askblog: Why Large Corporations? - Arnold Kling
Kling writes:
... Some possibilities:
1. Governments want them. Surely, from a “seeing like a state” perspective it is better to have large corporations that are dependent on favors than small firms that are not.
2. There are genuine economies of scale and scope, including network effects.
3. Workers believe that they are more secure working for large corporations, and they are willing to take less compensation as a result. Note that this sort of belief could be self-fulfilling. Note also that it is not terribly consistent with the data: compensation appears to be higher at large firms, although that comparison assumes that the investigator’s idea of objective value of workers is more meaningful than their actual choices.
Think about Google. It needs to retrieve, store, and process huge amounts of data. There are scale economies. Once you have that data, you can benefit from other data, so you want to expand into email, location services, social networking, phones, and anything else that generates data. So there are economies of scope as well.
Maybe that is an exceptional case.
My tendency is to think that economies of scale are fairly common, but economies of scope are relatively rare. I understand big companies that specialize in a relatively narrow capability–something like Fedex, for example. I am less convinced about organizations that branch into many functions, like universities or large financial firms....
I think his last paragraph is an important distinction. The size of the firms in an industry is directly related to the nature of the goods and services offered in that industry. The economies of scale and the technological wherewithal needed to execute the manufacture of a jet versus providing a haircut means a handful of big firms will exist in the former industry and no large firms will exist in the latter.
There is nothing intrinsically bad about having large corporations. They are indispensable in achieving certain ends. That doesn't mean they don't present challenges.
