Can Small Businesses Make America Prosperous?
American politicians may not agree on much these days. But they are unanimous in their veneration of small business. With the job market stuck in neutral, both Republicans and Democrats are pushing to give small companies more help, and are trumpeting the supposedly unrivalled ability of small firms to create jobs and propel innovation. In part, this reflects political calculation—the small-business lobby is powerful in Washington. But it also reflects the hold that small business has on the public imagination. We may spend our dollars at Walmart and IKEA, but in our hearts we have a soft spot for the corner store.
Americans have always been ambivalent about big companies, as Marc Levinson shows in his new book, “The Great A. & P. and the Struggle for Small Business in America.” A. & P. was the biggest and most important chain store in the first half of the twentieth century. Consumers liked the lower prices and the greater selection that A. & P. offered. But distrust of A. & P.’s power, and the threat that it posed to the livelihood of small grocers, sparked a national campaign against chain stores, which led to the enactment of laws designed to limit competition and to restrain cost-cutting by big retailers. States passed taxes targeted specifically at chain stores. The Robinson-Patman Act, of 1936, effectively made it illegal for suppliers to offer chain stores better deals than they offered other retailers. And state and federal fair-trade laws allowed manufacturers to set a minimum resale price for their goods and to legally prohibit retailers from discounting them.
The odd thing is that although these laws stemmed from a populist movement, they actually resulted in price increases for the public at large. In other words, it wasn’t consumers the government was trying to protect from big business—it was small business. A. & P.’s most important foe in Congress, the populist Wright Patman, was open about this, saying that he wanted to insure that the U.S. did not become a “nation of clerks.” Forcing consumers to pay a few extra dollars for their groceries or household goods was worthwhile if it was a means to this end.
These days, government regulation to keep prices high is less popular. But the fetishization of small business continues apace. Some of the support derives from real virtues that small companies offer—diversity of choice, connection to local communities. But much of it derives from the idea that the nation’s economic well-being depends on such companies. Given that the overwhelming number of American businesses are small, and that, as we’ve all heard, small businesses create most new jobs, this seems reasonable enough. But the truth is that, from the perspective of the economy as a whole, small companies are not the real drivers of growth. One can see this by looking at the track record of the world’s economies. The developed countries with the highest percentage of workers employed by small businesses include Greece, Portugal, Spain, and Italy—that is, the four countries whose economic woes are wreaking such havoc on financial markets. Meanwhile, the countries with the lowest percentage of workers employed by small businesses are Germany, Sweden, Denmark, and the U.S.—some of the strongest economies in the world.
This correlation is not a coincidence. It reflects a simple reality: small businesses are, on the whole, less productive than big businesses, and though they do create most jobs, they also destroy most jobs, since, while starting a business is easy, keeping it going is hard. This is true around the world….