Harry Geels: What the rise of big business means for prosperity
This column was originally written in Dutch. This is an English translation.
By Harry Geels
The rise of ever-larger companies is neither a coincidence nor a conspiracy, but the result of five forces that are making scale increasingly important. What does that mean for society?
A century and a half ago, Karl Marx predicted that companies would become ever larger. Today’s largest companies now have more employees, more capital and greater economic influence than the industrial giants of his day. Yet Marx would probably be surprised by the reasons behind this development and by the outcome, in terms of prosperity. According to The Economist, new research shows that large companies are making an ever-greater contribution to our prosperity, partly because they are, on average, more productive than small and medium-sized enterprises.
1) Technology and AI
In the past, a shrewd entrepreneur could start a new business with relatively little capital. But more and more markets are governed by the ‘winner-takes-all’ principle. As an entrepreneur, it is crucial to scale up quickly, and that often means investing heavily in technology – nowadays, more specifically, AI, data management and cybersecurity. Scale in technology and data, in turn, creates investment opportunities for further innovation. The energy transition, too, requires ever-larger players, for example for investments in energy and network infrastructure.
2) Increasing regulation
Two years ago, I wrote a column entitled Why small businesses are in big trouble. One of the causes mentioned was ever-increasing regulation. Every societal demand seems to translate into new regulations. This causes headaches for smaller businesses, particularly in the areas of cybersecurity, privacy, sustainability reporting, anti-money laundering rules and supply chain accountability. Whilst multinationals have dedicated departments to deal with these matters, such regulations can have existential consequences for smaller businesses. Smaller businesses can quickly find themselves ‘too small to comply’.
3) Globalisation 2.0
Globalisation seems to be on the wane since the COVID-19 crisis, during which we experienced the consequences of disruptions in global supply chains. Nevertheless, a great deal of international trade still takes place. Companies must now simultaneously navigate multiple trading blocs, geopolitical tensions, differing standards and complex supply chains. This demands management capacity and financial clout. Of course, an entrepreneur may decide to operate on a smaller and more local scale, but this often means having to do business with ever-larger international players.
4) Cheaper and deeper financing
As described in the aforementioned column, financing is becoming an increasingly significant problem for smaller entrepreneurs. Because banks are required to hold more capital against smaller loans and are themselves growing larger, small businesses are more often reliant on more expensive financing from family and friends or private markets. Large companies generally have access to structurally cheaper capital, whether or not via the stock market. Not only to invest in the aforementioned technology, but also to acquire competitors. Scale attracts capital, and capital creates further scale, and so on.
5) Geopolitics and national champions
Geopolitical developments represent a relatively new dimension that plays into the hands of big business. Countries are rediscovering that economic power is also geopolitical power. America has Google, Microsoft, Amazon and Meta; China has Tencent, Huawei and BYD. Europe, too, is increasingly seeking out its own champions. Not because politicians have suddenly taken a liking to large companies, but because they offer technological autonomy, enhance strategic security of supply and generate geopolitical influence. A leading company can become an extension of foreign policy.
The advantages of big business
Not so long ago, we focused primarily on the concentration of power in large companies, but as mentioned, a growing body of research shows that large companies do indeed deliver significant benefits. Thanks to their scale, they can offer products and services more efficiently, thereby contributing to higher productivity. In addition, they have substantial research budgets, enabling them to play a key role in innovation alongside smaller firms. Many investments are only feasible for organisations with very significant financial clout.
Employees, too, often benefit from this scale. Large companies generally have comprehensive pay structures, enabling specialised staff in particular to earn relatively high salaries. Some industry giants also offer share schemes; at Nvidia, for example, a significant number of employees have become millionaires due to the sharp rise in the share price. Depending on the sector, there are other attractive benefits, ranging from free or heavily discounted airline tickets and staff discounts on financial products at banks to access to exclusive events, extensive training opportunities and international career prospects. Large companies can therefore be attractive to employees who value salary, training, career progression and international career opportunities.
The disadvantages
Scale also creates new social problems. Large companies can influence prices, put pressure on suppliers and discourage new entrants. Wealth transfers occur from consumers to companies and from smaller companies to larger ones. Furthermore, large corporations are increasingly resembling mini-states. They have their own culture, jargon, standards, training systems, healthcare provisions and sometimes even their own ecosystems of suppliers and partners. It is not uncommon for them to no longer fully understand people outside the corporate world.
Karl Marx
Marx foresaw that capital would become concentrated in ever-larger enterprises. The current scale-ups would not have surprised him. What would probably have surprised him, however, is the multitude of causes behind this development and its consequences for prosperity.
Companies have not merely grown larger because of what Marx saw as the inner logic of capitalism. Technology and globalisation demand ever-greater investments and thus favour organisations with economies of scale. Capital markets, too, often give large companies an advantage over smaller enterprises. Finally, the state is playing an increasingly significant role, including through regulation and geopolitical strategies aimed at creating national or continental champions.
Big business therefore arises not solely through capitalist accumulation, but primarily because the complexity of modern society is constantly increasing. Marx would probably have been surprised by the role of the state in this process and perhaps also by the extent to which many of the companies’ own employees benefit from the growth and success of large enterprises.
Final thought
Marx saw big business as the end point of capitalism. Reality turns out to be more complicated. Companies are growing not only because capital is concentrating, but also because technology, regulation and geopolitics reward scale. This generates greater prosperity, as recent research by The Economist emphasises. But it also creates new centres of power. The big question of the 21st century is therefore not whether companies should be allowed to grow large. The question is how we prevent economic scale from turning into social dominance and unfair social structures.
In various columns, I have stated that I am not in favour of Big Business because of the concentrations of power and unfair transfers of wealth that can accompany it. At the same time, in many sectors we are unlikely to be able to avoid it. The challenge is therefore not to combat Big Business everywhere, but to ensure that the benefits of economies of scale are widely shared and that economic power does not automatically lead to social or political power. Only then can the additional prosperity created by large companies benefit a wider group of people. This could be achieved, for example, by allowing customers to benefit from the (proprietary) data that companies exploit, by taxing excess profits (arising from oligopolies) or by making it easier for customers to become co-owners of the companies.
This article contains the personal opinion of Harry Geels