Small Is Natural?

I want to agree with Roderick Long when he makes the following claim:

In a free market, firms would be smaller and less hierarchical, more local and more numerous (and many would probably be employee-owned); prices would be lower and wages higher; and corporate power would be in shambles.

I clicked through Will’s link without reading the whole thing, read most of Long’s essay, and filed it with wistful skepticism under “Articles that Confirm My Own Prejudices and Therefore Ought Not Be Trusted.” Imagine, then, my sense of coming full circle when I read the rest of Will’s post:

I’m a bit skeptical of Rod’s implicit claims about optimal firm size. He thinks that a genuinely free market will involve a larger number of smaller firms. Maybe, but I think he’s overselling it. I agree that, at a certain scale, the lack of internal prices can create inefficiencies greater than the efficiencies of bringing tasks inside the firm. But the point at which you hit diseconomies of scale depends on what kind of business it is. To go back to Wal-Mart, once it’s basic structure is in place, it’s hard to see how the marginal outlet significantly increases internal transactions costs. “Bigger” in this sense doesn’t do much to add complexity for the managers of the core firm. But it does create efficiencies. The larger the market Wal-Mart constitutes, the harder a bargain it can drive with suppliers, allowing it to offer consumers lower prices, etc. It seems to me there is market pressure toward larger scale in this kind of retail, whether or not the state subsidizes roads. And it’s worth noting that the innovative efficiencies of Wal-Mart in part explains why localities offer subsidies to attract their stores. Wal-Mart is a stable, reliable source of jobs and tax revenue because it is a highly-successful business because it offers lower prices than competitors in part because of its economies of scale. Big business can be beautiful.

This seems both true in the case of Wal-Mart and generally important for anyone who intuitively prefers a pluralistic, decentralized economic order. Crying “gigantism!” at every turn isn’t enough. If regulatory capture and bad actors cause agglomerations of corporate power, then those things can be combated as such. One must reckon differently with corporate power if it’s the natural course of a free market, and the economies of scale that conduce therefrom.