In Critical Mass, Philip Ball indirectly addresses a criticism that Timbro et al. often make about one characteristic of the Swedish economy — its lack of new large companies. Sweden’s start-ups do not grow into behemoths like Microsoft and Google. They never join the ranks of the AstraZenecas and Ericssons, Sweden’s mature large companies. As an example of this criticism, Johan Norberg quotes Johnny Munkhammar: “None of Sweden’s 50 largest companies was started after 1970.”

I have never understood why this observation was meant to constitute a criticism per se: Either the Swedish economy in aggregate is less productive as a result of this phenomenon or it is not. Before you can state that the lack of large new companies is somehow an indictment of the Swedish model you should really first argue that there is a link between the high taxes/regulations and an inability of small companies to grow large,Another argument might be that large companies in Sweden enjoy too few constraints on their behaviour, allowing them to successfully crowd out upstarts, but I do not expect Timbro to front an appeal for less laissez faire.
 
Or, yet another possibility, perhaps Swedish large companies are so innovative that they pre-empt the need for smaller upstarts to replace them. and then argue that smaller companies are less productive, which in turn causes lower overall productivity in the economy.

The only problem is that Sweden has one of the most productive economies in the world, despite the high taxes and this relative lack of large new companies. Perhaps then it is time to look for a link between the lack of churn in business size in Sweden and the country’s admirable productivity.

Philip Ball offers a hint on page 219 of his book. He points in the direction of the work of Paul Ormerod, a British economist who created a model [PDF] linking the severity of the fluctuations in an economy’s business cycle with the distribution of company sizes. His model is able to explain why economies composed of a few large companies tend to experience deeper recessions,“The model therefore suggests that the business cycle arises because of, first, the different scales on which individual firms produce and, second, the interactions between these firms. It is the concentration of output amongst a relatively small group of firms which gives rise to the business cycle.” while economies composed of predominantly smaller businesses — such as Sweden’s — experience shallower recessions. Ball’s adjoiner:

This is a sober message in the light of the tendency for small companies to get swallowed up by a handful of big ones: in such an economy, we must expect deeper, more severe recessions. In this sense at least, a “healthy” market is a diverse one.

Which raises another interesting point. Perhaps it is harder for Swedish companies to grow not because taxes are higher, but because these companies tend to merge less often, for whatever reason. There are plenty of examples of mergers, ostensibly driven by promised synergies and economies of scale, which in fact were the product of megalomanic CEOs (witness AOL Time Warner) and which performed poorly afterwards. These tend to balance out the success stories — the Googles and the Microsofts. Large companies clearly are not automatically more productive than smaller ones — at least not anymore. Perhaps the internet now provides smaller companies with access to the same economies of scale that previously were only available to larger companies. Or else smaller companies prove to be more nimble in times of accelerating technological change. Or perhaps smaller companies benefit from the rule of 150Also see Blink on this matter..

Whatever the reason, Timbro needs to do a bit more work if it wants to convince me — reciting the mantra won’t do it. I’m not saying they’re wrong, outright — this post is far too tentative for that — but I am saying that it’s rather easy to think of plausible rebuttals, and then to find support for these among economists.

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title=Timbro

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Swedish free-market think tank

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