Thursday, May 24, 2012

Roses Are Red

Violets are blue
Small businesses are the engine of the American economy
So let's subsidize them directly and through the tax code.

Mercatus Center scholar Veronique DeRugy writes on the misguided fetishism of small business favoritism. One reading of representatives' currying favor with small businesses is mere vote buying. Small businesses churn voters like spiked golf balls in a button flash tumbler (I used to work in a button factory, so at least I get this reference, even if no one else will). The idea is that by giving some sweetheart preference to small businesses, politicians can reap some political goodwill from employees and owners alike. I'm not convinced that's what's necessarily happening though.

I think people genuinely distrust large, anonymous organizations. Corporations routinely, as a matter of economies of scale, conduct non-euvoluntary trades. These trades are non-euvoluntary by dint of BATNA disparity: the individual customer is always worse off than the corporate seller if a trade isn't struck. One lost tire sale is piddling to Bridgestone, but it might mean an inability to get your wife to the maternity ward on time to the unfortunate dad-to-be. Corporations don't care any more than to set marginal revenue to marginal cost because it's not in their interest to do so.

Therefore, small businesses must be better, right? The customer has a chance to get to know the owner, maybe  explain his plight, maybe cut a good deal because the guy looks like a mensch you can trust. It's more euvoluntary when the business has a stake in making the sale go through.

I can actually buy that bit of reasoning, as far as it goes, but like anything else, ain't nothin' free. Small businesses suffer from scale economies. What you give up by scaling down from Home Depot back to the corner hardware store is selection, price, contingency inventory tracking (ever notice how snow shovel prices inexplicably don't skyrocket at Home Depot every time there's a giant surprise snowstorm and there's always stock on the floor?) and time economies? There are efficiencies to large-scale operations and there is indeed a happy baby splashing about in that non-euvoluntary bathwater.

Questions for discussion:

  • Are all corporations (say, mid-cap and larger) necessarily non-euvoluntary?
  • Are all small businesses necessarily euvoluntary (by BATNA)?
  • Do regulations like Sarbanes-Oxley, Glass-Steagall and Dodd-Frank help move firms in the direction of euvoluntaryness?
  • What are the costs and benefits to favoring a particular class of business based strictly on size? How do special favors influence firms' incentives to grow and produce more valuable products for customers?


  1. I agree that small businesses are an important source of commercial relationship to the consumer market. "Large" corporations can have a tendency to not fulfill consumer needs in terms of satisfaction, happiness, and comfort. They exist mainly for profit seeking by making a wide array of products/services readily available for the population that surrounds them. In contrast, small stores and enterprises can develop a positive relationship with their respective communities in addition to their limited product or service selection. This helps build consumer loyalty and comfort, which would eventually lead to potential profits of their own. These small businesses are of great importance in the market and if aid is needed to keep them running, I'm all for it.

  2. Trade with large corporations appear to be non-euvoluntary by failing condition no. 6 for certain individuals (low income, time sensitive, etc...) Income restrictions will incentivize these individuals to trade with only large corporate entities due to the lower prices offered. Those who need a specific product right away must also engage in trade with larger firms. These individuals might want to trade with smaller firms for the stated non-pecuniary benefits, but are unable due to their income restrictions and other negatives of small firms (selection, inventory stock, etc...) Vice versa the same conditions also make smaller firms non-euvoluntary. The existence of both types of firms in the market is euvoluntary, negating the conditions for non-euvoluntarity.

    Large firms and small firms exist to satisfy differing wants in individuals, favoring one over the other through intervention negatively impacts all consumers, by distorting the natural efficiency of the free market to allocate resources. For example, favoring one type of business by size, induces other firms, who would not naturally operate at this favored size, do so to get the benefits of the favoritism. Leading to inefficient production induced by the intervention.

    1. *edit* The existence of both types of firms in the market is euvoluntary, negating the conditions for non-euvoluntarity by offering individuals in the market a choice.


Do you have suggestions on where we could find more examples of this phenomenon?