The entire argument of this article is the broken window fallacy.

The original article is not that great either, but I'm sure it's true that government programs intended to encourage small business have a net negative effect. The author's proposed alternative policies would probably have a net negative effect, too. The best thing the government could do to help innovation would be to interfere less with the economy.

I do disagree with one thing – that somehow larger companies are more efficient than smaller companies. I’ve spent three years working in Siemens, and was loaned to several other large companies in telecoms and aviation business. The amount of HR overhead in those places is scary beyond belief.

In none of those places have I seen the efficiency of a typical startup, where one employee/founder will customarily be doing the work of at least two people employed by larger companies.

What does your experience tell you?

Large companies typically grow to their size through efficiency. IKEA grew by ultra-streamlining their ordering, distribution, shipping and supply chain in general. I can buy a $50 bookshelf that accomodates all of my trade paperback collection and is higher quality than many of its competitors.

International Paper, while not being the greatest example, has also done an amazing job at refining its distribution and supply chain such that I can order a quarter ton of paper today and have it in house within 2 days.

Amazon is another example of big company efficiency, for reasons I think are obvious.

Yeah, they might not be the best at bookkeeping and/or HR functions, but they also have a LOT more employees and revenues to keep track of than a 5 person startup... but at their core operations, a really good large business is something to model after more than sneer at.

Indeed. If you're going to argue against that article, surely that's the main point you should be addressing.

Large companies? Efficient? In what universe?

There are different types of efficiencies.

A small group can accomplish more tasks per person than a large group, as there is less overhead.

However, large groups can benefit from network effects. A larger group may be able to build a reputation, distribute work to a broader audience allow more specialization. So even though each individual worker accomplishes fewer tasks per day, the overall output of the firm may be much higher.

A factory with 90 workers and 5, managers, 4 HR people, and a CEO may be able to produce more chairs than 100 independent workers, all of whom spend every day with a hammer and saw.

Different organization sizes are appropriate for different tasks.

"Different organization sizes are appropriate for different tasks."

Yes, if you are making chairs or cars, it makes sense to have more people (up to a point of inflection where the diminishing returns would make adding new workers grossly inefficient).

HOWEVER, if we are talking about startups -- disruptive, scalable businesses -- they are, by definition, more efficient than big companies. I would make this argument myself, but it has already been made pretty well by PG:

http://paulgraham.com/boss.html Startup founders seem to be working in a way that's more natural for humans...each species thrives in groups of a certain size...groups of 8 work well; by 20 they're getting hard to manage; and a group of 50 is really unwieldy.

http://paulgraham.com/wealth.html You could probably work twice as many hours as a corporate employee, and if you focus you can probably get three times as much done in an hour. You should get another multiple of two, at least, by eliminating the drag of the pointy-haired middle manager who would be your boss in a big company. Then there is one more multiple: how much smarter are you than your job description expects you to be?

http://paulgraham.com/avg.html In a big company, you can do what all the other big companies are doing. But a startup can't do what all the other startups do [this is why/how startups can beat the average].

It's hard to argue that startups are not more efficient than big businesses.

I found that efficiency argument baffling as well. And not only are larger companies rife with bureaucracy and fiefdoms, the non-essential overhead staff can actually be a net drag on the productive members as they are entrusted with more and more with decision-making capability divorced from situational knowledge. In a startup this is generally not the case.

I don't like this guy's blog. I happen to not agree with the AEI article about startups, but blowing a long jet of smoke into the debate isn't doing anything to help us. The AEI article is full of facts, and the blog post is full of emotions and ideology. Also, Grameen Bank scored a Nobel Peace Prize, not a "Nobel in Economics".

The AEI article is stunningly bad - reminds me of intelligent design arguments. Take this: "To get more economic growth by having more start-ups, new companies would need to be more productive than existing companies." This is like suggesting that people shouldn't have kids because kids aren't as productive as adults. I usually try to not name-call on the internet, but Scott Shane is an idiot. He clearly didn't get to be a professor based on his intelligence.

Unfortunately the linked blog post doesn't quite hit the nail on the head...