ECON: Theory: Free market limits company growth?

James Rogers (
Wed, 17 Sep 1997 00:35:09 -0700


It recently occurred to me that free market economics may actually prevent
the formation of really large corporate entities. I actually touch on a
number of related points in this post. I am writing as I think, so please
bear with me.

My assumptions are pretty basic: 1) As companies grow, the management
heirarchy becomes deeper, and 2) a modern free market economy is based more
on the flow of information and technology than on industrial sectors (which
will become increasingly automated with the advent of nanotech).

Ignoring all indirect cost issues, the issue that really starts to become
important is information flow latency within the organization. An
info/tech driven free market economy will necessarily (?) revolve around
the speed and flexibility of the producers. While these factors are true
today, the current market structure has other factors that in many ways
overshadow the importance of speed and adaptibility. A modern,
well-lubricated (i.e. "free market") economy would add significant value to
technological agility.

For every level in an organizational heirarchy there is added latency for
information that has to pass through it. The latency may vary depending on
the specifics of the organization, but the latency exists nonetheless.
This latency exists going both from top-to-bottom as well as bottom-to-top.
Think of the human body as an analogy. Based on the size of our bodies and
speed of our nervous system, the latency between thought and action, or
sense and reflex, is measurable but small. Although it would be useful to
have faster reaction time, the added utility is minimal, natural selection
having produced a nervous system that is "sufficient". Now consider what
the effects would be if the latency in the human body was 5 seconds. If
there was a 5 second latency between the brain and the peripheral nervous
system, the utility of the human body would approach zero. I believe that
the utility of large corporate entities in a free market environment would
suffer the same fate due to informational latency in within the
organizational heirarchy.

There is some evidence of this effect in the market today. In Silicon
Valley, most companies never manage to grow beyond the small- to mid-cap
range. There are relatively few Silicon Valley big-cap companies, and most
of the Silicon Valley big-caps date back to the Industrial Age era of
computing (e.g. IBM, HP, Microsoft). Yet there are a relatively huge
number of Industrial big-caps. Proportional to their respective percentage
of the GNP, Industrial big-caps are considerably more common than Info/Tech
big-caps. Even in the Info/Tech market sector, most of the big-caps are
hardware vendors, the more industrial side of Info/Tech. Notice that the
only big-cap software companies have been firmly entrenched in the
marketplace since the Industrial era of Info/Tech.

IMO, a free-market economy would effectively control the practical size of
any corporate entity by making the cost of not having information exceed
the cost of letting information flow freely. This has some intellectual
property ramifications, but I'm not going to spend any time on that issue

It also follows that for maximum efficiency, organizational heirarchies
would be mostly transient. A possible scenario is a lot of small
companies, temporarily forming larger companies strictly where it is
useful. This would increase the overall (dare I say it?) entropy of the
market, and hence efficiency.

It also follows that the reason the government is so inefficient is that
its organizational heirarchy far exceeds that of the largest corporations,
primarily because it has been shielded from the forces of natural
selection. Information latency in the government is so severe that the
left hand really doesn't know what the right hand is doing.

-James Rogers