Back in February I argued that since bias is inherent in institutions we should encourage the government to be biased toward entrepreneurship and away from corporatism. The result of such a bias would be to favor newer—and presumably smaller—businesses over more established—and presumably larger—ones, thereby reducing the levels of regulatory capture and crony capitalism (at least in theory).
An implicit assumption in my post was that we should value small businesses. But Veronique de Rugy had made a compelling case against “America’s Small-Business Fetish” that has caused me to modify my position:
The ubiquitous statistic that small businesses create 70 percent of all net new jobs is also misleading. The source of this figure is none other than the Small Business Administration itself. In a 2005 study published by the American Enterprise Institute, I noted that to arrive at this figure, the SBA divides net small business jobs—a figure that includes every single current employee of a small business—by the net job creation from all businesses combined. This is not an accurate way to determine the share of new jobs created by small businesses.
The results can be comical: One table published by the SBA in 2005 showed that small businesses created more than 100 percent of new jobs, a truly heroic (if fantastical) result. We should stop using this junk statistic.
Our national obsession with small businesses misses the point. It’s not micro-firms that drive our new, entrepreneurial economy. Young firms—the startups that will grow to be the next Facebook—do tend to be small. But their newness is the relevant factor, not their size.
While I would still argue that government should be biased in favor of entrepreneurship, I would make it contingent on de Rugy conclusion: “Instead of preferential policies, the government should establish an environment that encourages businesses with strong growth potential to evolve into successful large enterprises. This means low tax rates, low levels of regulation, and a stable legal structure that protects property rights.”
