In a Truly Free Market, Small Businesses Would Rule

Another interesting post on the Cato Institute blog, this time by Timothy B. Lee, commenting on an essay by Roderick Long, which argues that corporate welfare, government-imposed barriers to entry, and the like favor big business, and businesses would be smaller in a truly free economy.

What caught my eye about Long’s article was his claim that in a genuinely free market, businesses would be significantly smaller than they are today. He points out that large, hierarchical businesses are subject to many of the same inefficiencies that plague government bureaucracies. The executives of the largest corporations cannot possibly have enough knowledge to make good decisions about the thousands of different projects various parts of their companies are undertaking, and so it’s inevitable that large companies will suffer from inefficiencies greater than those that afflict smaller firms.

For example… the Internet’s success depends on the fact that it isn’t owned or managed by any single entity. Back in the 1990s, when the Internet was competing with proprietary online services like AOL and Compuserve, the Internet’s lack of centralized control turned out to be its most important strength. The hierarchical decision-making processes of the AOL and Compuserve companies simply couldn’t keep up with the spontaneous order of millions of Internet users acting without central direction.

Lee goes on to partly agree and partly disagree. On the one hand, you have Microsoft, who started as a small, entrepreneurial, innovatively disruptive company and has grown up into a struggling, bumbling behemoth. (My words, not his.) On the other hand, you have Google: “The reason Google is so profitable, in a nutshell, is network effects. Google sits at the center of a vast network of users, website operators, and advertisers who are locked in a virtuous circle.”

Fascinating topic, and one that I haven’t yet thought much about in those terms.


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