How would the hypothetical Silicon Valley startup change with growth, such as having thousands of employees?
The other problem -- demonstrated in some of your remarks -- is the departure of economic reality from the classical models we all came to know. Many large corporations seek rents from government -- depending on long-term government contracts. People engage in long-term contracts with their mortgages. Labor contractshave a long-term duration. Perfect competition, instantaneous adjustments and all the wonders and advantages of "free-markets" don't apply, or don't adequately apply. I also noticed your reference to advertising -- cannot remember for sure, but I thought that Frank Knight had also raised that point about firms "manufacturing" consumer demand for their own products.
Ultimately, attempting to correct the economy faces populist myths based on oversimplification of those old models. At the center of it: imperatives of property rights. People cite a "demand" for CEO talent that mandates the excessive bonuses -- but demand by whom? There is quite a pool of so-called "talent" willing to work for much less. Since the firm is a "team" with all elements contributing to a production process, it would seem that the market for labor is undercompensated for its marginal product-- based on an arbitrary allocation of returns by decision-makers in another so-called market.
On the point of scale, let me modestly suggest the following. There ought to be public debate and public expression of opinion as to how the benefits of scale stack up against the costs. If hierarchy is one of those costs then we ought at the very least to weigh their negativity )and that of their social consequences) against the gains flowing from cheaper cost per unit output. We don't do that in this culture, and that too is a cost of capitalism (however unrecognized or repressed).
The free market that adjusts in Walrasian or Marshallian ways has always been a theoretical construct with heavy utopian dimensions, one a long way from realization, ever. I always chuckled when hearing some learned colleague explain to students the utopian contents of Marx's criticism of capitalism as if what neoclassical economics proposes is one whit less utopian. They are just very different utopians, and that, of course, makes all the difference.
Frank Knight was brilliant in that as in so many things he taught. He certainly had little time or respect for the apologetic theories of the firm that came after him.