Arnold Kling  

The Virtues of Small Enterprise

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Paul Graham writes,


The average MIT graduate wants to work at Google or Microsoft, because it's a recognized brand, it's safe, and they'll get paid a good salary right away. It's the job equivalent of the pizza they had for lunch. The drawbacks will only become apparent later, and then only in a vague sense of malaise.

And founders and early employees of startups, meanwhile, are like the Birkenstock-wearing weirdos of Berkeley: though a tiny minority of the population, they're the ones living as humans are meant to. In an artificial world, only extremists live naturally.


He goes on to argue that small companies ought to aim to remain small.

I do think that there is something degrading about working in large organizations. For people like Paul Graham, certainly.

But as an economist, I have to respect revealed preference. And many people, for whatever reason, work for large organizations. They value security. Or structure. Or group identity. Or...


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CATEGORIES: Business Economics



COMMENTS (13 to date)
Caliban Darklock writes:

I agree that small companies ought to remain small, for one major reason - success at running a small company does not imply that one will enjoy comparable success at running a larger company.

In my experience, you can run a great company where everybody loves to work and feels their needs are important provided you stay under a hundred people. Over that, you start to have people slip through the cracks, and it's not until you reach a thousand that you gain the anonymity and economies of scale available to large companies.

Crossing that gulf, you tend to hemorrhage time, money, and efficiency, so you need to do two things: cross it as quickly as possible, and have the infrastructure in place to keep running at the new capacity when you get across. You will not be the same company when you reach the other side, so don't expect to do things the same way.

Les writes:

I think it is ridiculous for outsiders with no stake in the enterprise to try to tell small companies what to do. The owners of those companies will do whatever they wish because its their time, their effort and their money that entitles them to make their own choices.

Incidentally, the Birkenstocks are the least weird thing about the weirdos in the Peoples Republic of Berkeley - what makes them weirdos is their strong views based upon their utter ignorance.

RL writes:

Isn't the ironic humor that Graham chose as his counterpoise Google and Microsoft, companies that when they began were EXTREMELY small, and (esp. for Google) not all that long ago...?

Ajay writes:

Revealed preference is only relevant when there are no countervailing forces that cause people to act against their preferences, which is certainly not the case for companies. Whether it's that there are only a small supply of Bill Gates's or Larry Ellison's out there or because of economies of scale, there are many economic realities that force people to band together into much larger organizations but employees' preference is almost certainly not one of those reasons. Current technologies are leading a trend towards smaller and smaller companies as much of the internal, fixed costs of smaller companies and many of the external costs of dealing with many more vendors are being automated away but we're fairly early in that shrinking process.

SheetWise writes:

I've had an interesting run in this game. I began programming in '74 -- and had an immediate interest in what we used to call "personal computers". I never looked back. I've been programming software and working with all of the major players since then. I could calculate the stock options and compensation packages I threw away in the hundreds of millions today (I did keep some ;) -- but I always preferred new development over being the proverbial cog in a successful wheel.

I always left large organizations, because I missed the dynamic nature of the startup. Poker players recognize it as an all-in play -- it will circulate some blood and hold your interest. But if you're playing on the team that always has the big stack, there's no real risk -- and boredom sets in.

People who want to go work for "big companies" will get what they deserve. When I got out of school, the big ones were IBM, XEROX, and AT&T.

Go figure.

Lord writes:

Really, I think it only familiarity. They have heard of them, while small ones remain nameless.

James A. Donald writes:
But as an economist, I have to respect revealed preference. And many people, for whatever reason, work for large organizations. They value security. Or structure. Or group identity. Or...

Or small organizations can only exist by breaking the law and hoping that they are too small for the government to notice.

Every ordinary middle class individual commits numerous felonies of which he is entirely unaware. An ordinary small business commits a great many more felonies, and these felonies are more likely to be detected.

David N. Welton writes:

Paul Graham has a lot of interesting writings about computers and startups, much of which is quite interesting, coming from a guy who has "been there and done that":

http://paulgraham.com/articles.html

NickK writes:

In regard to the follow sentence:
"And founders and early employees of startups, meanwhile, are like the Birkenstock-wearing weirdos of Berkeley: though a tiny minority of the population, they're the ones living as humans are meant to. In an artificial world, only extremists live naturally."

Does anyone really believe this? Who knows how humans are "meant" to live? I wouldn't want to be one of those Birkenstock-wearing weirdos at Berkeley ever again. I've rather enjoyed growing up and becoming a responsible person with informed opinions. I was totally clueless before. I may still be clueless, but I know that who I was in the past is not who I want to be.

I love generalizations...

jb writes:

James A. Donald - can you elaborate on my felonious past as an entrepreneur?

As far as revealed preference - it's proven that people dislike losing $10 more than they like winning $10, etc. Small companies, in general, are more at risk for failing and putting you out of a job than large companies.

Many, many,many,many,many,many people are so adverse to the risk of losing a paycheck that they will suffer through the relatively degrading world of large companies, rather than absorb the moderately higher risk of unemployment of working at smaller organizations.

Stephen W. Stanton writes:

There are many, many differences between small and large companies.

The compliance burden on small companies is oppressive... Especially if you are working in a licensed industry, deal with visas, etc.

And it's hard to get experts to cover every issue at a small company. You are constantly taking risks that would be easily covered by a dedicated legal / tax / credit risk department in a large firm.

That said, there are many advantages too. It's purely a matter of preference (or blissful ignorance in some cases).

SheetWise writes:

"And it's hard to get experts to cover every issue at a small company. You are constantly taking risks that would be easily covered by a dedicated legal / tax / credit risk department in a large firm."

That's why people are as important and valuable as startups value them. Successful startups tend to generate from people who have multiple disciplines.

Give me one good guy that has great business sense, understands the business objective, signs on to the business plan, understands the UCC, can pre-flight his own contracts, works well with attorneys, has a good grasp on game theory, doesn't have any temperment issues, works well as a negotiator ...

That's a person of value.

Chris writes:

I would much rather work for a small company - all things being equal. But all things aren't equal, working for a large company provides a myriad of opportunities (advancement, compensation, variety, etc) that small companies typically can't offer.

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