Big Is Beautiful Debunking the Myth of Small Business Robert D Atkinson and Michael Lind The MIT Press Cambridge, Massachusetts London, England © 2018 Massachusetts Institute of Technology All rights reserved No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher This book was set in ITC Stone Sans Std and ITC Stone Serif Std by Toppan Best-set Premedia Limited Printed and bound in the United States of America Library of Congress Cataloging-in-Publication Data is available ISBN: 978-0-262-03770-9 eISBN: 9780262345651 ePub Version 1.0 Table of Contents Title page Copyright page Preface Acknowledgments I History and Present Trends 1 Belittled: How Small Became Beautiful 2 Why Business Got Big: A Brief History 3 Understanding US Firm Size and Dynamics II The Advantages of Size 4 The Bigger the Better: The Economics of Firm Size 5 Small Business Job Creation: Myth Versus Reality 6 The Myth of the Genius in the Garage: Big Innovation 7 Small Business in a Big World III Politics and Policy 8 A Republic, If You Can Keep It: Big Business and Democracy 9 The Strange Career of Antitrust 10 Brandeis Is Back: The Fall and Rise of the Antimonopoly Tradition 11 Has Big Business Gotten Too Big? 12 Small Business Cronyism: Policies Favoring Small Business 13 Living with Giants Index List of Tables Table 3.1 US industries with an average establishment size of three employees or fewer, 2012 Table 3.2 US industries with an average establishment size of more than 400 employees, 2012 List of Illustrations Figure 3.1 Change in Average Firm Size by Industry, 1997–2012 (Employees) Source: US Census Bureau, Statistics of US Businesses Annual Data Tables 1997 and 2012, https://www.census.gov/programs-surveys/susb/data/tables.html Figure 3.2 Change in US Establishment Size by Industry, 1997–2012 Source: US Small Business Administration, Firm Size Data (Detailed Industry Data), https://www.sba.gov/advocacy/firm-size-data (accessed March 10, 2017) Figure 3.3 Trends in Average US Manufacturing Plant Size (Employment) Source: US Census Bureau, Statistical Abstracts of the United States (various years, 1900–1987), https://www.census.gov/library/publications/time-series/statistical_abstracts.html (accessed March 22, 2017); US Census Bureau, Economic Census: Manufacturing (various years, 1992–2007), https://www.census.gov/programs-surveys/economiccensus/data/tables.html (accessed March 22, 2017) Figure 3.4 Change in US Firm Entry and Exit Source: Ian Hathaway and Robert E Litan, “Declining Business Dynamism in the United States: A Look at States and Metros,” Economic Studies at Brookings (Washington, DC: Brookings Institution, May 2014), https://www.brookings.edu/wpcontent/uploads/2016/06/declining_business_dynamism_hathaway_litan.pdf Figure 5.1 Net Jobs Created by Firm Age, 2000–2013 Source: US Census Bureau, Business Dynamics Statistics (Longitudinal Business Database, Firm Characteristics Data Tables, Firm Age by Firm Size, 1977 to 2014), https://www.census.gov/ces/dataproducts/bds/data_firm.html (accessed March 17, 2017) Figure 6.1 US Business R&D by Firm Size Source: National Science Foundation, “Business Research and Development and Innovation: 2012,” NSF 16-301 (Arlington, VA: NSF, October 29, 2015) (Table 21 Percent of R&D by Firm Size), https://nsf.gov/statistics/2016/nsf16301/#chp2 Figure 6.2 Ratio of Share of Large Firms to Share of Small Firms Introducing New Products, 2010–2012 Source: OECD, OECD Science, Technology and Industry Scoreboard 2015: Innovation for Growth and Society (Paris: OECD Publishing, October 19, 2015) (Table 4.5.3 Firms Introducing Products New to the Market, by Firm Size, 2010–12, October 2015), http://dx.doi.org/10.1787/sti_scoreboard-2015-en Figure 7.1 Change in Average Firm Size in the United States and the EU-28 Sources: US Small Business Administration, Firm Size Data (Table Number of Firms, Establishments, Employment, and Payroll by Firm Size, State, and Industry) (database), https://www.sba.gov/advocacy/firm-size-data (accessed February 11, 2106); and Eurostat, Structural Business Statistics—Main Indicators (Number of Enterprises) (database), http://ec.europa.eu/eurostat/web/structural-businessstatistics/data/database (accessed February 2, 2017) Figure 7.2 Labor Productivity and Enterprise Size in the European Union, 2014 Source: Eurostat, Structural Business Statistics Overview, Labor Productivity by Size of Enterprise (database), http://ec.europa.eu/eurostat/statisticsexplained/index.php/Structural_business_statistics_overview Preface Small business is the basis of American prosperity Small businesses are overwhelmingly responsible for job creation and innovation In addition, small businesses are more productive than big companies As they power the American economy, small business owners are the basis of democracy in America, whose health depends on the existence of a large and growing number of self-employed citizens Yet Washington, controlled by big business and engaged in “crony capitalism,” systemically discriminates against small businesses Every word in the previous paragraph is false or misleading Small businesses create many jobs but they also destroy many jobs because most small businesses fail Virtually all big firms are more productive than small ones—that is why they got big and that is why they pay their workers more Only one particular kind of small firm contributes to technological innovation, the technology-based startup, and its success depends on scaling up, either on its own or in affiliation with large corporations, which are themselves extremely innovative because they can marshal the resources needed to invest in innovation Nor is it true that democracy and liberty in the United States depend on maximizing the number of Americans who are self-employed In the United States as in other nations, economic development is marked by the replacement of self-employed farmers and peddlers and artisans by a majority of citizens who work for medium-sized to large firms Civil rights and voting rights and freedom of expression are far safer in today’s American economy with its many big corporations than they were in the agrarian America of the past, when a small-proprietor majority coexisted with slavery, segregation, and the denial of rights to women and sexual minorities All of this is demonstrably true—and we have written this book to demonstrate it Why, then, is small business the most sacred of sacred cows in the United States, and other nations as well? The cult of small business in America can be attributed to two schools of thought— producer republicanism and market fundamentalism Producer republicanism, which holds that a republic must rest on a majority of self-employed small farmers and small business owners, is a relic of the Jeffersonian agrarian republicanism of the preindustrial era Producer republicanism has been anachronistic for more than a century, although it enjoys periodic short-lived revivals and is enjoying one at present among progressives The small business cult is also reinforced by market fundamentalism Market fundamentalism assumes that all markets are naturally competitive markets atomized among many small firms, in which competition, in the absence of government favoritism or business cheating, would soon whittle down any firm that temporarily got bigger than the rest This is a good description of firms in technologically stagnant, labor-intensive sectors of the economy, such as local shoe repair companies But it ignores the centrality in modern advanced economies of such sectors as manufacturing, transportation and infrastructure, and high-tech retail, which are characterized by economies of scope and scale In these industries, the supposed “laws” that students learn in Econ 101 not apply: monopoly can be efficient and rivalry among a few big oligopolistic firms can drive innovation These are the themes we develop in Big Is Beautiful Following a discussion of the small-is-beautiful rhetoric in chapter 1, in chapters through we detail the advantages of scale that have led businesses in America to become big and continue to get even bigger In the second half of the book, chapters through 13, we turn to the politics and policy of business Political corruption is a genuine problem, but public policy is warped as much or more by small business pressure groups as by large firms We argue that from the nineteenth century to the twenty-first, American antitrust or competition policy has been warped by a harmful bias against big firms as such While using antitrust legislation to assault many firms guilty only of the crime of success, the US government, motivated by a confused mix of populist and free market ideology, has showered favors on small firms, the greatest beneficiaries of so-called crony capitalism We conclude by calling for size neutrality in government policies toward business— including in taxation, financing and subsidies, procurement, and regulation—combined with a focus on new high-growth business, not small business, that is, on dynamic startups that can transform the economy, not on small businesses whose owners not engage in innovation and not seek growth Our motive in writing Big Is Beautiful is not hostility toward small firms, some of which have vital functions to play in a dynamic economy that includes firms of all sizes as well as nonprofit research institutions and growth-promoting government agencies Our intervention in this debate is motivated by our conviction that boosting America’s economy-wide productivity makes all other public policies easier to achieve The best way to boost productivity is to remove obstacles to the replacement of small-scale, laborintensive, technologically stagnant mom-and-pop firms with dynamic, capital-intensive, technology-based businesses, which tend to be fewer and bigger The current “small is beautiful” belief, held by both sides of the political aisle, represents a major barrier to that necessary and beneficial reallocation But doing so will require debunking the small-isbeautiful myth while at the same time working to restore the reputation of large firms as engines of progress and prosperity The eighteenth-century writer Jonathan Swift said that “whoever could make two ears of corn, or two blades of grass, to grow upon a spot of ground where only one grew before, would deserve better of mankind, and more essential service to his country, than the whole race of politicians put together.” We should not let nostalgia for the village life and small-scale economies of an idealized past blind us to the benefits of the kinds of businesses that are most likely to make two ears of corn or blades of grass grow where only one grew before Acknowledgments We thank the Smith Richardson Foundation for the financial support that made the research and writing of this book possible In addition, we would like to express our appreciation for the helpful comments of the three anonymous reviewers in the Smith Richardson review process and the three anonymous reviewers in the MIT review process Rob Atkinson thanks John Wu and Kaya Singleton for research and editorial assistance and his wife, Anne-Marie, daughter, Claire, and son, David, who patiently supported his writing efforts during family time I History and Present Trends Political corruption, 137 Politicians and big business, 13–14, 221, 249, 253–254 and corporate influence, 16, 147, 150–152 Republican Party, 242, 254 and small businesses, 3–6, 13, 149, 221, 239 Pollan, Michael, Pollution control, 70–71 Population and firm size, 124–125 growth, 19 Populism, 173 Porter, Michael, 238, 243, 258 Portugal, 120, 129 Prices and industry concentration, 202–206, 218–219 and innovation, 247 and mergers, 26–27, 206 and productivity, 195 resale, 172–173, 177 and technology, 26–27 Producer republicanism, 14, 135–147, 197 and antitrust policy, 155–161, 190–191 and consumers, 247 and productivity, 144–145 and technology, 142 twentieth-century, 156 and wage earners, 137–139, 145–146 Production and firm size, 57 manufacturing, 41–42 and subsistence economy, 145 transnational, 34–35 Productivity, 122–124 and antitrust policy, 191, 258 and concentration, 202 and firm size, 67–68, 204 large firms, 67–68, 122–124, 194–195 and mergers, 202–203, 207 national, 248–249 and prices, 195 and producer republicanism, 144–145 and size discrimination, 128–129 small businesses, 67–68, 122–124 and wages, 194 Professional employment, 79 Profits, corporate, 195–197 and concentration, 202–204, 210 and purpose of business, 251 rate of, 203 and R&D, 106, 196–197 Progressive localism, 243–245, 247, 249–250, 254 Progressive Party, 166–167 Proletarians, 138 Promise of American Life, The, 165 Proxmire, William, 222 Publicly traded companies, 229 Public policy, 15–16, 226–239 See also Antitrust legislation; Government and campaign contributions, 150–152 competition, 155, 256–262 congressional legislation, 224–225 contracting, 224, 232 developmental state agenda, 255–256 and efficiency, 236–237 and entrepreneurial decline, 46, 52 fairness, 233–235 financing, 231–232 job creation, 237–238 regulatory exemptions, 226–229 size neutrality, 238–239, 262–266 and small businesses, 52, 126–131, 222, 262–266 and special interests, 152–153 taxation, 229–231 and wage earners, 146 “Pygmies, The Quarterly capitalism, 11, 252 Rahman, Sabeel, 194, 218 Railroads, 22, 213–214 Rauh, Joshua, 79–80 RCA, 31, 185–186 Reagan, Ronald, 3, 46, 158, 178, 190 Recession of 1937, 179–180 Redistribution, income, 194–195, 235 Refrigerators, 211 Regulation See also Public policy compliance, 263–264 of corporations, 125–126, 165–166, 168–170, 227, 229 firm costs, 233–234 and firm growth, 237, 265 and size neutrality, 263 small business exemptions, 226–229 and startups, 46–47 streamlining, 263 Regulatory Fairness Act of 1982, 227 Reich, Robert, 4, 193, 205, 221 Rent-seeking activities, 150, 194 Report on the Concentration of Economic Power, 180 Republicanism, See also Democracy; Producer republicanism agrarian republicanism, 139, 141–142, 146 and city-states, 141 redefinition of, 146 and wages, 137–139, 145–146 Republican Party, 242, 253 Research and development (R&D), 69 and competition, 105 and corporate profits, 106, 196–197 corporations, 102–106, 190 early-stage, 102–103 federal support for, 256 and firm size, 109–111, 113–114, 124 innovation industries, 210–211 small businesses, 109 Retail industry, 51–52 antitrust legislation, 157–158, 173 and farmers, 171 firm size, 43 market concentration, 201 scale economies, 209 Retail pharmacies, 205 Road to Serfdom, The, 180 Robber barons, 22 Robinson-Patman Act of 1936, 172–173, 181 Roosevelt, Franklin D., 169–170, 178–180, 197 Roosevelt, Theodore, 158, 164–166 Roosevelt recession, 179 Rothwell, Jonathan, 79 Rural store keepers, 174 Ryan, Paul, 13, 238, 242 San Francisco, 112–113 Sarnoff, David, 186 Scale See Economies of scale Scandals, corporate, Schoar, Antoinette, 53 Schumacher, E F., 14 Schumpeter, Joseph, 21, 54, 56, 99–100, 102, 106–107, 178, 189, 211 Schumpeterian rivalry, 211 Schwartz, Bernard, 12, 252 Schwegman Bros v Calvert Distillers, 173 Sears, Roebuck, 171 Second New Deal, 179 Self-employed workers, 5, 36, 44, 72 and antitrust policy, 191 decline in, 137 and democracy, 140, 153 and exports, 117–118 gig economy, 36, 119–120, 147 global distribution, 117 and industrialization, 119 and information age, 96 and poverty, 117 trends in, 146–147 and unemployment rate, 86 Semiconductor industry, 98, 188, 217, 260–261 Service industries, 42–43, 120–121 Shane, Scott, 86, 88, 108, 123, 236 Shapiro, Carl, 200 Shapiro, Irving, 12, 252 Shareholder value movement, 11–12 Sherman Antitrust Act of 1890, 23–24, 155, 160–161, 166, 172, 182 Shockley, William, 98 Short-termism, 11–12 Sidney, Algernon, 138 Silicon Valley, 99 Size neutrality, 238–239, 262–266 Small Business Administration (SBA), 156, 182, 224, 228, 231–232, 265 Small businesses and antitrust legislation, 160–161, 169, 177 attitudes toward, 8–9, 221–224 and bank lending, 47 in bimodal economy, 20–21 cybersecurity, 71 diversity, 74–75 and entrepreneurship, 53–54 environmental protection, 70–71 exports, 69–70 government subsidies, 128 growth, 64, 123–124 high-growth, 89–90 income inequality, 77–80, 118 and information era, 32 and innovation, 69, 107–112 job benefits, 63–64, 66–67 job creation, 15, 69, 81–94, 225, 237–238, 264 job loss, 83–84, 87 and large firms, 86, 90–93 layoffs, 73 local economic benefit, 68–69 and local production, 37 market/employment share, 35–36 and market power, 219–220 and mergers, 114–115 as monopolists, 219–220 output/employment share, 85 owners’ attitude, 87–88 patents, 108–110 and politics, 3–6, 13, 149, 221, 239 productivity, 67–68, 122–124 profits, 204 and public policy, 52, 126–131, 222, 262–266 R&D, 109 social responsibility, 75–76 subsidies, 182 taxation, 229–231 tax compliance, 71–73 tax incentives, 127 and unemployment, 85–86 unionization/training, 74 wages, 64–66 worker safety, 73–74 Small Business Jobs Act, 230 Small Business League, 232 Small Business Paperwork Relief Act of 2002, 226 Small Business Regulatory Fairness Act of 1996, 227–228 Small industries, 37 See also Small businesses Small Is Beautiful, 14 Small-is-beautiful view, 17, 267 See also Antimonopolist tradition and big business, 4–5 political support for, 3–6 representatives of, 159 Small and medium-sized enterprises (SMEs) See Small businesses Smith, Adam, 13–14, 136, 260 Social contract, 153 Socialists, 162–163 Social networking, 214 Social responsibility, 75–76 Software industry, 209, 214–215 Song, Jae, 77–78 Sony, 185 South Korea, 65, 121, 123 size discrimination, 128–129 subsidized loans, 127–128 tax credits, 127 Soviet Union, 216 Spain, 112, 122 Special interests, 147–148, 152–153 Staggers Act of 1980, 214 Standard Oil, 104 Staples, 52 Startups, 44–60 See also Entrepreneurial decline; High-growth entrepreneurship and economic growth, 48–49, 53, 123–124 employment share, 118 entrepreneurial/routinized regimes, 57–58 and government assistance, 15–16 high-growth, 54–60, 264–265 high-tech, 15, 55–57, 107 information technology, 32 and innovation, 54, 59, 99, 108–109 and job creation/loss, 83–84, 86–90, 225 manufacturing, 49–50, 58–59 and monopolies, 47–48 patents, 108–109 rate decline, 44–53, 55 and regulation, 46–47 and small business favoritism, 225 and techno-economic paradigms, 30–31, 57 types of, 53–55 State governments antitrust legislation, 157 and competition, 217–218 economic developmentalism, 254–255 incorporation statutes, 23 small business preferences, 265–266 Steam, age of, 142 Steam engines, 22 Steam-powered factories, 32–33 Stern, Scott, 54–55, 265 Stigler, George, 183 Stock market, 22 See also Markets Stoller, Matt, 207 Structure-conduct-performance (S-C-P) school, 177–178, 182–183, 188–190 Subsidies, government, 182 See also Government Sweezy, Paul, 33 Switzerland, 208 Taft, Robert, Tan, Elaine, 199 Tanglewood Tales, The, 266 Taxation corporate, 71–72, 195–196, 229–231, 262 incentives, 230 and size neutrality, 262 small business, 229–231 tax compliance, 71–73, 127, 230–231 tax reform, 151 Taxi industry, 209 Taylor, Robert, 98 Technocracy: An Interpretation, 163 Technocracy movement, 163–164 Techno-economic paradigms, 30–31, 57 Technology See also Information technology (IT); Innovation and antitrust legislation, 183–188 and early-stage research, 102–103 and entrepreneurial decline, 50–51 and firm size, 27–29, 43–44, 52, 56–57, 59–60, 120, 143–144 and industrialization, 143 long-wave theory, 56–57, 59–60 machine tools, 42 and oligopolistic competition, 100 and plant size, 68 and prices, 26–27 and producer republicanism, 142 technological cycles, 55–57, 60 Teegarden, H B., 172 Telecommunications industry, 212–213 Television industry, 185–186 Tesler, Larry, 96 Thailand, 65, 123 Theory of Economic Development, The, 107 Theory of the Growth of the Firm, The, 20, 99–100 Third Wave, The, 143 Thompson, Derek, 47, 52, 192, 195 Tire industry, 113 Tobacco, 228 Tocqueville, Alexis de, 140 Toffler, Alvin, 143 Tourism, 118 Trade associations, 148–149 Trade deficit, 215 Traded sector industries, 38–39 Trade liberalization, 244 Transnational corporations, 244 Transnational production, 34–35 Transportation, 33, 244–245 Traveler from Altruria, A, 163 Traveling salesman, 160 Trump, Donald, 3, 245–246, 250 Trust, 125 Trusts, 155, 160, 164 See also Corporations Trust: The Social Values and the Creation of Prosperity, 125 Truth effect, 81 Tsinghua Unigroup, 217 Turnbull, Malcolm, Turner, Donald F., 182 “2015 Index on Startup Activity, State Trends Tydings, Millard E., 160 Unemployment, 85–86 Unionization, 74, 164 Unit banking, 158, 175, 177, 208 United Kingdom employment share, 122 income inequality, 77 innovation, 113 tax allowances, 127 United States air travel, 206 average firm/establishment, 37 banking, 25, 206, 208 broadband service, 205–206 cartels, 24 companies in, 19 economic regions, 159 employment diversity, 75 employment trends, 35–36, 44 exports, 69–70 firm size, 35, 120–121 and foreign competition, 215–216 high-growth entrepreneurship, 55 labor force, 20 layoffs, 73 manufacturing, 28, 49–50 mergers, 23–27 multinational trade, 34–35 patents, 104, 108 population growth, 19 productivity, 122 railroads, 22–23 small businesses, 64 tax evasion, 72 technological research in, 103 wages, 65–66, 77–78 workforce training, 74 United States v Columbia Steel Co., 183 United States v Von’s Grocery Co., 183 US Chamber of Commerce, 149 Useem, Michael, US Steel, 25 Vaheesen, Sandeep, 193 Veblen, Thorstein, 163 Verizon v Trinko, 258 Viard, Alan, 222 Virtual corporation, 32 Wages CEOs, 79–80 and corporate profits, 196 financial services, 79–80 and firm age, 66 and firm size, 64–66, 193–194 income inequality, 77–80 and land ownership, 139 minimum wage, 264 and monopolization, 193 and multinational globalization, 35 and productivity, 194 professional/administrative, 77, 79 and public policy, 146 and republicanism, 137–139, 145–146 Wall Street, 252 Walmart, 171 charity donations, 76 Indian protectionism, 130 profits, 203 scale economies, 209 wages and benefits, 64–66 Warren, Elizabeth, 13, 181, 199 Washington, George, 142 Welch, Jack, 252 Wellness benefits, 66 Whitman, Marina, Whole Earth Catalog, 143 Wiens, Jason, 44 Wilson, Charlie, 10, 12, 252, 254 Wilson, Woodrow, 159, 167–168 Wine wholesalers, 220 Women, employment of, 75 Worker safety, 73–74 Workforce training, 74 Wozniak, Steve, 96 W R Grace, 31 Xerox, 187 Xerox Alto, 96 Xerox PARC, 96–98, 106 Xerox Star, 97 Yeoman republic, 140–142 Young, John, 12, 252 ... 9 The Strange Career of Antitrust 10 Brandeis Is Back: The Fall and Rise of the Antimonopoly Tradition 11 Has Big Business Gotten Too Big? 12 Small Business Cronyism: Policies Favoring Small Business. .. sing the praises of small business For example, the prime minister of Australia, Malcolm Turnbull, has said that small business is the backbone of our nation’s economy.”13 If small is beautiful, ... afflicted with what Louis Brandeis called the curse of bigness.” Wal-Mart is Big Box.”16 Then there is the sinister Big Beer.” The Los Angeles Times tells us: “Venture offers craft breweries