Yves here. This Richard Murphy post makes an important and often overlooked point: the roles that small and large enterprises play are fundamentally different, and that has policy implications. But I have a quibble about a passing comment about small businesses, that they were established because the founder wanted to make more money.
Even in my limited circle, mercenary motives were often not the driver for starting a new venture. Many mid-career managers and professionals wind up finding themselves in an untenable position, such as having their employer acquired (they soon or will eventually be turfed out; the target’s workers are presumed to be no good), having a new boss set priorities that the employee regards as misguided or unethical; or having to move in order to keep the job. Mid-career workers often have limited employment opportunities elsewhere in the industry (there just aren’t that many comparable slots and there are often none at acceptable employers when a employee wants to make a jump). So if they have already noticed not-well-served needs in their industry, that could serve as a basis for starting a niche enterprise (in fact, research on entrepreneurship has found that this sort of venture has high odds of succeeding).
By Richard Murphy, part-time Professor of Accounting Practice at Sheffield University Management School, director of the Corporate Accountability Network, member of Finance for the Future LLP, and director of Tax Research LLP. Originally published at Fund the Future
To pretend that there is almost any similarity between small and big businesses is absurd. Small businesses have to serve us, or they fail. Big business tries to entrap us in debt to ensure that they keep growing ever bigger. We need to rethink what we think about the private sector – and what parts of it we want to promote.
This is the audio version of this video:
And this is the transcript:
Big businesses and small businesses are nothing like each other. They might as well be like chalk and cheese for all the similarities they’ve got. It seems that most people don’t understand that. Most especially, most politicians don’t understand that, and neither do a lot of journalists. But it’s really important that this distinction be understood because as long as this confusion, which presumes that big business is just a small business that’s got a bit bigger, exists, we’re in deep trouble when it comes to economic policy.
Small businesses have characteristics which are utterly unlike those of most big businesses who are household brand names.
Small businesses do something useful for a start. They can only survive because they supply a product or service that somebody definitely wants to buy. And I do rather stress that point.
By and large, they don’t generate a market for a product. They do instead meet a need. So, vast numbers of small businesses are in the service sector doing things that people genuinely want. They’re plumbers, they’re builders, they’re electricians, they’re decorators, they’re people who supply personal services of various sorts, from chiropodists to home tutors to all sorts of things like that.
Those businesses are run by craftspeople, artisans, specialists in their area, who know how to do something better than the person who buys their services can ever hope to achieve. That’s their raison d’etre – their reason for being – their niche, which provides them with the opportunity to earn more than they otherwise could. Which is why people take the risk of going into self-employment in the first place by and large, because, don’t get me wrong here, it’s a hassle to be self-employed, and it involves more risk than employment does.
So those businesses are really important.
Some of them also grow. They tend to accumulate others who want to work for them, but they still meet the same broad criteria of actually supplying a service that somebody wants and knows they want without having to be induced to feel the need to buy.
The advertising that is undertaken by these businesses shows that. They’re not out there saying, we have this new product, whatever it might be – the ultimate new dog whistle or whatever it is that they have invented. No, what they’re doing is actually supplying something that already exists in reality and all they’re doing when they advertise is to make people aware of their availability to undertake whatever it is that they specialise in.
Let’s compare that with most big businesses. Big businesses are utterly different in type from small businesses because basically, unlike a small business, which is a bit-part player in the market of which they are a component, a big business seeks to control, manipulate, and even manufacture its own market.
The ultimate example is Apple. Apple sought to, from the very beginning of its existence, create a market for a type of PC that had never existed before, and then it expanded into iPods and then into iPhones and into Apple Music and all sorts of things, but it created a market for something that never existed beforehand.
There were similar companies in earlier generations. Hoover was an example. So commonplace was the idea that the Hoover was something new and generic that everybody wanted that we can all identify what a hoover is even though it might not be made by the Hoover company.
And that is what a large company does. It tries to create a niche that did not exist before and by protecting what it does through the use of intellectual property law for copyrights and patents and so on It makes a niche for itself where it can make what is called a super-normal profit.
A super normal profit simply means it is a rate of profit over and above that which would be made in an ordinary company which was participating in the market rather than creating the market.
Now, these large companies, because they can manipulate markets, create markets, and exploit markets, tend to earn excessive profits. And as a consequence, they do something which is quite different from small businesses. They grow very rapidly.
Small businesses tend to reach a plateau and stop. And there are good reasons for that. Normally, they only have a defined geographic area in which they can work. Or, they’re run by one, two, or three people or so. And they reach the limit of their capacity to manage, and they don’t want to expand as a result. They’re happy. Small businesses satisfy.
Large businesses are never satisfied. Large businesses always want more. Most of the world’s problems are down to large businesses wanting more.
The exploitation of the planet is very largely down to that one single goal of large business.
The exploitation of people was also, over time, for very much the same reason. Big business wanted more profit, and it got it by suppressing the terms and conditions, the wages, the rights to employment, the rights to holiday pay, the rights to pensions, the right to sick pay, and everything else that they could.
And that still goes on. You can even see it now. Labour is proposing some new employment laws, which I welcome. One of the few things it’s doing which are good. And those employment laws are being challenged by big businesses as being a fundamental threat to their right to operate as they wish. Their right, in other words, to make maximum profits at cost to the people they employ.
Now, you can identify these companies. I’ve already mentioned one. But there are also supermarket brands, and there are also sports brands.
So, for example, once upon a time, everybody took part in the football league, and they were comparable entities. I’m old enough to remember when Ipswich Town won what is now the Premiership. It wasn’t called that then. But they weren’t a super normal company seeking to exploit their situation to maximise their profits. They were just the local club.
Now we have super brands. Chelsea, Manchester City, Manchester United – even though they’re abysmal on the field – and others Liverpool, for example, and of course, their equivalents throughout Europe and beyond – are exploiting their brand to make supernormal profits through the sale of merchandise and everything under the sun, creating markets for things that we never knew we needed. Shirts with numbers and names on the back, for example. This is what big business does. The cost to us all has been enormous.
Because let’s also be clear what big business does. Small business borrows from finance. And frankly, most small business people hate their bankers. I don’t want to exaggerate, but I’ve never met one who had a good relationship with their bank. They all tend to hate them for their service, for their costs, for their refusal to loan, and everything else.
Big business, instead, works in cahoots with finance to keep us in debt. Small business doesn’t do that; it doesn’t normally offer finance to go with what it’s doing. But big business does. And the reason why, is they want us to keep coming back for more whether we can afford it or not and therefore they offer us credit. And the credit that they supply means that they work in partnership with finance to keep us in place as debtors.
And as debtors, we are beholden to the system. We can’t risk losing our jobs because we won’t be able to pay what we owe. We can’t, therefore, argue with our employers. And we are required to keep on servicing their system. Their system, which does, of course, keep on growing as a result, apparently exponentially, even though we know that the world cannot support that growth in the long term.
So big business and finance, which is a specialist subgroup of big business, which sets out quite deliberately to exploit us by offering loans which many people can’t afford – as we know only too well from what happened during the recent cost of living crisis – those in combination are so utterly different from small business that it’s ridiculous to say that they even are part of the same private sector economy into which they are all lumped together.
The three components I’ve identified now – small business, big business and finance – are utterly different. But if you’re going to group any of them together, it’s big business and finance.
They operate to exploit, to create new markets, and ultimately to destroy our planet in the process. While small business is entrepreneurial, takes risk, involves capital which could be lost, and which meets needs.
One of those sectors, and only one of them, is really of tremendous use to our society. Big business is not.
When it comes down to it, most of the things that big business can do could be done by small business and quite possibly better. We don’t really need to innovate to destroy the planet anymore.
We don’t need to be in debt to the level that we are. We could have lower house prices, for example. And we could have smaller cars, and we’d still get from A to B just as well. We could, therefore, have smaller car debts.
We could not consume as much of the planet and be better off.
We could cut our energy consumption, except that would offend those large companies who are in that big business sector who want us to consume more, not less.
We could take the steps to change.
Small business is a part of that future that is sustainable.
I seriously question whether large business is. Because large business does not work in our best interests, and by and large, small business does.
And by and large, small business could do most of the things that large business does just as well, or if not better, because it tends to be much more innovative than large companies actually are because the one thing that large companies do not want is innovation because that threatens their power to control markets, which is precisely why they buy so many of their small competitors just to kill their products.
It’s time for us to rethink what the private sector is. There’s a private sector that we want and should keep and should nourish. It’s not the one that Keir Starmer is trying to encourage in the UK. It’s not the City of London focused market. It’s that which is down on your High Street or out on your local industrial estate. That’s what he should be encouraging. And he’s not doing that. And the cost to us all might be considerable as a consequence.
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I suppose you could say that the difference between small businesses and large businesses is that one group has human resources departments and the other does not. But here, I would tend to look at this through the idea of negative feedback. With a small business, they have to be attuned to what people in their area want. In fact, a lot of them came about to fulfill a need that was not being fulfilled. So I will use a stupid example here.
Suppose that you had a small business preparing and selling food. Then one day they had the idea to sell chocolate-covered cockroaches as they would be cheap to make and it sounds like a good idea. And lets say that this business was located in Texas. There would be a helluva reaction of this being offered on sale in their stores and in fact they might go out of business as customers would suspect what is in their other foods. This is negative feedback at work. The lesson is that you push what people want and pull back on stuff people don’t.
Now suppose that this was a large corporation with the same idea. Because they are selling bugs the WEF may give them awards and recognition and maybe even financial incentives to help. The only negative feedback that those executives care about is Wall Street and their customers a distant second. If proved successful those executives can expect fat bonuses as a reward so will ignore how they are driving their corporation into a ditch with this idea. There is the momentum of a huge corporation that has committed to this idea and which is not agile enough to drop it. In the end it all ends in tears.
I know that it is a silly example but consider. How many times does a corporation fire a big chunk of their workforce to make Mr. Market happy for a coupla days, even though the people fired had the expertise to keep that corporation running? Did Bud Light think that they could choose Dylan Mulvaney to represent their beers and their customers would have to lump it? Did Boeing really think that ex-MacDonalds workers could replace veterans of the airline industry to build their planes? The problem here is that there is negative feedback at work but not for their customers but for the markets.
I think this bifurcation of small business versus big business is a little simplistic. To point to big corporations as creating monopolistic niches for themselves to exploit without actually providing something of value that people want and need is as an analysis, not terribly strong. What about Caterpillar (Fortune 500, manufacturer of construction and mining equipment)? What about Sherwin-Williams Co (paint, market cap of USD91.16bn)? Or US Bolt Manufacturing (fasteners, with a revenue of USD32.7bn)? And the idea of creating a market niche to exploit and to therefore make super-normal profits? Does that include General Electric and light bulbs?
Then, how do you define “big corporations”? By market share? By market capitalisation? By reveue? Number of employees? All of the above? And where is your cut-off? The world’s businesses are not either mom-and-pop stores /10 man companies on the one side and Fortune 500 companies on the other. You have literally everything from small, medium, large and Fortune 500.
I think the complexities of political capture, competition, oligopolies need an analytic framework more robust than small company good, big company bad.
Aye. I work in the power generation sector, and it’s definitely “big business”. The equipment we sell is very large and complex, and it takes a lot of people (and big manufacturing facilities) to design and build this stuff. It’s well beyond the scope of what a small (or even mid-sized) business could handle. And the same could be said of automobile design and manufacturing, CPU design and manufacturing, and other products that require big design teams, big manufacturing teams, and big facilities.
But with that said, it does seem like big companies are more susceptible to financial shenanigans, largely driven by their participation in the stock market. I’ve seen companies needlessly lay off employees because of stock market dips. I’ve seen companies ruined because upper management borrowed heavily against future earnings to do stock buybacks now, and then when sales softened the debt became too much to bear. And bad decisions made by upper management because they were ignorant of what their employees were doing day-to-day down in the trenches? Hoo boy.
So yes, there are things where we need big business. But it would be really nice if they weren’t subject to such bad management at times.
I completely agree that there are certain industries that we need that are LARGE businesses, and that it’s the financial shenanigans by the CEO, C suite that seems to cause the problems. Stock buy backs used to be illegal, how hard would it be to just make them illegal again? And back when America was “great”, large corporations had a tax rate of 42%, so can we not raise taxes again? (This forces upper management to invest in the business or be good Americans and pay their taxes).
I also think the whole concept of too big to fail distorts and removes one of the key aspects of the “free market” that is extremely vital. CEOs and companies that have FAILED, need to actually FAIL. The CEOS that drove their corporation into the ground need to take their golden parachute and go away. America still has CEOs that were in charge of huge banks (I’m looking at you Jamie Dimon) that were bailed out in the GFC instead of being comfortably ensconced in the dust bin of history. How can we expect these large business leaders to make intelligent decisions when they KNOW they don’t have to?
I see the world in terms of feedback loops. Small business is responsive to feedback loops in their local economy, because if they don’t they are gone. Big business also has feedback loops, except that their loops are attached to a source of money / power that will sustain them no matter what happens at the local level. For big business problems happen when they piss off the money supply, or the power supply (Big Government / Wall Street, etc.)
I would like to see a decentralized economy as I feel that this mimics natural ecological systems, which are for the most part very local. The issue with that comes in with the need for large scale systems such as railroads, airlines, supply chains which cannot be supplied at the local level. In nature these systems are very large, complex, and stupid (Ocean Currents, River Systems, etc..) but constrained by the laws of physics. My question is how do we constrain large business so that they focus on doing what they exist for and nothing else (running a railroad)?
From a worker’s perspective, small businesses are less attractive than big businesses. Low wages, no benefits, no unions, not even enough vacation time.
One might also say the small businesses operate according to the principles Adam Smith laid out regarding “competition” and “markets.” Large businesses today are all about eliminating competition and markets they do not dominate. Note that the subject of economics focusses on the good guys, the small businesses and not the monopolistic ones, the ones that hire all the economists to justify their thievery.
This does feel a little simplistic. One’s status as a big or small business can change, with Apple being a quintessential big business after starting off about as tiny as you can get.
But we should also talk about the type of customer: individuals/households versus other businesses versus government or other large organizations that are technically not businesses. A 5 person plumbing company may service a number of households while a 5 person software company may service one billion dollar Pentagon weapons program. What makes a satisfied customer is different depending on what the pain points are, and those are definitely different for an individual versus a large corporation versus a government.
And we should also look at the type of product/service being marketed: necessity, convenience, inessential (fashion or glorified trinket), or luxury. I’m way more sympathetic to high profits for luxury goods vendors and to a lesser extent for makers of inessential products. Providers of convenience and necessity products and services should not be bleeding their customers to support a higher net, because the customer’s demand for those is relatively inelastic. You can’t do without water or food with the minimum necessary nutrition or the means to heat your living space in the winter. You can definitely do without a Tesla Cybertruck or an airplane trip to Europe or even a high-end iPhone.
Then there is also a divide between businesses that are mostly localized, geographically, versus those that are everywhere, including transnationally (but, mostly, not anywhere near you with an office you can walk into to talk to someone). The former may either want or be pressured into contributing to the civic polity in which it does business, while the latter can always remove itself (or threaten to, at least) from a local area whose civic organizations are treating it in an undesired way (wanting remediation for environmental damages, allowing union organizing, etc.).
Another difference is between businesses that deal with the material world versus businesses that deal in abstractions and symbols. An airplane manufacturer and an appliance store and a manicurist are all dealing with physical objects and processes. An advertising agency or an accounting firm or an online media site are not. They may be all using material goods and resources in their business, but one group is actually marketing a physical good or service to its customers, while the other is marketing an idea or a display of symbols.
Surely a key aspect is that big biz enables many others to work, and this is a source of power: e.g. a big car assembly enables a multitude of (medium-sized) component suppliers. These last are in a vulnerable position because the assembler can at any time take his custom elsewhere, and there are not many alternative outlets for said components. The car co. also has leverage over its network of dealers, who can make good money providing they fulfil the target set from on high. Similarly Amazon allows many others to profit from its platform by selling stuff or running IT. On the other hand the failure or prosperity of a small company mostly affects a few people directly involved but rarely result in others earning more or less.
The annoying part is that the large co usually exploits an unequal relationship with other members of its channel: if a farm supplies fruit to a supermarket which pays late and with deductions, the bitter truth is that the farm needs the retailer more than the retailer needs the farm.
This topic was addressed in 1996. Big businesses were called anti-markets because they do not obey supply and demand; they manipulate them.
Here are some quotes
Small businesses are constantly being sued under laws that no one understands and under laws that do not even apply to them. Pre trial discovery costs can easily reach $1MM before even getting to a judge. This means there is no due process. Unscrupulous competitors and lawyers exploit this for extortion. This is more common that suits by actual customers. No insurance company will cover most of this.
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Priscius, a historian in the late Roman Empire who went over to the Huns( Scythians), and preferred them over Rome. He wrote this
He considered his new life among the Scythians better than his old life among the Romans, and the reasons he gave were as follows: “After war the Scythians live in inactivity, enjoying what they have got, and not at all, or very little, harassed. The Romans, on the other hand, are in the first place very liable to perish in war, as they have to rest their hopes of safety on others, and are not allowed, on account of their tyrants to use arms. And those who use them are injured by the cowardice of their generals, who cannot support the conduct of war. But the condition of the subjects in time of peace is far more grievous than the evils of war, for the exaction of the taxes is very severe, and unprincipled men inflict injuries on others, because the laws are practically not valid against all classes. A transgressor who belongs to the wealthy classes is not punished for his injustice, while a poor man, who does not understand business, undergoes the legal penalty, that is if he does not depart this life before the trial, so long is the course of lawsuits protracted, and so much money is expended on them. The climax of the misery is to have to pay in order to obtain justice. For no one will give a court to the injured man unless he pay a sum of money to the judge and the judge’s clerks.”