Size matters when firms sway our policymakers

Few of us need a fictional Zuckerberg 2020 presidential campaign to start worrying about the influence of large companies.

Big banks helped cause the financial crisis, an indication that powerful firms can overreach.

The first episode of Capitalisn’t, a new economics podcast by Kate Waldock of Georgetown University and Luigi Zingales of the University of Chicago, contemplates a future in which Facebook’s Mark Zuckerberg becomes president of the US and revises anti-trust law to make sure his company can never be broken up.

Zingales, who was born in Italy, reminds listeners that the disgraced former Italian prime minister Silvio Berlusconi parlayed his ownership of dominant media assets into the country’s highest political office and notes that if Zuckerberg did the same, he would end up controlling both the US government and what is arguably the world’s most important communications network — and would therefore wield “absolute power”.

But few of us need a Zuckerberg 2020 campaign to start worrying about the out-size influence that the largest companies have.

Research suggests that the biggest organisations in most industries account for a larger percentage of revenues and profits in their markets than they did a decade or two ago and that their power has grown. Meanwhile, the public trusts them less: about 40 per cent of Americans say they have little or no confidence in big business, up from just 24 per cent in 1985.

Are these concerns justified? Robert Atkinson, a DC-based innovation expert, and Michael Lind, a visiting professor of public affairs at the University of Texas, think not. In their new book, Big Is Beautiful, they argue that large companies are more productive, innovative and diverse than small ones. These companies also provide higher wages, more training, and broader benefits to employees and spend more money to limit pollution. When Americans lionise small shops and lambast big business, the authors say, they are getting it wrong.

As contrarian as this may sound, much of it is conventional wisdom among economists. Research suggests the only small enterprises truly driving the economy are the rare fast-growing, innovative ones that hope to one day be big.

However, Atkinson and Lind take the argument further, attacking the “anti-monopoly tradition” set by US Supreme Court Justice Louis Brandeis in the early 20th century and standing up for markets dominated by a few companies.

At times they do overreach: big food is an environmental and nutritional disaster; big banks helped cause the financial crisis. But the authors are correct that many people overrate both the benefits of small business and the evils of bigness. And although anti-monopolism is getting renewed attention, it is not equipped to deal with most of what ails the economy.

If size itself isn’t the problem, what is? Perhaps, as Capitalisn’t suggests, it’s the troubling intersection of economic and political power. In The Captured Economy, Brink Lindsey and Steven Teles, of the libertarian Niskanen Center, argue that too many corporations have undue influence over public policy. They offer the financial sector, real estate, intellectual property, and occupational licensing (the credentialing process for someone joining a profession) as case studies and warn that when the public isn’t looking, companies and industry organisations will lobby for laws beneficial to themselves.

Although Lindsey and Teles come off as far more sceptical of big business than Atkinson and Lind, there is overlap in their analyses. All four seem to agree that the problem with big business isn’t size but whether that size confers illegitimate power. And all four agree that small businesses, too, can corrupt policymaking.

Lindsey and Teles suggest reforms that would give politicians better access to independent analysis, limiting their reliance on corporate lobbyists and the reports they push. But the anti-monopolists whom Atkinson and Lind rebut will no doubt remain sceptical. If economic power is concentrated, can it ever be kept from translating into political power?

Historically, one countervailing force to such dominance has been creative destruction, through which new companies disrupt old ones, and industries rise or disappear. Hemant Taneja, the author of Unscaled, thinks we’re living through such a wave. As a Silicon Valley venture capitalist, he says, he sees two trends — demand for hyper-personalised products and entrepreneurs’ ability to “rent scale” in the cloud — that are putting incumbents at an increasing disadvantage.

Stripe, one of Taneja’s VC investments, is emblematic of these new market dynamics.

It offers smaller businesses the chance to rent payment-processing services and thereby compete cheaply against larger companies. Taneja doesn’t imagine an economy with no large companies — his book has a section on platforms and the risk of AI-powered monopolies — but he sees relatively smaller, more focused ones such as Warby Parker succeeding against giants such as Luxottica.

Again, however, anyone worried about big organisations wielding even bigger influence is likely to remain unconvinced. Sure, some early evidence exists that young companies are uniquely able to benefit from cloud computing and are more likely to survive as a result. But digital technology also seems to have helped the biggest players in each industry expand.

Whether the new cloud- and AI-enabled start-ups pose real threats to today’s giants or will be felled or acquired before they can supplant them is an open question. After all, Instagram and WhatsApp both illustrated the speed at which small, focused companies can scale up and threaten larger rivals. But both ended up as part of Facebook — and that was without Zuckerberg in the White House.

Walter Frick is a senior editor at Harvard Business Review.