Small Matters: Small business drives vibrant economy - if we let it

Ray Kroc's first McDonald's restaurant in Des Plaines, Ill., 1955. The empire began as a single drive-in.
Ray Kroc's first McDonald's restaurant in Des Plaines, Ill., 1955. The empire began as a single drive-in.
Posted: July 25, 2011

Small business is the major provider of jobs in the United States, and it produces half of the goods and services in our economy (excluding government) each year. But its contribution to our prosperity is far larger and in some ways far more important: It is the "R&D" of the economy.

None of our famous corporate nameplates started off with billions of dollars in sales and profits.

Wal-Mart? A single store in Arkansas.

Microsoft? A consultant to Commodore Computers.

McDonald's, Ford, Dell, a list of the "who's who" in corporate America, each started as a "small business." By using resources (labor and capital) to serve consumers well, these companies succeeded.

Each year, an estimated 600,000 firms are started. But an estimated 500,000 terminate operations (about 30,000 through formal bankruptcy, the rest just shut the door). This is a result of our entrepreneurial process - the experimentation that is the lifeblood of economic progress. Entrepreneurs with an idea for a new product or service, or a better way to do something, put their ideas to the test on Main Street.

These smaller start-ups create 13 times more patents per employee than their larger patent-generating counterparts and employ more than 40 percent of high-tech employees. If they are right, managed well, choose a great location, or have a great new product, they succeed and are rewarded with profits, which finance growth, and attract copycats.

If they fail, they have a personal loss, but "society" doesn't lose them or their buildings or equipment. Instead, the assets are repriced and redeployed in another venture, a process that continues until the assets earn a profit, a signal that they have value.

Those firms that are the successful innovators produce the advances that raise worker productivity and propel technology, making contributions that are far more valuable to society than just the jobs they create.

When governments interfere in this entrepreneurial process, economic growth and innovation suffer. For example, the government saved General Motors and Chrysler by imposing losses on shareholders and bondholders and spending $60 billion of taxpayer money. Government determined the winners and losers here, not the market.

The rationale for this was, absent government intervention, the U.S. auto industry would collapse. This is nonsense: GM would have continued to operate while private-sector owners bid for the company, keeping the good pieces and discarding the bad (just as the market does every year to 500,000 less-efficient firms).

This would have left the market with a much more efficient and competitive auto company (or companies) than we now have. Taxpayers will lose about $20 billion on the bailout on top of the losses incurred by shareholders and bondholders.

GM's success as a competitor is still not assured. Taxpayers are still subsidizing the purchase of their cars. Nissan, Toyota, and others don't get such help.

It is the private sector that has produced the high standard of living we enjoy, not the government. Governments don't create wealth or jobs. We must make sure that our economic policies don't impede the process of innovation, entrepreneurship, and wealth creation that has made this country great.


Bill Dunkelberg is a professor of economics at Temple University and a nationally recognized expert on small business. Contact him at dunk@temple.edu. Read more of his columns at www.philly.com/dunkelberg

 

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