Small businesses and market system

29 Jul 2018

Capitalism has lost some of its lustre in the U.S., economists say. The number of Americans aged 18 to 29 who say they support capitalism checks in at only 39 per cent.

Other polls find similar results. Meanwhile, openly socialist candidates are winning primary elections in the Democratic Party.

Why is this happening? The fading memory of the Cold War might be part of it. Young people also might simply be more idealistic than adults, and less accustomed to the business world. And who knows — today’s socialist youth might grow up to become tomorrow’s defenders of the status quo.

But there are also big changes in the economy that might be undermining support for the market system. One of these is rising inequality. But another, related trend might be subtly and corrosively undermining faith in capitalism — the decline of small business.

Some of that decline comes from fewer tech startups. But tech makes up only a minor share of small businesses, so most of the decline must come from a drop in non-tech business formation. This also can be seen in the aging of the small business-owner population — from 2007 to 2012, the share of small business owners younger than age 50 fell by 4.9 per cent. The same thing is happening in other rich countries.

Nothing is more emblematic of the decline in small business than the struggles of the family-owned store. In a 2016 paper about the decline in business dynamism, economists Ryan Decker, John Haltiwanger, Ron Jarmin and Javier Miranda wrote:

“In the Retail Trade sector … the shift has been away from single-unit establishment firms (‘Mom and Pop’ firms) to large national and multinational chains. The latter have taken advantage of IT and globalization to build efficient distribution and supply chain networks.”

In the modern economy, mom-and-pops have little chance against chains like Walmart. As a result, the decline in dynamism has been especially severe among retail and service businesses. This trend isn’t just a function of the internet; it’s been happening since the 1980s.

But retail isn’t the only area in which so-called superstar companies have been pulling away from the competition. Economists David Autor, David Dorn, Lawrence Katz, Christina Patterson and John Van Reenen believe that the big companies are dominating sector after sector because they’re so much more productive than others. That seems to be supported by data showing that a few companies on the frontier of productivity are pulling away from the pack.

If smaller and less-productive businesses are driven out of business by bigger, more productive ones, is that bad for the economy? Maybe, maybe not. But it could have profound social and political effects that are hard to measure.

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