Arnold Kling  

Small vs. Large Businesses

Foresee the Empty Nest... Multicollinearity and Micronum...

In this essay, I write

Small organizations are the size of hunter-gatherer bands. The behavior of each individual can be monitored and constrained by the group, using instincts that are deeply embedded by evolution into our social psychology. Members want the approval and respect of the group, and this desire is sufficient to orient the individual toward obtaining group goals.

...Large organizations incorporate more people than a prehistoric tribe of hunter-gatherers. The social psychology of tribalism, in which people trust fellow tribe-members but fear and dislike other tribes, can be a hindrance within a large organization. Conflicts between individual interests and organizational interests require much more careful management.

Actually, I try to pack a lot of ideas into this essay. The main point, taken from Amar Bhide, is that large organizations utilize planning while small organizations use improvisation.

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CATEGORIES: Business Economics

COMMENTS (6 to date)
Sean Lynch writes:

It seems like successful large organizations are frequently composed of mostly autonomous teams that are the size of hunter-gatherer bands or smaller. In every company where I've been happy I've been part of such a team and generally didn't have to deal with a large number of people outside the team. The other success factor seems to be an easily-bypassable (or nonexistent) chain of command. If I can go directly to the person that I need to do something for me and they can do it without their having to get more than a nod from their boss, things seem to work much more efficiently.

Barkley Rosser writes:

Closely related to this is the question of how large can a firm be and be run by a visionary founder/entrepeneur who knows everybody in the firm, who in turn all know each other more or less, the expanded hunter-gatherer group, although such a firm may consist of several smaller bands put together. An increasing amount of evidence suggests that around 60 seems to be the critical number. Above that one must get "professional management" and become more impersonal and bureaucratic.

spencer writes:

Great insight.

Ronnie Horesh writes:

Interesting essay. You say:

If large organizations are dehumanizing, then why do they exist? ... Large organizations exist, in spite of their awkwardness, because they create or exploit economies of scale.

I think also their size means they have greater influence on the political and regulatory environment. Much government intervention favours big business at the expense of small businesses (and consumers, taxpayers, the environment as well). Big firms (steel, agribusiness) can more effectively lobby or blackmail government into giving them economic protection. They can manipulate the regulatory environment in ways that make it much harder difficult for small businesses to cope with: health and safety rules; tax collection and avoidance; employment law etc. Compliance costs typically bear more significantly on small than big business. Is there a positive relationship between industry concentration and subsidies/protection given to sectors? Looking at steel, energy, agribusiness, oil, and military it seems to be that way.

Glen Smith writes:
If large organizations are dehumanizing, then why do they exist? ... Large organizations exist, in spite of their awkwardness, because they create or exploit economies of scale.
Based on my experience working with both larger organizations and small ones, my duties tend to be more well defined at large organizations. In larger organizations, I do my job and that's all I have to do (often, all I'm allowed to do) to keep my job and get promotions (I've even got promotions when I felt my performance was lousy). If I do lose my job, I can blame the company without having to blame my friends at the company. In smaller organizations, I can do my job but my job can still be at risk. If I loose my job, its my fault or, at best, the fault of a friend. In smaller organizations, its harder to shift the blame for failure.
Mark Wonsil writes:

I propose that there is no such thing as economy of scale; instead there is only economy of volume. It is the volume quality that allows companies to be more efficient by spreading the fixed costs further. Scale has many costs. Software producers who have read Fred Brook's book, "The Mythical Man Month" (, are familiar with this topic. The costs outlined in this tome are evident in many large organizations: corporations, cities and national governments. The gains produced by volume often exceed the costs of scale and that is why large organizations continue to exist at all. When the benefits of volume disappear, the large organization will fail quickly.

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