Size Matters

Whenever I think of markets and the businesses that (at least in theory) compete in them, I think of sailboats.

For many years, my small businessman father never took a day off, but in my teens he acquired a fourteen foot wooden sailboat. (A Blue Jay for those of you who care about such things.) In addition to a mainsail, it had a jib and spinnaker, which is why it took two people to sail her (at least when we were racing). On many Sundays (the only day he could take off thanks to Blue Laws) dad and I would head to the local lake to compete in races. We couldn't help ourselves. I think competition was in our blood.

And we were snobs. Not about the "yacht" club that we helped start (it had no clubhouse, no dues, it was just a way of organizing races). We were snobs about sailing a small boat. We knew that the smaller the boat, the more likely you were to turn turtle.  "Turn turtle" is much more descriptive than "capsize." It captures the helplessness of having one's mast on or under water, especially if one is sailing a non-self-righting boat as we were. The ignominy of being towed back to port haunted us. The knowledge that it had never happened buoyed our snobbishness about the superiority of small boat sailors.

We once gave the helm to an experienced owner of a 36 foot sailboat and he nearly turned turtle after an involuntary jibe in erratic winds. Fortunately, he ducked and the boom missed him. It would have been funnier if it hadn't been our boat we were watching from the shore. In a similar vein, my mother who was used to sailing our boat, borrowed a small(er) Sunfish thinking it would be fun to zip around the lake in it. So it would have been, if she could have kept it upright.  Fortunately, Sunfish are self-righting. She got a workout that day.

The point here is that, in general, the smaller the boat, the harder it is to keep it upright and underway.

We were real amateurs at racing, but I remember one of the key strategies was not to let another sailboat block your wind (for obvious reasons). Much of my time as first mate (when I wasn't setting jib or hoisting the spinnaker) was spent watching the competition and letting the skipper aka dad (seated on the gunwale facing leeward) know if any other boats were maneuvering to cut off our wind. Because it was a small club, there weren't enough boats like ours to make up a class , which meant there were often larger boats in the race. Larger boats were even more of a threat because their larger sail area made them more effective at blocking a smaller boat's wind. Make no mistake, this was a strategy everyone used, but the big boats had an advantage. They were much more effective at it.

As someone who enjoys competition and has occasionally won or placed, I have always made a distinction between winning because you're faster and winning because you tripped the other guy. I don't think I'm alone in this.

The astute among you (and all my readers are astute) will now understand my title and my opening sentence.

The parts of economic theory that easily translate in soundbites to non-economists assume that the actors and agents in markets are all like small sailboats. Buffeted by competitive forces, the efficient, productive businesses remain upright, the inefficient, unproductive, inept businesses turn turtle to the benefit of us all (including, in the long-run, the inept because they are freed to pursue ends to which they are better suited). Competitive (free) markets we are told will sweep the inefficient (read unworthy) from the race to make room for efficient (read worthy) businesses that will lead us to greater economic growth and prosperity. The "creative destruction" of capitalism. We lose inefficiency and gain innovation and progress. Win-win.

Who could ask for anything more? It's a lovely idea that resonates both morally and practically. It has the beauty of a well-made watch and the elegance of a mathematical proof.

The problem is that like small sailboats with a competent helmsman in high or erratic winds, even efficient, innovative, well-run small businesses are easier to turn turtle in an economy-wide recession/depression. And just like small sailboats with a competent helmsman in a race, it easier for large firms to block the "wind" of small innovative, productive firms, stifling innovation, growth, progress, and sometimes even costing lives. It also costs us jobs. Small businesses power roughly 50% of job creation in the US.

Now that you understand small sailboats, I want you to read Mariah Blake's Washington Monthly article, Dirty Medicine. I want you to think about how large firms and large group purchasing organizations are blocking the financial "wind" that powers small start ups, innovation, and new jobs creation. I want you to think about all the "destructive destruction" that is occurring because small innovators and entrepreneurs are being hard hit by an economy-wide downturn and by larger firms blocking their "wind." And don't imagine that health is the only sector where wind is being blocked.

My one quibble with the article is the following:

This is hardly the first time Shaw has found his path to market blocked. In fact, he has spent the last fifteen years watching his potentially game-changing inventions collect dust on warehouse shelves. And the same is true of countless other small medical suppliers. Their plight is just the most visible outgrowth of the tangled system hospitals use to purchase their supplies—a system built on a seemingly minor provision in Medicare law that few people even know about. It’s a system that has stifled innovation and kept lifesaving medical devices off the market. And while it’s supposed to curb prices, it may actually be driving up the cost of medical supplies, the second largest expenditure for our nation’s hospitals and clinics and a major contributor to the ballooning cost of health care, which consumes nearly a fifth of our gross domestic product. [Emphasis added.]

I quibble with it because it seems to imply that the guvmint is the problem. And in a way it is. But the guvmint won't stop being a problem until we, the people, understand that the guvmint doesn't do anything unless there's a campaign contribution in it for someone. The campaign contributions come from large businesses and are aimed at fixing the sailboat race. As long as we continue to drink the guvmint-is-the-problem kool-aid, as long as we are determined to shrink the government that is of, by and for us to a size that cannot effectively regulate the big sailboats, as long as we continue to believe that a theory about small sailboats applies to an economy dominated by mega-multinational sailboats, small businesses will turn turtle, health care costs will continue to rise (read the article), large business will increase market power and become even more effective at blocking the winds of job creation, innovation and progress.

It isn't just the small sailboats that are losing the race. We are all losing. Sensible, effective regulation of markets dominated by large sailboats, empowered by an informed electorate in a country with a government of, by and for the people, is the obvious next step if the necessary destruction engendered by a capitalist economy characterized by competitive commercial enterprise is to remain creative and a benefit to us all.

Comments

[Tertium Squid]

Okay, your comment infrastructure is engaging in creative destruction, too. My brilliant words just went down the memory hole. Trying again because I care.

There's shrink-the-gubmint kool aid, but there's also campaign-contributions-cause-all-our-problems kool aid. Right now the reputation damage a politician incurs by whoring himself out to corportate interests can be counteracted with a bunch of tv commercials telling us to vote for him. As soon as that's not the case anymore and the dirty stuff that gets those contributions isn't worth the cost, politicians won't go so cheap for money (or will restrain themselves to more conventional types of corruption).

I'm a Udall-type, I come down from David King Udall through his daughter Luella. Are you a Udall or did you marry one?

[K Ackermann]

I like Udall-types.

I like what they write, and I really really like how they write it. I like reading you after Jesse. You both write great, but I like being upbeat when I stop reading.

I notice Mark Thoma noticing you quite a bit these days, too. Good for you!

[ecrive]

Brilliant.

On my first visit to Monaco this past Spring I was confronted with the largest boats I've seen (other than an aircraft carrier).

These were not sailboats, nor did there appear to be any owners' interest in racing them (or even taking them out of dock). Instead, it mostly seemed to be a kind of bloated self-satisfaction with the fruits of being clever rather than able.

ecrive

[Sarah]

I've never understood this penchant of small businessmen to identify with huge corporate interests, even while those interests are deliberately targeting them for extinction. My grandfather, with his small furniture store, was the same way. He managed to be both honest AND canny, and my father is probably right in thinking he would have done just as well, if not better, in the current climate as he did in the Depression. But he ignored everything my economist mother tried to tell him, worried himself into ulcers over the national debt, and never ceased to blame the unemployed for their 'laziness'.

It's a pity, really. If more of the small business people would throw their lot in with the rest of the middle class instead of imagining themselves great magnates we might get policies that allowed many more people to work for themselves. When I think of all the government grants and free business coaching my German friend got to start her small business it makes me sad.