Small Business Doctor

Yes, big companies are incentivized to favor mass migration. Why?

Why are some companies very big?

Coase’s theory of the firm tells us that companies exist because of transaction costs in the economy. Transaction costs are costs between two economic entities. Let’s say you’re going to buy a house. The amount that you pay as the buyer and the amount the seller will receive are not going to be the same. The difference between these two amounts is the transaction cost.

Transaction costs in the house buying example are fees for inspections, title insurance, real estate agent commissions, and so forth. As transaction costs increase, especially in frequency, companies will eventually bring these transaction costs inside of their firm. At some point, it’s more efficient to do those tasks internally.

Internalizing these transaction costs increases both the number of employees and the scope of tasks being performed at a company. Both of those things in turn increase the management burden on the company. This increased management burden increases the operating expense of the company.

The company decides how to balance the external costs from transaction costs and the internal costs from diminishing returns to management of increasing the number of tasks done internally. This is a classic economic tradeoff. Different companies decide differently how best to do this, and even the same company will decide differently at different points of its history.

When we observe a very big company, we know that this company has decided to internalize a great many of these external transaction costs. In any given transaction where these internalized transaction cost avoiding tasks are relevant, this very big company will be able to outcompete a much smaller competitor who lacks these internal capabilities and faces those external transaction costs.

We also know that this very big company is purpose-built through these decisions to perform well in an economic environment where there are significant transaction costs. Otherwise this very big company wouldn’t have taken on all those very big internal management costs. So, being a very big company is a strategic choice that most makes the sense when a company is facing an economic environment with significant transaction costs.

Migration lessens social cohesion

Migration lessens social cohesion, which increases transaction costs. Think about it.

Imagine that you’re in the market for a used car. Your mechanic neighbor is selling his wife’s car that he has meticulously maintained its entire life. You’ve known him and his family for years. You go to him for advice about cars. A used car dealer across town is also selling the exact same model of car with the same mileage and apparent condition for the exact same price.

Of course you would buy your mechanic neighbor’s car instead of the one at the used car dealer. You know exactly what you’re getting with your neighbor’s car. You don’t really know what you’d be getting from the used car dealer. That’s why it’s wise advise to hire a mechanic you trust to inspect used cars before you buy them. And that is a transaction cost. Both cars could be identical in every way, but you incur an inspection transaction cost from the used car dealer that you do not from your neighbor.

Economists refer to that difference in knowledge as information asymmetry. The buyer in this example doesn’t know as much about the used car as the seller does. So the buyer pays to have an inspection performed.

Back when most people lived their entire life in one place and when everybody knew all about everybody else, there weren’t nearly the transaction costs we increasingly face today. In American economic history this transition is usually referred to as urbanization. People migrated from rural farms to urban cities. When they did so, that old social cohesion was lost. Information asymmetry became the norm instead of the exception.

Information asymmetry is one of the causes for transaction costs in an economy. Since migration increases the prevalence of information asymmetries, mass migration increases transaction costs in an economy. Please note that this does not imply that migration is therefore always a bad thing. It undeniably has a cost, but there can be benefits to migration that would offset this cost.

Incentives Matter

Mass migration increases transaction costs. Very big companies are strategically and intentionally positioned to compete best in an economic environment with significant transaction costs. Therefore, all things equal, very big companies are incentivized to favor mass migration because it supports the economic environment in which they are strategically positioned to succeed.

Does this mean that every CEO, board member and shareholder of very big corporations supports mass migration? Of course not. It simply means that there is an economic incentive in place for them to support it.