New York, 1982. Photo by Harry Gruyaert/Magnum Photos


The small business myth

Small businesses enjoy an iconic status in modern capitalism, but what do they really contribute to the economy?

by Benjamin C Waterhouse + BIO

New York, 1982. Photo by Harry Gruyaert/Magnum Photos

Small business is the hero of modern capitalism. Owners of small firms are the virtuous strivers, the job creators and the plucky entrepreneurs who drive the economy. ‘Small businesses make a huge contribution to national prosperity and supporting Australian jobs,’ states the Labor Party in Australia. And you would struggle to find a political party in any Western democracy that disagrees. A British government official made the (unverifiable) claim that firms with fewer than five employees made 95 per cent of radical innovations. Even amid the divisive politics of the United States, as the satirist John Oliver recently noted, everyone seems to agree that ‘small business is the backbone of the economy’. In a world of international conglomerates and global capital, the proverbial Main Street proprietors get a lot of love.

For all the enthusiasm, a central puzzle remains: what, really, is the role of small business in the economy? Is looking out for small business a progressive goal? Surely, the public fascination with upstarts, bootstrappers, and innovators reflects ideals of independence, improvement, and a better tomorrow. Yet history reveals another story: a distinct and powerful small business mythology at the heart of modern political life. Beginning in the late 1970s, adulation of small business acquired a new and important role in modern capitalist countries. In particular, the Reaganite and Thatcherite movements turned to celebrating small business as a stalking horse to advance the very kind of economy that handicapped upstarts and small independent proprietors, and privileged big national and multinational corporations.

Although love for small business may seem like a timeless feature of capitalism, the widespread belief that small entrepreneurs hold the keys to economic revival is relatively recent. Across the wealthy world, starting around 1980, small business emerged from the shadows of ‘Big Business’, with newfound political, intellectual, and cultural clout. In the United States, President Jimmy Carter, cast himself as the first ‘small business owner’ in the White House since Harry Truman. Carter promised to help small businesses by rolling back government regulations. Small business lobbyists also became more active. The National Federation of Independent Business (NFIB), founded in the 1940s as a mail-order survey company, reinvented itself in the 1980s as an influential lobbying group on behalf of small businesses. Intellectual attention to small business increased as well. In 1970, eight American universities offered courses on starting a new business; by 1980, 137 did. Whole magazines devoted to entrepreneurship emerged. ‘After years of neglect, those who start and manage their own businesses are viewed as popular heroes,’ one commentator raved.

A key moment in the modern myth-making around small business 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 quite wrong, 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. ‘Small businesses create eight out of every 10 new jobs,’ said Richard Lesher, president of the largest pro-business lobbying organisation, the US Chamber of Commerce.

Small business is among the most powerful symbols of modern capitalism. Small business owners are 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. Just as important, small business, by virtue of its limited scale and scope, avoids the moral baggage often attributed to Big Business – bureaucracy, market manipulation, and good-old-boy networking, for example.

Like many powerful symbols, small business is notoriously hard to define. When creating the Small Business Administration (SBA) in 1953, the US government officially defined one as ‘independently owned and operated and … not dominant in its field of operation’. Today, to qualify for an SBA loan, US manufacturers must have fewer than 500 employees, and non-manufacturers must have annual receipts below $7.5 million (although the government reserves the right to make exceptions). More qualitative traits – like the absence of managerial hierarchies, less formalised labour relations, and closer ties to local communities – also influence how some scholars define small businesses. To make things more complicated, ‘small business’ covers a diverse range of business functions, counting everyone from the small-town dry cleaner to the wealthy software start-up. We know small business the way US Supreme Court Justice Potter Steward knew pornography: when we see it.

Historically, however, ‘small business’ did not exist in any meaningful sense until the advent of ‘Big Business’ in the late 19th century. Before the emergence of large, vertically integrated, and diversified corporations, ‘small business’ was simultaneously everywhere and nowhere, and no one spoke on its behalf. Steel, oil, sugar, and cigarette producers emerged as the first Big Businesses, and in 1890 the Sherman Act inaugurated American anti-trust policy to protect smaller competitors from their monopolistic practices.

Big corporations, with big research grants from big government agencies, worked with big universities to bring you modern life

The real boom in small business political consciousness came in the early 20th century, with the rise of the chain store model. Rooted in the anti-trust tradition, the anti-chain movement championed small retailers who faced destructive competition from mail-order houses and department stores.

In the United States, the representative Wright Patman stepped up as the face of the anti-chain movement. Patman was a doughy, balding populist and segregationist Democratic congressman from rural Texas. First elected to Congress in 1928, the son of tenant farmers made his name as an avid defender of small companies – the ‘common man’ – against the predations of eastern bankers, industrialists, and chain stores. In 1935, Patman pushed legislation that limited the discounts large retailers could offer. Hailed as the ‘Magna Carta for small business’, the Robinson-Patman Act (Senate Majority Leader Joseph Robinson (D-AR) was the co-sponsor) became law. President Franklin Roosevelt worried that the law would hamper economic recovery, but signed it anyway in a gesture toward the popularity of the cause. Patman defended the measure for its commitment to ‘fairness’ – by making the same discounts available to all buyers (whether at a chain store or a small grocer), the law struck a blow against concentrated wealth and privilege while still preserving the consumer cost advantages that mass distribution had created.

The Robinson-Patman Act marked the end, not the beginning, of a policy regime that protected small firms. By the post-Second World War years, small business was a divided and weak community. An ethic of ‘bigness’ reigned. Big corporations, with big research grants from big government agencies, worked with big universities to bring you modern life – from pharmaceuticals to aerospace, computers to communications. By the time Wright Patman died in 1976, at age 83, the popular backlash against bigness and the renewed attention to small business had not yet taken hold.

But had Patman lived into the 1980s, he would likely not have recognised the new ways politicians embraced and defended small business. Throughout the first half of the 20th century, small business advocates like Patman had claimed that small firms were inherently virtuous and worthy of special protection, even if larger companies offered lower prices or greater efficiencies. Yet by the 1980s, a decade of recession, inflation, fiscal crises and weak productivity combined to recast political culture in wealthy capitalist countries. In the United States, Western Europe, and eventually Australia, the logic for defending small business shifted entirely: rather than a virtue unto itself, smallness became the antidote to the bloat and inefficiencies of bigness; independence, the source of innovation.

The revival of small business’s symbolic political appeal in the 1980s brought another key change: activists used it not to attack Big Business, but to go after big government. Wrapping themselves in the cloak of small business mythology, those conservatives successfully redefined a hundred years of debate over economic size.

These changes did not come easily. To the frustration of small business groups and many conservative activists, the Republican Party retained its longstanding image as the party of Big Business, particularly in the early years of the Reagan administration. Many small business owners complained that Republican tax policies favoured larger firms, which took advantage of loopholes and provisions for writing off the depreciation of large assets. In addition, they charged that the growing federal budget deficit – which expanded due to a combination of Reagan’s 1981 tax cuts and the sharp recession that lasted until late 1982 – led to high interest rates that hurt the little guys the most.

Members of the Reagan administration worried about their popularity among small business owners. ‘Small business is bedrock Republican,’ as Elizabeth Dole, the director of public liaison at the White House, told George Bush, the then vice-president, in 1981. Or at least, it should have been: most small business owners were middle and upper-middle class white men, and most held economically conservative politics. But some parts of the small business community were moving away, Dole warned, because they believed ‘this administration favours Big Business and corporate America’. In 1983, White House staffer Red Cavaney warned that the Democratic National Committee planned to make overtures to the small business community. If Republicans ‘become too heavily associated with the “big” at the expense of the “small”,’ Cavaney predicted, ‘this threat could pose some serious problems.’

Republicans picked up the rhetorical mantle of small business, but instead of changing their policy ideas, they changed what it meant to speak for small business. For the better part of a century, small business activists had stressed the virtues of competition. Small businesses, they argued, demanded legal support – through punitive taxes on market dominators and the break-up of monopolies – because their very existence created a more competitive market place.

Economic conservatives in the 1980s pushed a counter-narrative. Murray Weidenbaum – first chair of Reagan’s Council of Economic Advisors – charged that economic growth, not competition, should be policymakers’ primary goal. Certain sectors of the economy, including the rapidly growing service sector, lent themselves more productively to small-scale enterprises. Industrial manufacturing, on the other hand, did well when a small number of giant operators took advantage of their size to produce more efficiently at a massive scale.

‘Entrepreneur’ today implies a growth orientation: small business owners that don’t want to remain small business owners

What mattered to Weidenbaum wasn’t size or market share per se, but rather how good businesses were at growing, because only a growing economy would create new job opportunities. The single-minded focus on small business as the creator of jobs, in other words, confused cause and effect. ‘It is not the small businesses that created the jobs,’ he concluded, ‘but the economic growth’ (emphasis mine).

By putting the focus on growth, not small business as such, conservatives subtly manipulated the mythology of small business. Most small businesses do not grow into mid-sized or large companies, and in fact the vast majority fail within five years. Earlier small business proponents understood the nearly permanent condition that small business represented and treated small business owners as a stable class. The conservative politics of the 1980s, however, focused instead on a small subset of the small business community: entrepreneurs.

Although the classical definition of an ‘entrepreneur’ simply invoked someone who started a new business (the French word means ‘someone who undertakes’), the term acquired a new connotation in the late 20th century. ‘Entrepreneur’ today implies a growth orientation; while a mere small business owner may persist in remaining small, an entrepreneur seeks to strike it rich. In short, entrepreneurs are small business owners that don’t want to remain small business owners.

The growing fetish about entrepreneurship formed an integral part of the conservative project that blurred distinctions between small and large firms. President Reagan himself perpetuated this shift. Reagan – whose pre-political private sector experiences lay in Hollywood and at General Electric, two exemplars of mid-20th century Big Businesses – positioned himself as a populist defender of the people even while promoting an economic vision rooted in the interests of concentrated wealth. Bragging about a recovering economy in 1987, he insisted that ‘small businesses fare best with stable prices, low interest rates, and steady growth’. Moreover, ‘America’s entrepreneurs are continually experimenting with new products, new technologies, and new channels of distribution.’ Small businesses, in other words, achieved their value through their innovative contributions, rather than servicing or maintaining an existing system.

Yet Reagan betrayed the bait-and-switch. ‘The great industrial and commercial centers of our nation were built by innovators like Henry Ford and Alexander Graham Bell,’ he continued, ‘whose small businesses grew to help shape a new economy.’ At a stroke, the president – perhaps unintentionally – gave up the game: small firms’ worth came not from promoting competition or preserving local values, but rather from their potential to cease to be small businesses. Left out of this formulation, of course, were the millions of nail salons, fast-food franchises, accountants, landscapers, general contractors, housekeepers, cosmetics sellers, photography studios, restaurant owners, small town lawyers, and florists who would never become the next Ford Motor Company or AT&T.

Why does all this matter?

Since the 1980s, the pace of global capitalism has quickened, and economic transactions occur at a speed and complexity unparalleled in human history. At the same time, political culture has become increasingly fragmented and atomised. From the breakdown of party authority to tribalist politics and hyper-partisanship, residential and educational re-segregation to media segmentation, fracture dominates. The bigger things have got, the more powerful the urge has been to get small.

This manic contradiction – between the scale of modern life and the powerful siren call of the atomised locality – lies at the heart of a destabilising transformation within capitalism itself.

The present historical moment is witnessing the breakdown of the so-called ‘Berle and Means’ corporation – the shareholder-owned but manager-controlled, bureaucratic, and deeply interconnected organisation first described in Adolf Berle and Gardiner Means’s book, The Modern Corporation and Private Property (1935). Since the end of the mid-20th century conglomerate wave, corporations have concentrated and streamlined. Since the 1990s, the number of publicly traded companies has declined. Liberalised trade and cross-border capital flows have accelerated the ‘Nike-fication’ of production, birthing a world where anonymous and poorly regulated sweatshops in developing countries pay paltry wages to workers who manufacture items adorned with a global brand. The internet created new opportunities for instant communication and coordination, and firms responded by outsourcing and off-shoring far more than production. Spinning off their financing, distribution, advertising, human resources, and customer service functions to the lowest bidder, many of the world’s biggest businesses are today little more than coordinators of a massive network of nodes. The dissolution of the classical corporation emerged alongside a new business focus on portfolio management and short-term valuation. Such managerial priorities reflect the rising ideological and economic clout of the ‘shareholder-value’ movement as well as a broader commitment to a neoliberal vision of value.

This breakdown of the corporation as an economic and social institution is a critical feature of capitalism today, and it deeply shapes how we value – and overvalue – small business. The disintegration of the old order, although couched in populist language of ‘shareholder democracy’, has generated uncertainty and dislocation as well as freedom and opportunity, and those ups and downs have not been distributed evenly. The well-educated with privileged access can take advantage of the new niches that open up, and become entrepreneurs. Those in the lower tiers, however, confront a deteriorating employment landscape pockmarked by wage stagnation, decreased mobility, and lower-paid and low-benefit jobs. Social safety nets are evaporating, and wealth inequality is expanding. ‘Necessity-based’ self-employment is rising in rich and poor countries alike. Self-sufficiency has always been part of the allure of opening one’s own business. In the globalised, atomised economy, it has also become an unstable lifeline.

By linking the political agenda of small business and large business, conservatives in the 1980s laid the foundation for a set of policy developments that hastened the globalising forces of late-stage capitalism and failed to mitigate its effects. By presuming that small business was uniquely or exceptionally innovative, they ignored the real world of small business owners and perpetuated a devastating myth that judged small companies by their ability to become Big Businesses. In so doing, they missed the most critical developments in global capitalism: the simultaneous fracture of the mid-century corporate world and the rise of an isolated, privileged global elite that marginalised and weakened the vast majority of small businesses.