Understanding Bullshit: Small Businesses
Small businesses enjoy an iconic status in modern society, but why? What do they really contribute to the economy? When it comes to a small, family-owned business they are no more likely to provide worker protections than any other enterprise. And they are no more likely to provide anything of value to the community that other, bigger, businesses do not. So why do we insist on venerating them at every turn?
Small business owners are also frequently described as virtuous, self-reliant, and independent – the same characteristics Thomas Jefferson ascribed to free farmers in pre-industrial society, or that Max Weber used to explain the Protestant work ethic which, he argued, undergirded industrial capitalism in the late 19th century. Small businesses, by virtue of their limited scale and scope, also manages to avoid the moral baggage often attributed to Big Business – bureaucracy, market manipulation, and good-old-boy networking, for example. Yet, around all the enthusiasm of small business owners, a central puzzle remains: Is looking out for small businesses a progressive goal? (Frankly, no. Earnestly supporting any privately owned business is incompatible with socialism. Syndicalism ought to be the goal to the alternative of capitalist entrepreneurship).
It's actually a Republican myth that has, over the last 20 years at least, really crawled into even leftist discourse: that the small-business owner must be respected, that the small-business owner creates jobs and is part of the community. But this is actually just right-wing, capitalist, propaganda. Which seems to be partially driven by the ideological and aesthetic view that there’s something inherently just and beautiful about small-time entrepreneurs and mom and pop shops. In reality, small business promotion is mostly a bad idea. (Fact: when politicians say “small business” it’s only a euphemism for employers to try and garner sympathy for anti-worker policies).
Small businesses routinely find ways to skimp out on paying their employees. They spend company funds on vacations and cars and homes for their families, (then gripe about how their business can’t survive because “Muh Taxes”). I don’t know a single small business owner who hasn’t tried skimping out on pay roll, and the ones that I know that have actually done it have then moaned about their employees reporting them! (It’s especially bad in restaurants). They also routinely have no idea how to run a business, resulting in choices that no sane person would ever make, and routinely exploit their staff for free hours and extra work. (You know who failed high school economics? Most small business owners).
I’m tired of people valorizing these shitheels who clearly have no interest in helping anyone but themselves. (Incoming salty small business owners in the comments but for real, you guys suck ass and your workers should unionize or turn your business into a co-op). Because small businesses pay lower wages, provide worse benefits, are often exempt from important worker protections, and are incompatible with the way unionization works in the US. (Seriously, every election we break our arms jerking off small business owners, but we don’t recognize the drain they are on our society).
A key moment in the modern myth-making around small businesses came in 1978. That’s when MIT economist David Birch published claims – which he repeated in testimony before Congress – that small firms had accounted for 80 per cent of all new employment opportunities between 1968 and 1976. Critics quickly pointed out that Birch’s findings were bullshit, largely because he defined firm size according to how many employees worked in a given location (like a branch office, factory, or store), not how many the firm employed altogether. In fact, most job creation, in the 1970s and today, comes from a small number of very fast-growing firms, while most small firms either fail (killing jobs) or remain small. Birch later admitted that the 80 per cent figure was a ‘silly number’, but the claims took firm root in popular mythology and political rhetoric by the 1980s.
But surely, the public fascination with upstarts, bootstrappers, and innovators reflects ideals of independence, improvement, and a better tomorrow. Aren’t startups the source of American economic renewal? Again, no. It turns out that most startups don’t actually create that many jobs. As Scott Shane, an entrepreneurship expert and author of The Illusions of Entrepreneurship writes in his book: “Only 1 percent of people work in companies less than two years old, while 60 percent work in companies more than ten years old.” The majority of small businesses actually shed jobs after their first year. One study found that among small businesses in their second, third, fourth, and fifth years of business, more jobs were lost to bankruptcy than were added by those still operating. This is why the mean number of workers per firm actually goes down every year after a firm is born. According to the SBA, the mean number of workers in a new firm in its first year is 3.07. But by year five this figure declines to 2.36, and to 1.94 in year 11. Or, as the SBA puts it: “Employment gains from growing businesses are less than employment declines from shrinking and closing businesses.”
Shane also found that: “One study of a representative sample of the founders of new businesses showed that 81 percent of them had no desire to grow their new businesses.” Another study found that 50 percent of small business owners did not start their business principally to make money. Indeed, a Federal Reserve Bank study by the economists Pugsley and Hurst noted that when asked about their ideal firm size, the median response of new business owners is that they desire their business to only have at most a few employees. Nearly three-quarters of individuals who start a business want to keep their businesses small. Surveys show that the lion’s share of people who start businesses do so not because they want to be a rich entrepreneur, something that takes enormous dedication and hard work to achieve; rather, most don’t want to work for a some dipshit boss. (Which is actually something I can completely understand, having worked under several myself). Instead of being exploited, they in turn, simply seek to exploit.
This, combined with the fact that so many new businesses fail within ten years, is why Shane has found that it takes 43 startups to end up with just one company that employs anyone other than the founder after ten years. And on average, that surviving startup will have just nine employees. Why, then, should policies favor small and new businesses in order to create jobs? (And the fact that young and adolescent companies don’t on net create many jobs cannot be blamed on regulation and high taxes either; if anything, small business owners are pampered and protected when it comes to the taxes and regulatory burdens bigger firms face).
Unfortunately America’s enthusiasm for small businesses remains remarkably high. Seventy percent of Americans say they have a “great deal” or “quite a lot” of confidence in small businesses. For big business the same figure is 21 percent. Both major parties can be seen singing small businesses praises, Democrats as a wholesome alternative to big corporations and Republicans as capitalism’s friendly face. But small businesses can be just as bad as large businesses and are, on average, even worse. They don’t offer anything of value to the community outside of providing and few low wage jobs and taxes (whenever they aren’t allowed to skimp out on paying either of course).
This isn’t to say small businesses are totally useless. The creation of new businesses, which often start out small, is one of the ways that innovation gets injected into the system. But there is a huge difference between supporting small entrants in order to keep open an important channel of innovation and supporting an economic structure that only serves to exploit workers.
One final point on this: One for all you pro-small business types (i.e. the people who constantly bitch about the possibility of having to pay someone a living wage). If you can’t afford to pay a living wage to you’re employees, then you don’t deserve to be in business. Asking people to accept low wages just so you can own a business is entitlement at it finest. You are asking human beings to use their lives to subsidize your desire to own a business. If a job is worth being done, it’s worth being paid enough to live. (If you feel otherwise, consider this an invitation to go fuck yourself).