Friday, May 06, 2005

Big and small business

Great questions beget wonderful research. In 1937, Ronald Coase asked: "Why do firms exist?" Since then, we have considered and have learned a lot about transcations costs; in the years of the Web, we have seen them fall dramatically.

Last Nov. 9, I posted Economic Census comparisons between 1997 and 2002 which showed dramatic sales increases by small (nonemployer firms), 32 percent over the five years, vs. 21 percent for all other firms.

The 2002 data include the very early internet years and so are only indicative. We now know that the number of firms with employees grew by 7.4 percent in five years and jobs per firm grew by a modest amount, from 15.8 workers in 1997 to 16.5 workers in 2002. Many markets had grown in response to more global opportunities and new scale economies became available in selected cases.

Globalization and the internet go hand-in-hand and the nature and the composition of industry changes accordingly. New giants appear and old giants recede. Yet, it is the rise of small firms and solo free lancers that is so exciting. Not just J.K. Galbraith, but the whole chorus that equates the market with "big business" is missing the fun part.