Scarcity serves as the organizing principle underlying our economy. People want more goods and services than are readily available, so market forces set prices which encourage production and discourage consumption. Improved technology has continually lowered the real price of most goods, however, and this has in many cases practically eliminated scarcity as a brake on consumption. Most people in the United States drink all the milk they want. If the price were lowered further, they would not increase their consumption of milk. This is now the case with a great many goods, including most of those essential to life.
Historically, the most expensive of goods has been capital equipment. High-cost machinery is necessary to mine iron ore, make steel from it, and use that steel to build cars. The need for businesses to accumulate large amounts of capital has necessitated the creation of giant corporations financed by thousands of individual investors.
Of course, not all types of business require large amounts of capital. Small economic entities such as neighborhood grocery stores, barbershops, and service stations have existed along with the large corporations. For some purposes, the amount of capital needed is small enough that one or a few individuals can amass enough to pay for the tools they themselves use.
Before the industrial era, most businesses were small and required little capital. The blacksmith, tailor, and tinkerer each owned his own tools. This changed with industrialization, which demanded large investments and so decreased the proportion of people who could afford their own tools.
There is reason to think that in the future, fewer people will be working with tools owned by others. The giant corporations will gradually be replaced by small economic entities, each owned and run by a small number of individuals. There are a number of drivers for this change:
1)Individuals are becoming wealthier and more able to purchase the capital equipment they need to do their work;
2)A greater portion of the economy is using tools such as computers, which are relatively inexpensive. At the same time, technology is being developed (such as that of mini-steel mills) which makes tasks less capital-intensive;
3)Customers are demanding customized products, which do not lend themselves to large-scale production. Hence what used to be a single large market has broken into a multitude of smaller niche markets better served by small companies dedicated to their particular segment;
4)Large organizations do not offer the autonomy and opportunity for personal and financial growth which are offered by small economic entities. The increased competition for capable workers offered by these small entities (through non-salary incentives) is increasing the labor costs of large companies to the point where it is becoming difficult for them to meet the prices and features of products manufactured by small companies.
5)Large corporations are easy and lucrative targets for taxation and regulation by governments. This governmental interference creates a dis-economy of scale.
6)Large corporations are inherently less innovative than are small ones, and this leads eventually to their decline.
It may be worthwhile to expand on point (6). Large corporations discourage innovation, not as a matter of policy, but due to the natural consequences of their size. Consider the point of view of the risk taker. If the owner of a small company takes a risk and wins, he can increase his wealth many times over. He may go from having a yearly income of $50,000 to one of $500,000. Contrast this with the risk taker in a large company. He probably is not the owner, so if he takes a risk and wins, he stands to personally win only a modest bonus or increase in salary. If the risk taker is the owner, the increased business may be small compared to existing business, and so may result in only a marginal percentage increase in his wealth.
What if the risk taker is wrong? In a small company, he may lose his job, but since he only makes $50,000 per year, that is not such a terrible loss. In the large company, however, decisions are more likely to be made by a highly-paid manager. If this manager loses his job, it will be hard for him to find such a well-paying job elsewhere.
The safest thing for a manager in a large company to do is not to take a risk - not to make investments. If he avoids risk, chances are that no one will know that he passed opportunity by. So there is a natural tendency for less risk taking in large companies than in small ones. This makes them less innovative, and ultimately less viable.
Those large corporations which survive will do so by dividing into the smallest possible divisions, making those divisions autonomous, and creating a small-company feeling within each division. The motivational value of making the employees also owners of their own division will encourage large corporations to go a step further, and make each entity an independent corporation which is partly owned by the people who work there.