Is Big Business Really That Bad?

In 1952, Charles Wilson, then the president of General Motors, was nominated by Dwight Eisenhower to become secretary of defense. During his confirmation hearing, Wilson was asked whether, as secretary, he could make a decision adverse to GM’s interests. Wilson assured the chamber that he would always put the interests of citizens ahead of those of his company. He added that he could hardly imagine a situation in which the two would be in conflict: “I thought what was good for the country was good for General Motors, and vice versa.”

To contemporary ears, this may sound like standard C-suite spin. But this sunny view of Big Business was shared by the public. One 1950 poll found that 60 percent of Americans had a favorable opinion of large businesses; more than 70 percent had a favorable view of GM. “We believe today, both inside and outside the business world, that the business enterprise, especially the large business enterprise, exists for the sake of the contribution which it makes to the welfare of society as a whole,” the management scholar Peter Drucker wrote in 1952. “There is, in fact, no disagreement, except on the lunatic fringes of the Right and on the Left.”

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Today, you need not travel to the lunatic fringes to find suspicion of Big Business. A majority of Americans now view large businesses as self-serving and self-dealing. Only 21 percent of respondents to a 2017 Gallup poll said they have a “great deal” or even “quite a lot” of confidence in Big Business.

How did large firms go from being a symbol of American strength to being the object of almost universal scorn? A series of high-profile corporate scandals—Enron’s accounting chicanery, Goldman Sachs’s manipulation of derivative markets, among others—certainly hasn’t burnished the image of Big Business. Nor has the rise of the shareholder-value movement, which tolerates no mission other than producing profits, preferably in the near term. The globalization of the economy has at the same time turned American corporations into multinational enterprises with interests that do sometimes run counter to those of their home country.

Small businesses, by contrast, have remained an exemplar of American ingenuity and pluck, the rare hero championed by both sides of the yawning political divide. To Republicans, they’re the purest expression of the creative potential of the free market; to Democrats, small businesses are a bulwark against the encroachments of greedy, heartless corporations.

Meanwhile, an influential school of scholars and advocates now blames a variety of ills—from stagnant wages and lagging productivity to growing income inequality—on the domination of markets by large firms. Channeling antique figures such as Louis Brandeis and William Jennings Bryan, this school claims that “monopoly” and “concentration” are rampant and that aggressive antitrust enforcement is the only cure.

Many of the evils identified by these reformers are real and must be addressed. But the diagnosis is wrong—and the prescription is malpractice. American admiration for small business is rooted in anachronistic ideals passed down from the nation’s preindustrial founding. Our reflexive disdain for large businesses exaggerates their malfeasance while misapprehending their vital role in continued American success. The problem isn’t merely one of perception: Feeding off the popular esteem for small business, policy makers are handicapping Big Business—in the process lowering productivity, dampening innovation, and hurting U.S. global competitiveness.

The new antitrust advocates tell us that monopolistic companies are threatening to use their market power to crush remaining rivals, cheat workers out of fair wages, and gouge customers. Senator Elizabeth Warren paints a near-apocalyptic picture: “Today, in America, competition is dying. Consolidation and concentration are on the rise in sector after sector.” Writing in Washington Monthly, Barry Lynn and Phillip Longman contend that “the degree of consolidation in many industries today bears a striking resemblance to that of the late Gilded Age.”

Corporate concentration has increased, albeit modestly, over the past few decades. From 1952 to 2007, the percentage of manufacturing industries in which the top four firms accounted for at least half of shipments increased, though only slightly: from 35 to 39 percent. (In about 40 percent of industries, including banking and electronic-product manufacturing, concentration rates have actually fallen.) But the majority of industries that have grown more concentrated remain highly competitive. Even in the retail sector, the top four companies in 2016—Walmart, Kroger, Costco, and Home Depot—held just 13 percent of the market combined. (Amazon, a favorite target of the new anti-monopolists, ranked seventh.)

Whatever market power big companies do have, they’re doing a lousy job of turning it into excess profits. According to IRS data, in 2013 corporations with receipts of less than $500,000 had higher profits than did corporations with more than $250 million in sales. The anti–Big Business crowd likes to claim that large corporations find ways of holding on to more of those profits. But the myth of Big Business as unrepentant tax cheat is not borne out by the data. Large corporations do hire top accounting firms to minimize their tax exposure, and some keep profits offshore. But even with the advantages conferred by wily accountants, the tax code favors small firms to such a degree that, in 2013, federal income tax paid, as a share of total net income, was 18.2 percent for firms with more than $250 million in sales and just 4.6 percent for firms with less than $5 million in sales. Big companies are also much more likely than small ones to be audited and to face steep penalties for malfeasance.

As for the treatment of workers, here too perception and reality part ways. The depredations of a few job cutters have earned Big Business a reputation for heartless streamlining, but employment at large businesses is in fact steadier than at small businesses. In 2015, small enterprises were four times more likely to lay off their workers than large ones. Workers employed by large firms also earned more—on average, 54 percent more than workers at small companies. Companies with more than 500 employees offer 2.5 times more paid leave and insurance benefits and 3.9 times more in retirement benefits than workers at firms with fewer than 100 employees. Large firms are also more likely to be unionized, and they employ a greater share of women and minorities than small firms do, making Big Business an unlikely enemy of progressives.

Big companies also create more net jobs. This will surely come as a surprise to many Americans, who have been handed down the hoary legend that small business is the engine of job creation. The origins of this misimpression began with David Birch, an MIT researcher, who in the late 1970s purported to show that, from 1969 to 1976, companies with 100 or fewer employees created more than 80 percent of all new jobs. A few economists have found similar results, but many others have criticized Birch’s methods and conclusions. The economist Catherine Armington found that, from 1976 to 1982, small firms were responsible for just 56 percent of new jobs, much closer to their share of total jobs in the U.S. Even Birch himself has acknowledged that his results rely on a series of assumptions very much open for debate. For example, he failed to account for the much higher rates at which small businesses destroy jobs shortly after creating them.

Big firms pay better, offer more paid leave, and employ a greater share of women and minorities than small firms do.

Even if small companies aren’t creating an outsize share of jobs, don’t we rely on them to power American innovation—to outfox complacent corporations with the kind of irreverent thinking that can only occur while wearing a hoodie? Despite the much-mythologized genius in the garage, the tech revolution owes far more to teams of scientists and engineers working in well-funded corporate labs than to college dropouts tinkering at home. The business professors Anne Marie Knott and Carl Vieregger have discovered that large firms not only invest more in R&D than small firms, they get more innovation output per dollar invested.

Brilliant entrepreneurs like Steve Jobs and Bill Gates are indispensable for technological progress. But much of the information technology that they commercialized had been developed in previous generations by big firms such as IBM and Xerox. Jobs and Gates stood on the shoulders of giants—and then became giants themselves. That’s the kind of small-business success story Americans should rally around. Alas, as the economists Erik Hurst and Benjamin Pugsley have found, most small businesses do not intend to grow or innovate. Most that manage to survive their fledgling years never employ more than a few workers.

If the claims of the small-is-beautiful school are so at odds with the facts, how can we explain their popular appeal? The answer is that the cult of small business has been entwined in America’s self-conception since its founding.

In his 1656 political tract, “The Commonwealth of Oceana,” the English theorist James Harrington argued that a constitutional republic could be sustained only in a society in which farmland was widely distributed among citizen farmers: “Equality of estates causeth equality of power and equality of power is the liberty not only of the commonwealth, but of every man,” he wrote. The colonists who rebelled against Britain and designed the United States were deeply influenced by this tradition of “producer republicanism”—to be truly free, they believed, a citizen must have economic independence, which at the time meant running a family farm or a small business.

However dearly the Framers may have held the idea, it has long since been left behind by history. More than a century ago, most Americans became urban wage earners, not farmers or small-town shopkeepers and artisans; by World War II, just 20 percent of workers were self-employed, a figure that is down to 10 percent today. Working Americans face many challenges, but transforming them by the millions into shopkeepers and artisans is not the answer to improving their lot. In fact, today the richest regions in the United States and abroad are those in which self-employment is lowest—and the poorest are those with the most self-employed inhabitants. The reason is simple: As a rule, the smaller the firm, the lower the productivity level. Richest and fairest: Economies led by large firms also tend to have less income inequality.

The anti-monopoly school identifies many genuine problems, ranging from low wages to the massive influence of money in politics. But the solution to low wages is not to break up big, productive firms that pay higher wages. Public policy should encourage start-ups that have the potential to scale up into dynamic national or global firms. Helping a robotics or biotech firm that can boost national productivity and competitiveness will benefit everyone. Why should Ashley and Justin get tax breaks and exemptions from regulations to help realize their dream of opening a brick-oven pizzeria?

As for the corruption of politics by special interests, it is a real threat to democracy, and there’s no denying that Big Business buys influence in Washington. But K Street is also lined with trade associations and pressure groups representing small businesses and professionals. Of the top 16 business-funded political-action committees in 2016, five represented small business. Why single out corporations as the sole benefactors of the current system when the National Association of Realtors, the National Beer Wholesalers Association, and the National Automobile Dealers Association are busy advancing the interests of their members?

The small-is-beautiful consensus is wrong. But we need not replace it with an equally simpleminded orthodoxy in favor of Big Business. A dynamic economy requires the interaction of firms of all sizes. Small firms play legitimate if diminished roles today, and always will. To flourish in the 21st century, we must learn again that big can be beautiful, too.

This article is adapted from Robert D. Atkinson and Michael Lind’s book Big Is Beautiful: Debunking the Myth of Small Business. It appears in the April 2018 print edition with the headline “Learning to Love Big Business.”