Chapter 1

1.6 Economic Units: Structure, Size and Interactions

last revised/edited 11/2010, 7/’16, 4/’17

1.6.1 Relationships among economic units and between production facilities and their owners
1.6.2 Ways economic functions are fulfilled
1.6.3 Benefits versus problems of large institutions
1.6.4 Visualizing a system of small independent enterprises rather than large corporations

1.6.1 Relationships among economic units and between production facilities and their owners
In modern economies, ownership relationships and functions of money are complex. They are poorly understood and operate without planning or governmental control. Much money is created by commercial banks rather than a central bank, and much circulating money is owned by banks, not corporations or individuals. In addition, the function of money is often usurped by credit systems and investment instruments. Consequently much of the capital goods, buildings, and supplies of enterprises are owned by financial institutions. Corporations are mostly owned by investors who are not involved in product designs and production processes.
Ownership relationships between corporate economic units are confusing: a corporation may own shares in other corporations, which allows it to influence their work, borrow designs from them, etc. Relationships may be cooperative and mutually beneficial. Often there are hostile takeovers of a less profitable corporation to stop competition – often the corporation’s products are sold under the new owner’s brand name, its production is stopped and the facilities are used to produce some of its own products or it may be sold to another enterprise. In the inadequately regulated flow of investment assets, corporations may buy smaller enterprises and branches of other corporations with borrowed money, while they themselves are not doing well. As can be expected, the haphazard financial dealings often lead to instability; accounting gimmicks confuse banks, regulators, and investors alike. The collapse of large corporations and unforeseen downturns in a segment of an economy can have major consequences for whole regions.
It appears that much money is owned by investors who finance promising start-up companies, continuously trade stocks and bonds of corporations and deal in the very indirect speculative derivatives’ market that was developed in the late 20th century and early 21st. However, most of the investors’ money is also borrowed or “leveraged,” leveraged meaning that they use assets as collaterals for many loans.
The question is: is there any economic advantage to these indirect dealings and indirect connections between enterprises and investors that create huge profits for financial institutions? The answer is hardly positive; they certainly do not create stability for middle-class workers, and products may be complex and attractive but rarely make people happier.

1.6.2 Ways economic functions are fulfilled
In modern democracies, economic functions are primarily fulfilled by:
– More or less large corporations whose ultimate objectives are profits for investors and continuous growth
– Government institutions including public universities
– Non-profit and small enterprises with specific goals, small family businesses, etc.
– Self-employed professionals, consultants, builders, artists and artisans, etc.
– Work within families outside the money economy.
Investors demand profits; consequently the goals of corporations are always skewed. A company may set out to bring a near-perfect product onto the market at a reasonable price. Investors want the price as high as the market bears and production costs as low as to keep the product barely sellable. Founders of the enterprise may want to spend much on development, applying scientific and technological progress to create superior products that truly improve customers’ quality of life. Investors want profits and no more development investments than is needed to keep the company profitable for a few years. When sales lag, large corporations may find it cheaper to increase advertisement budgets, than improve the quality of its products, or investors may withdraw support and let the enterprise close.
In well-functioning democracies, governmental institutions and their services are invaluable. Decentralized institutions are generally preferable to large centralized ones.
Small economic enterprises are usually adapted to local markets and conditions, including education of available workers. Although working primarily with local materials for local markets, they may buy from and sell to enterprises and individuals worldwide, trading unique products and/or manufacturing custom designed goods. Worldwide phone and Internet consulting or counseling may develop.
All economic functions are interdependent. Economic units may be owned by larger entities, they may interact according to contracts and free market principles, and/or their activities influence each other indirectly.
Desirable economic development may not consist in producing as much as possible as cheaply as possible. Its primary objective is to provide people with goods and services that increase their quality of life. Quality of life must consider reasonable stability and quality of commercial work. If small enterprises are not discriminated against, they are much better able to offer good working environments, reasonable pay, and products adapted to local desires and needs.
Small enterprises that invest much of their profits for research and development may market a relatively easy to build product but then spend much resources to develop a near perfect products, rather than mass produce a good that has apparent shortcomings and does not appear ‘finished’ in its development. Far too many marketed products have obvious, relatively easily correctable shortcomings, and many products that people may wish are not developed.
Many small independent economic units consist in people who work more or less independently with few or no employees, do subcontracting work, have a small franchise as a family business, find niches to make a living such as having a car wash, own or rent and manage storage units, a food trailer, a flee market stand, etc.

1.6.3 Benefits versus problems of large institutions
Large economic units and corporations obviously benefit from lower costs buying raw materials and parts, transporting their products, etc. However, they require complex administrative structures that are expensive and often rigid. There is a false perception, that producing and buying large quantities of a product necessary decreases costs. Large endeavors require support staff that small ones do not need. In terms of hours worked, large corporations are hardly able to produce goods more efficiently than a system of small, interacting economic units. Large corporations save by utilizing underpaid contractors and Third World workers, however, with the rapid development of Third World labor markets these cost savings are likely to disappear.
Because of the perception that large is more efficient, small economic units are often discriminated against.
While in well functioning democracies governmental institutions and their services are invaluable, many institutions are too large; they often have problems similar or worse than large corporations. Maintaining bureaucratic structures with well-paid managers becomes a goal independent of the mission of the institution, and when changes are indicated, “stake holders,” usually business people with vested interests, usually argue for essentially maintaining the status quo. Decentralized institutions are generally much preferable to large centralized ones.
Another inadequately considered problem of large-scale industries is the transportation of goods across continents and oceans. While low costs may make the shipping of parts and finished goods a rational choice, hidden costs are huge and rarely considered. Highways and rail lines divide ecosystems and neighborhoods; noise pollution, damage to atmosphere from plains and pollution of oceans and water ways by ships are significant; all ways of transporting goods adds major dangers for humans and animal life. Pollution is unavoidable, even if renewable energy is used (“dirty” minerals and polluting mines are necessary to produce electric and hybrid cars, etc.)
In the USA, health insurance costs for self-employed people and employees of family businesses are much higher than for employees of large enterprises, even though people working in their own business are typically much more invested in their work and health and require less medical services. Insurance companies usually have to pay but a fraction of what hospitals charge poor, uninsured patients, although the administrative costs of filing insurance claims, justifying procedures and medications, etc. are major.
The U.S. Health and Human Services bureaucracy is an example of inflexibility and inability to adapt to crisis. Apparently persons with some power and profitable health care enterprises are interested in business as usual, no matter how bad the outcomes. In addition, there is no cooperation with the Drug Enforcement Administration and law enforcement, which make problems worse, and very inadequate cooperation between the Substance Abuse and Mental Health Services Administration (SAMHSA), the Office of National Drug Control Policies (ONDCP), the other federal health-related agencies and state agencies. While the opioid addiction epidemic has been largely contained in Europe, it has been escalating in the USA with annual overdose deaths alone having increased from about 5,000 in 1999 to >30,000 in 2015.
Many examples of trade appear unbelievable: some cast iron manhole covers in Austin Texas are made in India, others in Austin. Mexican tomatoes and peanuts are shipped across the United States to be processed in Canada and then shipped back to Texas and Mexico.

1.6.4 Visualizing a system of small independent enterprises rather than large corporations
Small enterprises are sensible: a cook may open a restaurant or a physician found a clinic. Every partner and hired employee depends on the success of the enterprise. The leaders or owners are responsible for creating a viable enterprise in which patrons, clients or patients are satisfied, will return, and recommend the establishment to others. All partners and employees participate in this goal. Every member of the organization can hurt all others, and every person’s ability to improve services adds to the enterprise’s reputation and workers’ personal satisfaction. In a clinic, any new idea, preliminary research, or successful experiment may advance standards of treatment and is likely to be imitated by others without hurting the clinic.
Small architecture firms who work closely with groups of engineers and subcontractors may design and build structures. Grocers may, as in the past, work with a network of local farmers and rural cooperatives, small food producers and small transportation enterprises. Goods may be less uniform and beautiful but organic, savory, and seasonal, produced locally by appropriately paid workers.
Manufacturers of sophisticated technical products, such as vehicles, may be organized by a small group of engineers and craftsmen. They design models, contract detailed engineering to other groups, buy parts, order or manufacture custom parts; then build models; they then may contract with small factories to assemble a developed model. All groups working on the development and production of the vehicles are independent entrepreneurs and free agents. The manufacturer may utilize many groups and switch contractors when performance is inadequate. Many groups may compete in designing and building high quality parts with desirable characteristics, and initially, vehicles built for different regions may vary some. Soon, inferior products are adapted and improved, following the model of most successful manufacturers. Rather than small enterprises keeping secrets and patents, trying to grow at the cost of others, they fill their niche and learn from each other. All keep improving their products.
Modular designs should be encouraged in al areas of industrial products: people should be able to build a product utilizing parts from many companies and allowing customers choices, as is, to a limited degree possible, in some products, e.g. a piano being available with a Chinese (the company’s own) action, the Czech Detoa or the German Renner action, and also with their own or Renner hammers, etc. Most manufacturers use imported parts, e.g. American watches with Swiss movements, bicycles with Japanese parts that are actually manufactured in lower wage Asian countries, etc., but modular design where a product can be fitted with parts of varies companies is not usual.
In all complex products, a small enterprise functions as project leader and there is a hierarchy of contractors. All involved enterprises work independently and compete with similar establishments. None is directly supervised by the project leader. Rather than having a hierarchy of administrators that take responsibilities for aspects of production they do not understand, every small entrepreneur takes responsibility for his/her work.

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