Surowiecki on small firms

Larry Ribstein —  24 October 2011

The New Yorker’s James Surowiecki writes that politicians are misguided in the current push to help small business. He notes a recent book on how regulatory bias against the growth of A & P, including the Robinson-Patman Act, hurt consumers by raising prices. He also notes evidence that the countries with the highest percentage of employment in small business are the weakest economies.

Surowiecki explains that small businesses are less productive than big ones because they lack economies of scale and scope and the ability to invest in the technologies and systems that result in better wages and benefits and lower prices. Anyway, “most small businesses aren’t necessarily interested in expanding or innovating. * * * Most are people who simply want to run a small company, do work they enjoy, and have some control over their own financial lives.” He concludes: “Small may be beautiful. It’s just not all that prosperous.”

Surowiecki is correct to criticize regulation suppressing successful firms like A & P or Wal-Mart just because they’re big.  But he could be understood (perhaps misunderstood, I don’t know) also to be against moves to reduce the regulatory burden on small firms by easing capital-raising (e.g., by increasing exemptions from SOX or the Securities Act of 1933) or licensing rules.  Part of the problem with these rules is that they effectively discriminate against small firms by increasing their per-dollar compliance burden compared to large firms.

The existence of anti-small-firm regulation shouldn’t be surprising.  Politically powerful incumbent firms fear most the upstart’s innovation that will put them out of business. And even if Surowiecki is right that big firms contribute most to growth, we need to remember that they started as small firms.

The economy needs both big and small firms and a level regulatory playing field on which they can compete.

Larry Ribstein

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Professor of Law, University of Illinois College of Law

2 responses to Surowiecki on small firms

  1. 

    I have to agree with Surowiecki in terms of price raising hurting competitiveness because obviously, consumers will just go to who offers the lowest price.

  2. 

    Every firm that is now a large firm was once a small firm. Do not eat the seed corn.