Thursday, 18 January 2018

Indian Bicycle Marketing: Big businesses v small businesses

Bayard left a throwaway comment on a thread about Carillion a couple of days ago:

"But the govt (and the EU) ignores small businesses because we don't so as we're told, can't lobby for bungs, oops contracts, and push back against their regulationism."

Not only do they ignore small businesses, they pretend that they don't exist. "Businesses" to the government, are only large ones run by the likes of Richard Branson or Philip Green. The left wing happily go along with this myth, as the image of silk-hatted millionaire boss profiting from his low-paid cloth-capped workers suits their rhetoric so much better than the owner-operator working long hours on slender margins and even thinner profits.


Then I noticed similar comments by people I follow on Twitter:

@aTalkingDude:

It's interesting that right leaning libertarians I follow are saying little about Carillion. I've noticed that most of them are much more interested in topics like multiculturalism and the EU than they are about corporatism.

Capitalism needs as level a playing field as possible. The Carillion mess shows so many ways in which markets are horrendously distorted. Market Libertarians have to call out this stuff as vigorously as lefty folks do.

In fact, pro market libertarians need to be more vigorous than lefties in exposing corporatism. This is because if lefties are the only ones doing it, then people will assume that the only alternative to corporatism is socialism.


@Land_Liberty, regarding an article in the fairly hard-left Jacobin mag, headed Small Businesses Are Overrated*:

Left and right on the same hymn sheet here. “Current state of small biz poor, ergo anti-monopoly movement bad.” Nope.
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This is actually another fine example of nominally left and right, for example the UK Labour and Conservative parties, both subscribing to the same basic lie, each to serve their own nefarious ends.

The Conservatives promote the Protestant Work Ethic myth, if only you work hard enough, you too could be Richard Branson, a billionaire merchant banker or the next Duke of Westminster. Labour, under Corbyn in particular, seem to throw all employers in one pot; the little bosses are as guilty as the big ones - so let's regulate them all to death.

As ever, the key is to distinguish between:
a) rent-seeking, corporatism or outright corruption and
b) proper wealth-generating businesses.

The actual size of a business is irrelevant. There is some correlation - large businesses can hold out for bail-outs and subsidies; similarly businesses which collect rent find it easier to grow - but that is not correct way of looking at it, there are plenty of gigantic corporations who do a decent job, and plenty of small businesses who live off bungs.
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* The article includes a chart showing that average wages are higher in larger businesses. Which is why "small businesses are overrated".

Well duh.

It's clear that entry-level, bottom rung wages must be pretty much the same in small and large businesses. So you earn much the same in the local corner shop as at the checkout in Tesco. A car mechanic in the local garage earns the same as somebody on the production line at Ford.

Small, local businesses only have one or two levels in the heirarchy, there are the workers and the boss, the boss earns a bit more than the workers, but not much more. The larger the business, the more levels there are, and people in each level earn a bit more than in the level below, so in massive corporations, the top dogs earn (or pay themselves) a hundred or a thousand times as much as the bottom level.

Therefore, average wages in large corporations are higher than in small businesses. That's neither a good thing nor a bad thing in itself, it is just is the way it is.

Large corporations can only exist to exploit economies of scale, and those economies go into higher wages at higher levels of the hierarchy. The higher paid workers are exploiting the business' owners, rather than the other way round.

7 comments:

Shiney said...

@MW

Beg to differ...

There's a lot of literature (have to dig out my MBA notes to find refs) around the fact that once organisations get above a certain size, about 100 people or £10-20m T/O, inefficiencies start to come in - you get internal 'rent-seeking' twats (HR departments, H&S managers, compliance officers etc), inter dept politics and other such corporate bollocks.

I deal with many big companies (customers and suppliers) and they are stuffed full of low-grade power 'suits and skirts' and are ALL horrendously inefficient.

Mark Wadsworth said...

Sh, we've done this, there are efficiencies of scale and inefficiencies of scale. There are optimum sizes for all kinds of business, roughly where the inefficiencies start to cancel out the efficiencies.

And a lot of the HR, H&S, compliance crap is imposed by the government.

But it's largely imposed at the behest of large business who can carry these overheads, knowing that they act as barriers to entry or barriers to growth for smaller competitors.

And I wouldn't generalise about absolute size. There's also the concept of minimum efficient scale.

Some businesses tend to be small independents (estate agents, tattoo parlours). Some could be small one-offs or large chains (cafes and pubs). And some are almost exclusively large (car manufacturers).

The Stigler said...

"The actual size of a business is irrelevant. There is some correlation - large businesses can hold out for bail-outs and subsidies; similarly businesses which collect rent find it easier to grow - but that is not correct way of looking at it, there are plenty of gigantic corporations who do a decent job, and plenty of small businesses who live off bungs."

One thing I noticed in my brief time in the Conservative Party is how many of the senior local members who ran businesses were running the latter. Supplying to government (translation: spending a fortune on contract compliance bullshit), financial services. And lots of MPs are barristers and lawyers which is mostly rent-seeking from what I can tell (it's best to write contracts that allow easy exit by both parties so that you can avoid these parasites).

Graeme said...

What strikes me about Carillion is that it was getting less and less about doing stuff and more about managing and interfacing. Also that it was getting into different cultures. I suspect that it was the involvement in Canada, which is not as far down the cheap debt route as the UK, that killed it. Ultra low interest rates encourage unproductive uses of money. The move into Canada and having to refinance at 5%or higher might have been the last straw. Possibly

Mark Wadsworth said...

TS, good examples of non-businesses.

G, I suspect it was good old theft at management level that killed it. With long term contracts, you can borrow against the income, pay yourself a large bonus and run for the hills. The snowy hills, in some cases.

Shiney said...

@MW

"And a lot of the HR, H&S, compliance crap is imposed by the government.

But it's largely imposed at the behest of large business..."

Exactly. Less government would help businesses of all sizes.

Having said that, all the sob stories in the media about "small businesses owed thousands by Carillion" are also irksome

1. Since when have the Beeb an their ilk given a shit about small businesses - dirty-horrible traders who get stuff done not like nice friendly lawyers and academics

2. Most small businesses I know of are shit at getting the money in and are partly to blame if they now have a large bad debt

Bayard said...

S, many many years ago I was a civil servant in the long-departed PSA. Every March a farce would be enacted whereby myself and my fellow officers wrote to, rang up, telexed (yes, it was that long ago) and otherwise pestered small businesses to whom the PSA (and hence HMG) owed money, begging them to send us an invoice so that we could pay them in that financial year and not the next, in many cases to no avail.