Surowiecki: The ‘Myth’ of Small Business as Economy Driver

It is an article of faith that small businesses drive the U.S. economy, acting as incubators of innovation, and leading all forms of employment growth, especially for immigrants determined to raise their living standards. I’ll always remember New York Mayor Rudy Giuliani citing New York’s surging immigrant base as the source of the city’s booming economy in the late 1990s.

Now comes the contrarian view of New Yorker writer James Surowiecki. “The fetishization of small business continues apace,” writes Surowiecki. “Some of the support derives from the real virtues that small companies offer — diversity of choice, connection to local communities — (but) the truth is that, from the prospective of the economy as a whole, small companies are not the real drivers of growth.

“One can see this by looking at the track record of the world’s economies,” he says. Small business-driven countries such as Greece, Portugal, Span and Italy are basket cases. “The countries with the lowest percentage of workers employed by small businesses are Germany, Sweden, Denmark and the U.S. — some of the strongest economies of the world.

“It reflects a simple reality: small businesses are, on the whole, less productive than big business,” says Surowiecki. “Big businesses are able to enjoy economies of scale and scope. Big businesses are also better able to make investments in productivity-enhancing technologies and systems.”

Anticipating arguments that small businesses retain their vital role because they are the ultimate driver of innovation, Surowiecki points to a recent study by Erik Hurst and Benjamin Pugsley. “Only a tiny fraction of small business owners have any interest in becoming big-business owners, or even in bringing a new idea to market,” he notes. “Most are people who simply want to run a small company, do work they enjoy, and have some control over their own financial lives.”