Oct. 2, 2019

Are small businesses and buying local good for the economy?

First the good news about small businesses- They are definately more nimble. They have to be because there are no or very few layers of management between them and their customers, employers, creditors and suppliers. This means that they react faster to recoveries and recessions. Hiring and firing. Keeping the economy going.

All the economic research I have read over the years indicates small businesses are the main job creators. Big corporations buy up others and consolidate, downsize, offshore and introduce mechanization. This destroys jobs.

Now for some bad news. Not all but most small businesses I have observed sail close to the wind on laws, taxes, employee safety and benefits. Owners often put themselves and their families first. They can be like dictators, some benevolent, many not. Many have entitled and not very effective second or third generation family management and ownership. This limits promotion prospects and leads to innefficient managers rather than meritocracy and innovators.

A few small entrepreneurs drive their enterprises into high growth and eventually slower growth, huge corporations like the tech giants. Most are not that ambitious, that clever, ot that lucky. They take risks to start, but avoid them to limit downside and protect family incomes. Their cost of borrowing and limits on borrowing by their banks re inforce risk aversion.

The myth of the small guy and the local store as universally benign is nonsense. They are as likely to be good or bad as any corporate manager. They are humans and include sociopaths, paranoids and all the rest.

Lastly, the only businesses that the large socialist economies in Cuba, the former Comecon countries and the rest allowed were small businesses. There are reasons for that. The central bureucrats' attempts to destroy markets failed. This led to shortages, black markets, queues and price instability. Allowing small businesses helped ameliorate these problems.