Wednesday, March 24, 2010

Support Small Business! Create Jobs! Waste Resources?

Everyone wants to support small businesses because, as our glorious leaders ceaselessly remind us, small businesses create most of our jobs.

However, those small businesses, which produce about 1/2 of our GDP, employ about 2/3 of our workers (pdf). In terms of GDP, therefore, those employed by medium and large businesses are twice as productive as those employed by small businesses. Productivity is what it's all about; it's where new wealth comes from.

There are a variety of things which could cause this--the nature of the industries, lack of capital, local knowledge, etc.--but by advocating small business as an unmitigatedly good thing, you are ignoring the possibility that the reason small business employs so much labor is because it's using it inefficiently. Small businesses may be getting suboptimal returns because they're not big enough to provide economies of scale, specialization, experienced management, and the other benefits of large business. By promoting small business at the expense of big business (any promotion gives a competitive edge), you could be wasting resources, particularly the human variety.

Very rarely is soaking up massive quantities of a resource considered a good thing, but when the drumbeat of "Jobs! Jobs! Jobs!" is all you hear, you might be forgiven for thinking otherwise.

2 Comments:

Anonymous Anonymous said...

A lot of small businesses are retailers.

A lot of large businesses are manufacturers.

Which type of businesses add to the GDP? Retailers add to the GDP if it is calculated based on income, but there are other ways to calculate GDP and retailers don't technically don't create output. Manufacturers do.

I'm not sure if I want to trust the accuracy of the information here, just yet.

7:34 PM  
Blogger Octavo Dia said...

Remember the "Service Economy" debate in the 90's? That was when they started incorporating other things into the GDP calculations.

4:23 PM  

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