Bigger is Better…?

[ad#righthandside-tall]It seems people generally consider strength as highly correlated with size. Big corporations are much more powerful than small firms or individual entrepreneurs, small states are “at the mercy” of bigger states, big people are more terrifying than small. Yet the wisdom of the ancient giants in structured thinking talk of size and strength as very different, even the Bible show how the “small” David beat the living hell out of the monstrous giant Goliath.

The instinct that size equals strength lives on, however, and seems to be something that we need to learn how to live with. But with size comes a large number of problems – there is a reason the dinosaurs, the giants who ruled the earth some 70 million years ago, died out, just like it is rather unsurprising that insects are generally thought of by experts as the most successful type of species. It would not be totally surprising if future theories of how the dinosaurs became extinct show how they were simply too big – how there simply wasn’t enough space, food, etc. for all of these giants.

The same goes for organizations. Extremely big organizations struggle with problems that almost cannot be solved – collective action and organizing problems, surveillance, control, and overhead costs, etc. A large organization is generally much more vulnerable than a small organization. Just like the case of dinosaurs, a large organization is difficult to change – it is simply too rigid, too inflexible, and too heavy for its own good. Small organizations have no problem, or at least very small problems, totally changing its purpose and internal processes – small firms can easily adapt to quickly changing environments or even move to new markets completely; large firms generally do not have this luxury.

But it is not only levels of flexibility and rigidity that differ between small and large organizations. Small organizations/firms can utilize individual employees creativity and strengths and thereby keep innovate and change, while large organizations usually have very fixed and specific job descriptions and do not encourage (in reality, even though they often do pay lip service) creativity and change – such things are “threats” to “how things are done.” The large corporation is not about production but about calculation – the production process is faceless and anonymous, just like the corporation’s employees. Any worker is but a part of the machinery and can easily be replaced, at least in theory.

Ludwig von Mises wrote about the problem of large-scale attempts to control people and streamline processes, even though the argument was mainly targeting socialism (as it existed behind the “iron curtain”). It is however equally applicable on any kind of large-scale, control-based type of organization, therefore also on the corporation and any other kind of large body of collective action.

According to the calculation problem and the examples given above, we should be able to conclude that small firms, just like any type of small organizations, are more likely to successfully survive than larger firms or organizations. Large corporations are destined to starve or suffocate due to their own size – they will not be able to keep up the change and innovativeness required in a market.

And this would definitely be the case unless large corporations were so heavily subsidized by the state. For instance, Sweden’s large corporations (LM Ericsson, SKF, ABB, Volvo…) usually pay zero taxes and are paid directly by the Swedish state to stay in the country. One would think such a great deal – paying no taxes but getting more benefits than taxpayers – should mean these corporations are highly successful and profitable. And they are, but only periodically – never over long time periods.

Back to the dualism of small-large. It should be noted that the news media often report on large industrial corporations “in trouble” that require government bail-outs to survive; we very seldom (has it ever happened?) hear about small firms having the same problem, or a whole market being wiped out as market conditions change. Part of the reason is that small firms that are unable to stay innovative and meet market demands may disappear from the face of the earth, but the impact of it is at best very small. A large corporation always has an enormous bureaucratic machinery with hundreds if not thousands of people pushing papers with the sole purpose of controlling the corporation’s production process. The impact of a large corporation going bankrupt is therefore greater and more visible.

But the problem here is not that firms go bankrupt – this has been the case since the very first firm was founded hundreds (thousands?) of years ago. The problem is that the regulated market is biased towards big, where the ignorant notion of “big is better” has been built into coercive policies of government – companies aiming to be big are much more interesting to the state than companies aiming to survive and stay innovative.

The reason for this is that the state is the greatest example of the calculation problem – it is a monstrously large bureaucracy trying to “fix” problems (which are usually caused by its very presence or previous policies) through increased control. The state requires the market to be static and oligopolist – it is much easier controlled if it is. A nightmare for political rule would be a true market, i.e. a market consisting of a large number of small firms constantly and continuously taking advantage of creativity, innovation, and using change as a tool to get better and provide better services. Such a market is literally impossible to control, foresee, and calculate.

If the state would step aside we would see the market change rapidly – the large corporations would almost immediately start falling apart and either disappear or implement highly decentralized organizational forms with rather sovereign organizational units. Without the privileges granted corporations by the state they would find themselves in an impossible situation – their costs would be too high, their production processes too rigid and slow, their overhead costs way too large. A freed market would be the end for the large, bureaucratic corporation – only a limited few might be able to survive, but it is unlikely that they would be able to survive for long.

David would not have been able to beat Goliath if the state tied his hands while injecting Goliath with energy. This is exactly what is going on in the market today, where regulations are supporting large corporations working as economic states with departments, policies, and bureaucracies. In a sense, the state recognizes its organizational brothers. But just like David was able to beat Goliath through using creativity and flexibility rather than brute force and reliance on size, the market rewards innovation and ingenuity if left untainted and alone.

Bigger is neither better nor stronger. Something big is much more likely to get stuck and is usually too big to find and take advantage of the multitude of opportunities. And if something goes wrong with something large, it has enormous impact. The fact is, smaller is superior.