Growing up in China, I read the University of Chicago economist Ronald Coase, who was influential in the 1990s and ’00s because, with the economic development and reforms taking place in China, there was a lot of thinking about organizations and institutions that facilitate economic activities. We’re used to that activity coming from businesses, including large businesses, but it’s not obvious that it should do so.
If you go back to the founding father of many topics in economics, Adam Smith, a lot of the activities he describes are fairly individualistic. There’s little mention of organizations or firms. About 100 years after Smith’s work, firms and large-scale production had become much more prominent; people such as Marx and Lenin thought that planning was a natural consequence of industrialization and economies of scale. Lenin claimed the Soviet Union should be organized as one giant company in order to take advantage of large-scale production.
As a student in the 1930s, it intrigued Coase that even in Western free-market societies, you had not just the market mechanism and individualistic production described by Smith; you also had firms. There wasn’t just one firm, but it also wasn’t the case that there were no firms.
Today, large companies have gotten a lot of attention from the public and from economists. Some of the discussion treats them as though they’re a uniquely contemporary phenomenon. So the starting point of our research was to figure out whether what we are seeing in recent time periods is part of a general, long-term phenomenon.
My coauthors and I looked at nine or 10 other market-oriented economies around the world, and we again see long-term patterns of an increasingly large share of output or income of an economy coming from its biggest firms. It’s a pretty general phenomenon. This seems to suggest that maybe there are some elements of truth to hypotheses that say with the development of economic activity and technology there tends to be a feature of increasing scalability, so that more and more production will fall under the umbrella of large organizations.
Interestingly, even though the largest companies as a group have collectively become bigger and bigger, they’re not the same companies over time. In separate research, we collected data about the identities of the largest firms now and in the past—the 500 largest industrial companies, for example, or the 50 largest retailers—and it turns out that over a 50-year period, the composition of those groups changed quite a lot.
My personal hypothesis is that making a super-large organization work is not easy. You need a lot of coordination, and therefore you need clear objectives and processes for people to follow so that there’s some uniformity in the organization and not just chaos. But these processes that allow organizations to expand at a large scale can also make them rigid in the face of change.
Yueran Ma is professor of finance and Fama Faculty Fellow at Chicago Booth.
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