Friday, July 23, 2010

Small business fetishism

I can't quite wrap my head around what's so all-fired special about small business compared to his larger bretheren. Look fellas, all businesses start out small. That's as true for the mom and pop grocery store or the corner adult bookstore as it is for General Dynamics or Microsoft. You know how small companies get big? by delivering value, that's how. Come on now. The sad truth of the matter is that most small businesses, especially the ones that stay small just don't deliver all that much value. Yeah, yeah, there could be other reasons, like if you're in an industry that doesn't scale well (think granite quarrying or roofing services) but by and large, when policy favors small business it does one of two things:
  • it elevates the importance of relatively low-value-added enterprises
  • it promotes (again, relatively) excessive risk-taking by encouraging the formation and propagation of itty bitty ventures.

Don't get me wrong here now. Vigorous competition and the entrepreneurial spirit are critical for any vibrant economy, but siphoning talent from established providers of value destroys the creation of surplus, especially once you adjust for the inherent uncertainty of a startup.

Let's use an example to illustrate what I mean.

Hugh is an out-of-work chemical engineer. Now, it just so happens that Dow has a plant not too far from where he lives, but because Congress is offering hiring incentives to small businesses (for the sake of argument, let's say that this is defined by firms who have 20 or fewer employees), he's offered a compensation package that just edges out what Dow is offering. So Mr. Jass, Hugh, takes a job at Flybynite Chemicals, a small bioplastics firm bicycling distance from his apartment (the poor goofball's old house got foreclosed last year). He's all happy about his new job and is ten kinds of excited about getting to work on the thrilling project of turning corn into car parts. Six months later, and the enthusiastic but mostly incompetent amateurs who run the company go broke and have to lay everyone off. Hugh is out another job, and back on the dole.

On the margin, there could be lots of Hughs. Folks who would have been better off taking jobs with large firms, producing products that people want and supported by competent management. Instead, we have policy that champions one class of business over another, to the detriment of both the worker and the economy as a whole. Policy makers simply do not have the requisite information to judge whether or not employment with a large firm is less preferable than employment with a small firm. Only the workers themselves and the folks actually involved with the firm have the knowledge to make anything even approximating a best guess about the relative value of their resources (and yes people, labor is a resource. They call the hiring/firing departments in most companies Human Resources with little willy-nilliness involved). By pushing for more small business activity, we're shelving the valuable contributions made by big players, proven players, and taking risks with, yes, you guessed it, other people's money (well, maybe not money specifically, but with talent, time, and expertise, which are all worth a heck of a lot of money out there in the Wide World of Business). It's a recipe for misery and it's being sold to us in a cute perfume bottle as eau de economic recovery. Pathetic.

1 comment:

  1. On the other hand, only the bigger businesses have the extra cash on hand to fund a lobbying scheme which means they get to choose the rules of the game. Absent government meddling, there would most definitely be fewer concentrations of large companies in industries, and more small- medium- sized businesses. Even things like Accounting requirements, environmental requirements, etc, are all things that artificially encourage economies of scale by already existing large businesses.

    So, maybe the fetish for small businesses isn't a good thing, but its probably harkening back to a time when the regulatory environment made small businesses a more viable creature. So giving them tax breaks is something akin to breaking their legs, then giving them crutches.