Small Is Still Beautiful
The trendy—and wrong—new argument that because big businesses innovate better, we should let them become monopolies.
Small businesses may be scrappy, but are they innovators?
Americans love capitalism, and we also like underdogs, so nothing tickles the culture’s fancy quite like a dynamic small business. But when we boost small firms, are we selling short the value of big ones? That’s what Michael Mandel, chief economic strategist of the Progressive Policy Institute, argues. In a memo published last December, he contends that it’s big companies, not scrappy startups, that are the real drivers of innovation in the modern economy, and that as a consequence the United States needs to ease up on antitrust enforcement. The argument’s gained partial assent everywhere from Mother Jones on the left to National Review on the right to the Economist in between. But while there’s certainly something to it, the purported policy conclusion that we need to start caring less about competition policy is dangerously misguided.
Let’s start with what’s right about Mandel’s argument. An increasing body of formal research has found that a lot of small business’ role in job creation and economic growth is really just churn. Launching a small company is a risky endeavor, so in any given year lots of small businesses are shutting their doors and laying off their employees. This is counterbalanced by tons of new starts and minor employment increases, creating a huge gross flow of jobs but not necessarily a large net flow. The actual job-creation heroes of the economy are the relatively tiny minority of small businesses that grow fast and become big. Most small businesses, however, aren’t like that. The local hair salon or dental practice is not on the verge of becoming the next Google. Nor is the typical small business especially innovative, often by design. The majority of new restaurateurs, for example, have no intention of revolutionizing the food-service industry and expanding to become a multinational company. Small-business owners are happier than the average American, presumably because they enjoy more autonomy and control over their lives, and that’s an ample reason to become an entrepreneur.
Mandel is also right that large companies have the capacity to dedicate more funds to formal research and development activities. If you’re small, it’s difficult to make expensive investments with uncertain returns. Mandel, citing National Science Foundation data, writes that “big companies—those employing over 5,000 workers in the U.S.—spent an average of $3,368 per worker” while firms with 5 to 99 employees in the United States spent just $793 per worker.
This may be reporting bias. If the chef at a well-regarded local eatery tries out some new recipes, he’s trying out some new recipes. If Dan Coudreaut does it at McDonald’s headquarters, he’s doing R&D. What’s more, small startups don’t spend much time developing exciting new products, because the entire company is an exciting new product.
All that said, the point that a dynamic economy relies heavily on the kind of work that only an already-large firm can do is an excellent one. The real question: Does this actually have implications for antitrust policy?
Mandel’s ultimate point, after all, is to “raise questions about whether an aggressive policy of filing antitrust actions against America’s key technological leaders” is such a good idea. He offers three reasons for weakening antitrust regulations, none persuasive and none especially tied to the fact that big companies engage in some important innovation. He argues, for example, that “a company that looks large in the context of the domestic economy may be relatively small in the context of the global economy.” This is true, but scale as such has never been an important element of antitrust analysis. A merger between two regional supermarket chains could create monopoly pricing power without the combined firm being especially large in a national context, to say nothing of a global one. The relevant issue is the firm’s domination of the market in question and the existence of barriers to entry. That lots of people live in China where the economy is growing rapidly is nice, but has nothing to do with how many telecommunications providers are available in any given city.
Second, he says we must account for “the rise of the innovation ecosystem, in which a large core firm invests in key technologies and intentionally creates a stable platform which improves the innovation environment for many smaller firms,” citing Apple and iOS as an example. Lots of little app developers, in other words, are like pilot fish swimming in the wake of the Apple whale. But while Apple is a large company in an absolute sense, there’s just no antitrust issue here under even the most conventional definition. Neither Android nor iPhone has even a majority of smartphone market share and smartphones as a whole are a minority of mobile phones sold in America.
Least persuasive of all is his idea that the health care, education, and energy sectors are “large-scale integrated systems” and that the need to transform those sectors should lead us to relax our vigilance about competition. If anything, these are sectors of the economy where we should be exceptionally worried that lack of competition is creating dysfunctional results. Higher-education incumbents use accreditation rules to stymie potentially disruptive competition, and health care markets remain fundamentally localized, with lack of hospital competition driving higher prices. All three of these markets produce outcomes that are socially undesirable—excess pollution in energy, spiraling price growth in health and education—but each is working out quite well for the incumbent institutions, for profit or not, that dominate them. The kind of incremental innovations that established firms do such as adding new facilities to colleges or developing new and even more expensive surgical procedures are nice to have, but big structural transformations aren’t going to come from the players that benefit from the status quo.
The disruptions we need will have to come from elsewhere. That might mean established firms in other industries (players such as CVS and Wal-Mart launch retail health clinics) as well as startups, but in either case, removing barriers to entry and maintaining an open, competitive environment is crucial. A healthy appreciation for the role of big businesses in financing research and investment should not make us more accepting of monopolies.