The U.S. Economic Blessing: Variety
Think of American business, and the picture that likely flashes into your mind is a General Motors plant, an Exxon North Sea oil platform or an IBM computer. Such pictures flash in economists' minds as well. As a result, MIT professor David Birch shocked the business establishment a half dozen years ago with one of those landmark findings that's so obvious after the fact: Small businesses are creating the jobs and innovating; the very big firms are shedding jobs and failing to innovate. The Fortune 500, for instance, has cast off 3 million workers since 1981, while the U.S. as a whole is the envy of the world, with over 6 million jobs created since 1981. Moreover, in his new book, Job Creation in America, Birch points out that only 20 percent of us work in firms with more than 5,000 people on the payroll, while 35 percent are in firms with 100 to 5,000 employees and 45 percent work in firms with less than 100.
But my point is not to extol small business. Instead, I aim to call attention to the unique variety in the American economy and to urge all of us, especially policymakers, to understand and appreciate that variety, and not to be trapped by dangerously misleading impressions.
Right now we are snared by either/or thinking, half images and unhelpful language. Start with size and variety. Business is either Big Business (Exxon) or Small Business (the struggling mom-and-pop corner grocery or beauty parlor). And never the twain, nor its analysts, partisans, or observers shall meet.
First, the more accurate economic picture is chaos, which Birch painstakingly points out in his new book. Firms slide in and out of categories at an astounding rate—growing, declining, consolidating, sometimes folding up, but rarely staying stable, even in the huge-firm category.
Second, it is a hopeless misnomer to be strapped with just the two words—big and small. The Eskimos have scores of words for snow, and we need equal variety in our business-category language. For instance, what about the mid-size firm?
Just as Birch "discovered" small business' job-creation power in the early '80s, American Stock Exchange Chairman Arthur Levitt, Jr. and a set of colleagues "discovered" mid-size business at about the same time, and they formed the American Business Conference (ABC) to tout this group's concerns to the world. The ABC commissioned an extensive study by the consultants McKinsey & Company, which was written up in 1985 as The Winning Performance: How America's High-Growth Mid-Size Companies Succeed, by Don Clifford, Jr., and Dick Cavanagh. These experts defined the mid-size firm as a $25 million to $1 billion (revenue) entity. It has different views and tastes from both its bigger and smaller brethren. For instance, big business is behaving in an alarmingly protectionist mood these days, and small business has always been scared of imports. But the ABC
released a study in mid-November that is strongly anti-protectionist. Its members' foreign sales grew at a compound annual rate of 32 percent from 1984 to 1986, about two and a half times higher than that of larger concerns. The ABC, as a result, wants to be dealt into, not out of, the world economy.
On the policy front overall, the big firms and their to advocates are downright reactionary. They not only lean toward protectionism, but they also wish to muzzle the raiders, who so threaten entrenched management, and to slow the pace on Wall Street in general. Small businesses' concerns are more mundane—for example, they desperately crave relief from what they see as excessive insurance requirements. Mid-size firms and their spokespersons are cheery, urging only that competition be given free reign.
A second fundamental misunderstanding involves our blurred vision of the service sector. For instance, our dominant set of economic categories, the government's Standard Industrial Classification (SIC) codes, is sorely outdated. Within the manufacturing sector there are more than 55 categories for the aging textile industry, while all of banking merits only 17 classifications. The under-representation and misconceptions go much further. Leading business magazines all gravely short-change the service sector. Only rarely do business researchers study it. Few businesspersons can name more than one or two of the top-ten service companies, while almost all can tick off the biggest manufacturers.
So what? Well, if we are more or less what we eat, we surely are precisely what we talk about. Public opinion and policy are spurred or thwarted by mental images. Our mental images about the economy are badly out of whack. They lead us to be far too conservative (what's good for General Motors may or may not any longer be good for America), to dramatically underestimate the value of vitality per se, and to unconsciously malign the service sector (which includes more high-tech Federal Expresses, software firms, and hospitals than pizza parlors and barber shops).
If America has a deeply rooted economic advantage as we move through the wild and wooly future, it is our business variety. The diversity, interplay, creation and destruction that roils through our economy single us out, for the good, from all of our neighbors around the globe.
We can ill afford actions that restrain capital markets (hog-tying the corporate raiders, stemming the flow of venture capital), restrict labor mobility (such as the proposed plant shut-down notification rider in the trade bill), and choke off trade (the strongly protectionist omnibus trade act, with or without the very restrictive Gephardt amendment). We should develop a much richer business vocabulary that lauds and leads to understanding of our useful variety. Doing so will increase the odds that societal riches for all of us will follow.
(c) 1987 TPG Communications.
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