Full text: Small and Big Business

A great deal of dust has settled on this little book since it was 
published, and the subject has been covered by other books with more 
recent documentation, experience and insights. Some of my own opinions 
have changed and in part this reflects changes in the world. The booklet 
may thus be read like the excerpts from old newspapers which are 
reprinted in to-day’s press: It amuses us to see how people of another 
age experienced the world as it was then. 
While most of the text remains as it was I have been somewhat 
inconsistent in so far as I wrote a new version of chapter three which 
deals with capital intensity. In the old version I had misinterpreted 
certain data, and maintained that bigger firms had larger capital-output 
ratios. There is nothing to it. But the chapter also contained a 
theoretical analysis of the relation between size, capital-output ratio 
and profit rate. This showed that an increase in the capital-output ratio 
will not always be profitable, that it may reduce the rate of profit, and 
that in fact it is very likely to do so if the capital intensification is 
continued. My new version is built on this analysis and it uses it in 
order to show why in fact the larger firms apparently do not engage in 
"capital intensification". The new version thus uses the same analysis 
(in slightly improved form) as the old one but for a different purpose. 
Moreover, it extends the application of the theory to the historical 
development of the macro-economic capital-output ratio and tries to 
explain why this ratio on the whole did not tend to increase over time. 
That my view of the empirical facts is now the opposite of what it was in 
the old version has something to do with the paradigm, the prejudices 
current in economics. It was frequently believed that technical progress 
requires capital intensification and that the larger firms had the newer 
techniques. As to the first of these prejudices it went even farther, in 
so far as capital accumulation was seen as the driving force which caused 
productivity to rise. This indeed is the only explanation for the 
surprise which greeted the empirical demonstration of Abramovitz that the 
greatest part of the increase in productivity was in reality due to 
technical progress pure and simple and not to capital intensification. 
This tended to shift the paradigmatic view towards the opinion of 
Schumpeter for whom technical progress was the driving force. The aim of 
my analysis is to show that capital accumulation mostly takes the form of 
an increase in capacity rather than of capital intensity. 
The revised chapter stands in contrast to the rest of the book not only 
by the changed perception of capital and technical progress: The old text 
is untouched by environment, by "small is beautiful" and by the 
importance of organisational structures for the theory of the firm. These 
things, among others, were not anticipated by myself or by the bulk of 
the economic profession at the time when mass production by giant 
corporations was becoming the technological paradigm of the leading 
economic power.

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