulation of our industry sector, it is effectively impossible for a small business to join it due to the sheer amount of compliance and regulation imposed by government. We are fortunate our “back office” was set up prior to the regulatory changes.
    The fact that this has removed new competition and is actually bad for consumers has completely escaped the government.

  • Alsadius

    Antoine, you missed a few – Standard Oil of New Jersey is now known as ExxonMobil, and Standard Oil of California is now known as Chevron(and it now owns the Texas Corporation, aka Texaco). United Aircraft is now United Technologies. And while AT+T is a borderline case, due to the breakup, there’s still an AT+T on the index. However, even with those included, that’s only 8 of the 30 that remain, so the broader point stands.

  • Paul Marks

    Would the “libertarian” left like large enterprises any better if they were individually owned – and not “corporations” (like churches and so on are)?

    No they would not.

    Would they like railways and private roads any better if they were not subsidised by government?

    No they would not.

    Would they like large enterprises any better if the vast web of government regulations (which hit large companies as well as small ones now) and the endless flood of “cheap” (i.e. low interest rate) credit money was shut off?

    No they would not.

    “How do you know that Paul?”

    Because of who they support – and who they work with.

    The savage “Social Justice” mobs of Egypt (and so many other places) – they (the “libertarian” left) support then.

    Chevez in Venezula?

    Of course – he is “better than the regime the Americans would support” (this is written by people who were born and raised in the United States – they still think of “the Americans” as alien, and they do not even understand that Barack Obama is one of their own).

    The international (and fanatically collectivist) “Occupy” movement?

    Again of course – they can be seen with their Black Flags happily cooperating with the Red Flag Marxists (after all both want to destroy civil society – sorry “captialism”).

    The unions (even the Communist led Chicago Teachers Union)? Of course – they support them as well. Come over to dinner Mr and Mrs Ayers you are the allies of these “libertarians” against the evil “capitalist corporations”.

    These people are not honest libertarians who just want this or that regulation repealed or the government not to build roads.

    They are Social Justice types – and they are to the core of their being. What they are trying to do to the word “libertarian” is what the left did to the word “liberal” a century ago – turn in round 180 degrees.

    Turn a word that meant pro business, pro lower taxes and less regulations – and make it a word that means (at least in the United States) pro collectivist, anti private enterprise.

    Once liberal journals such as “The Nation” attacked collectivists such as Richard Ely – by the 1920s they were supporting their ideas.

    That can happen with the word “libertarian” – just as it happened with the word “liberal”.

    All that is needed for defeat (total and absolute defeat) is to treat these people as if they were honest and well meaning.

    They are neither – they are liars (they will lie and twist quotations in the “best” tradition of Karl Marx himself), and they are not well meaning.

    What they want is not civil society – they want the destruction of what is left of civil society.

    They want the world reduced to blood and ashes.

  • AT&T is a situation where a company was divested from a parent company, and ended up acquiring the parent company it was divested from (as well as various other companies, some of which were also divested from that parent company) and upon doing so taking on (or possibly retaking) the name of that parent company. Whether than makes it the same company or a different company is one for the philosophers.

    To a first approximation, Verizon is the other half of the original AT&T, too. So it’s kind of debatable whether that is a new company either.

    And anyway, the Dow is the wrong index to use. (The Dow is always the wrong index to use).

  • Laird

    “The Dow is always the wrong index to use.”

    Gave me a good chuckle. SQOTD?

  • I grant that large corporations with features unaesthetic to left-libertarians may continue to exist even in a truly free market, but I see no need to push away potential allies by pointing out this possibility. As long as they’re willing to oppose bailouts, protectionism, subsidies, or other forms of welfare, corporate or otherwise, we can work together.

    It’s worth pointing out that analogous “right-libertarians” who conflate being pro-free-market with being pro-business also exist. I’m generally more accepting of them than of left-libertarians for two reasons: to balance the anti-business sentiment so widespread in our culture, and because their errors seem to be less fundamental than those of the other side, or at least than those of any “libertarian” so far to the left at to use the word “propertarian”.

  • Paul Marks

    Eike Martinson.

    Please, please, please (pretty please with a sugar lump on top) understand.

    They are NOT “potentional allies”.

    The left “libertarians” are Chevez supporters and “Occupy” movement people (and so on) – they are evil to the very core of their being.

  • Dale Amon

    Paul, I had no idea you hated Murray Rothbard with that sort of passion.

  • Paul Marks

    Dale – if you really think that Murray Rothbard (a SUPPORTER of large scale private property in the means of production, distribution and exchange) was like Kevin Carson and co (ENEMIES of large scale private property in the means of production, distrivbution and exchange) you are mistaken.

    If you really think the Chevez supporters and Occupy movement people are “Rothbardians” perhaps you should watch the recordings the late Andrew Breitbart made of them.

    As for Rothbard – back in the 1960s (the decade you are stuck in) Rothbard did indeed come out with the “left and right join hands” bullcrap, and pretended that the Communist aggression in Indochina was a revolt againt “Western Imperialism”.

    However, Rothbard never (not even in the insanity of the late 1960s and early 1970s) opposed large scale private property in the means of production, distribution and exchange.

    The basic point of the “libertarian” left is to DESTROY large scale private property in the means of production, distribution and exchange.

  • Paul Marks

    Oh by the way….

    Electric cars do not save vast amounts of C02 emissions if the electricity is generated by the conventional burning of oil or coal.

    There were good reasons why the internal combustion engine won out in the competition with electric cars a century ago. Electrial technology has indeed changed – but whether it has changed enough remains to be seen.