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What ever happened to “Small is Beautiful?”

“Whenever something is wrong, something is too big.”
~ Leopold Kohr

Nassim Taleb:

Rule 3: Small is beautiful, but it is also efficient.

Experts in business and government are always talking about economies of scale. They say that increasing the size of projects and institutions brings costs savings. But the “efficient,” when too large, isn’t so efficient. Size produces visible benefits but also hidden risks; it increases exposure to the probability of large losses. Projects of $100 million seem rational, but they tend to have much higher percentage overruns than projects of, say, $10 million. Great size in itself, when it exceeds a certain threshold, produces fragility and can eradicate all the gains from economies of scale. To see how large things can be fragile, consider the difference between an elephant and a mouse: The former breaks a leg at the slightest fall, while the latter is unharmed by a drop several multiples of its height. This explains why we have so many more mice than elephants.

Rae on December 5, 2012 at 12:32 PM

Well said. Big businesses can take advantage of some economies of scale, but I don’t think that can be generalized to describe them as more efficient overall. In fact, small businesses by their nature are forced to be more efficient than big businesses. And where a big business can gain economy of scale, a small business can often leverage products or services from a big business to take advantage of that economy of scale.

There are some things where a small business can’t compete with a bigger business, such as marketing. But one of the biggest problems that a small business has in competing with a bigger business is that the bigger business can afford to do more lobbying for government favors and convenient regulatory loopholes.

Medicaid and Medicare are huge, along with most other government programs are bloated and rife with fraud. If anything that needs to be downsized, it is government, both on the state and federal level.

SC.Charlie on December 5, 2012 at 12:44 PM

concur. Government creates no wealth. It is the single least efficient player on the field. Their role should be left to military and courts!

Rae on December 5, 2012 at 12:32 PM

Interesting take. There are limits to economy of scale. I talked about one of them. When it gets to a certain size, it creates its own culture. That culture puts it in a box, and getting outside that box is hard. Group think sets in.

Small is not efficient. The cost of the equipment to create a product a few items ends up driving the price. If that same machine created 100 times as many items, the the driver of the price would be raw material and labor. It is why i do not do many things in my home and hire others to do them for me. By the time I buy the equipment for a couple uses, I already have paid three times the cost of hiring a small business person.

A small company might be able to build 100 of an item a month. Then sell it for 100 units of money. Efficiency = .01. A large company with a broader base can make 1000 of the same item and sell for 75 units of money. Efficiency = .0133. Far more wealth created with a 30% efficiency increase. As an example.

This does not take into account that the small business might offer the customer more than just an item that makes the higher price more appetizing to niche buyers. That is why a small business is small. A larger company could not offer that cost plus benefit.

I like both small and big business. They each serve a role.

Cost of buying anything from [small business]. They do not benefit from economy of scale. You can argue all you want, but the fact remains that they are not efficient, if they were, the would compete on price.

Small business is inefficient and innovative. Large business is efficient but stagnate. Are there exceptions? Yes. It is not a law of nature, just a reference point that is shown throughout our history and economy at many levels.

astonerii on December 5, 2012 at 12:25 PM

Efficiency is not always indicated by price, and scale does not equate to efficiency.

Small business is more innovative and generally more nimble to respond to the market demand, but doesn’t always have access to the resources needed to create a competitive efficiency or a marketing campaign.

Apples and oranges, pros and cons, but your point is heard.

That said, Tim Geithner and his boss are atrocious for business.

Canada, anyone?

Small businesses are inefficient, but innovative. Big business is typically efficient, but as a culture becomes ingrained into the big business, it loses the innovation it once had.

Both businesses are needed though. They each have their own benefits and detriments. If we all relied on nothing but small businesses our cars would all be different, but extremely expensive. If we all relied on nothing but big business, then everything would be the same, cheap but innovation would stagnate.

I think all businesses should be taxed at the same rate. 0% period, because businesses pass those taxes onto customers. Then small businesses would use the business tax code, which would be nothing.

astonerii on December 5, 2012 at 11:31 AM

What ever happened to “Small is Beautiful?”

“Whenever something is wrong, something is too big.”
~ Leopold Kohr

Nassim Taleb:

Rule 3: Small is beautiful, but it is also efficient.

Experts in business and government are always talking about economies of scale. They say that increasing the size of projects and institutions brings costs savings. But the “efficient,” when too large, isn’t so efficient. Size produces visible benefits but also hidden risks; it increases exposure to the probability of large losses. Projects of $100 million seem rational, but they tend to have much higher percentage overruns than projects of, say, $10 million. Great size in itself, when it exceeds a certain threshold, produces fragility and can eradicate all the gains from economies of scale. To see how large things can be fragile, consider the difference between an elephant and a mouse: The former breaks a leg at the slightest fall, while the latter is unharmed by a drop several multiples of its height. This explains why we have so many more mice than elephants.

right2bright on December 5, 2012 at 11:57 AM

Small businesses are inefficient. Proof? Cost of buying anything from them. They do not benefit from economy of scale. You can argue all you want, but the fact remains that they are not efficient, if they were, the would compete on price. Most compete outside of cost and work to sell to niche groups and provide special services and options that large retail business does not. Plenty of inefficient companies run for generations and never worry about being driven from the marketplace. Ferrari and Lamborghini for example. They are extraordinarily inefficient, but they offer their could care less what the cost is customers something they cannot get elsewhere. But if we relied on companies like them to provide our cars, wait times for buying vehicles would be generations in advance.

Large businesses are innovative. But on a person to person employed comparison, they lose out to small business on innovation on almost every level. That is why the big businesses are always on the prowl to buy the small companies and their innovations up. Think early Microsoft here. The only level this is not true would be where the cost of capital equipment for experimentation comes into effect. The problem is, that most large companies get a culture of their own, and they stagnate. They cannot get out of their current box. I have worked at several. They have so many design requirements for creating a new product that you cannot break through with anything really innovative.

As for growing. Of course growth is part of the small and large business plan. Not all. Some people are perfectly happy with a set size they enjoy and do it as a hobby that pays the bills. But in order to grow, the small business typically does a restructuring that improves certain efficiencies which allows them to expand. Some try and go the brute force of money way, and they typically end up as a part of history.

Small business is inefficient and innovative. Large business is efficient but stagnate. Are there exceptions? Yes. It is not a law of nature, just a reference point that is shown throughout our history and economy at many levels.