Some Rare Praise For Big, Chain Companies

by robekulick

It’s rare that you hear people say good things about big, chain companies, especially among the highly educated set that constitutes the social group anyone reading this blog falls into.  But there is one person, I know, Camp  W. who absolutely loves chain restaurants and big stores. He’s actually just about the only person I know who outwardly dislikes “mom and pop” operations.  So this particular blog entry is dedicated to Camp.

In this week’s New Yorker, the economics columnist, James Surowiecki wrote the following editorial entitled “Big is Beautiful”:

http://www.newyorker.com/talk/financial/2011/10/31/111031ta_talk_surowiecki

The main thrust of the article is that the fact that although politicians  and voters fetishize small businesses, big businesses are much more important in terms of maintaining a healthy economy with strong economic growth.  A few notable points from the article.

(1) Although the advocates of passing regulations to thwart large businesses in favor of small ones is generally promoted by “populists,” the fact is that such regulations actually raise prices for everyone. I’ll add that since price increases for consumer staples effect the poor proportionally more than the rich, thought of as a sort of tax, such regulations are inherently regressive.

(2) Surowiecki provides some interesting empirical evidence on the importance of big companies for economic growth. “Given that the overwhelming number of American businesses are small, and that, as we’ve all heard, small businesses create most new jobs, this seems reasonable enough. But the truth is that, from the perspective of the economy as a whole, small companies are not the real drivers of growth. One can see this by looking at the track record of the world’s economies. The developed countries with the highest percentage of workers employed by small businesses include Greece, Portugal, Spain, and Italy—that is, the four countries whose economic woes are wreaking such havoc on financial markets. Meanwhile, the countries with the lowest percentage of workers employed by small businesses are Germany, Sweden, Denmark, and the U.S.—some of the strongest economies in the world.”

and

“This correlation is not a coincidence. It reflects a simple reality: 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. This is true around the world. A recent study by the World Bank that looked at ninety-nine developing countries found that large firms had significantly higher productivity growth. And in the U.S. the connection between size and productivity is, as a 2009 study showed, especially close. 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; in the U.S., for instance, big companies account for the vast majority of R. & D. spending.”

Anyone who has studied Industrial Organization (the area of economics that deals with these questions) will be aware of the first issue, but I was unfamiliar with both pieces of empirical evidence. I think they’re very compelling.

Of course its one thing when consumers making their own choices choose to pay more for unique products. I’m certainly guilty of restaurant snobbery sometimes. And there’s nothing wrong with people pursuing their own tastes and preferences. But it’s important to keep in mind that despite the surface appeal of arguments for regulations favoring small-businesses, such measures are largely counter-productive from a common good economic standpoint. So overall its a pretty good thing that even though most people (Camp excluded) won’t admit that they favor big companies, when it comes to actually buying stuff we continue to favor them with our wallets.

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