Nation of Shopkeepers

The epithet “Nation of Shopkeepers” was used by Napoleon to infer that a British merchant society was incapable of effectively waging war against the mighty nation of France.  Napoleon was wrong.   British merchants and industry provided the resources that enabled England, with half the population of France, to win the Napoleonic Wars.

The phrase, “Nation of Shopkeepers”, did not originate with Napoleon. It first appeared in The Wealth of Nations by Adam Smith in 1776.   Smith believed that when individuals pursue their self-interest, they indirectly promote the greater good of society. He argued that merchants, seeking their own self-interests, contribute significantly to the commonwealth by producing vital goods, services and tax revenues.  Without this “invisible hand”, societies would be incapable of effectively pursuing self-sufficiency, prosperity and wealth creation.

Recent articles in prestigious publications, like USA Today and The Economist, make similar claims that a nation of small businesses cannot compete in the global marketplace because:

• Big is better.  Big firms employ more, are more productive, can reap economies of scale, can focus resources on innovation, offer higher wages, and pay more taxes.
• Smaller means weaker.  Small businesses fail at greater rate than big businesses.    Small businesses are not particularly adept at creating jobs, at least not the best jobs.  Almost all the 6 million companies in the US are small businesses, with fewer than 500 workers.  Most small business owners just want to be their own boss and never expect to hire more than a few employees.

Like Napoleon’s premise that a nation of shopkeepers cannot compete, those that believe that a nation of small businesses cannot compete are simply wrong.  Small business is America’s economic backbone—producing $6 trillion worth of annual products and services and employing half of the American private sector work force.  Moreover, it is small business, not big business, which is the foundation of job creation.  Since the beginning of this decade, small business generated 95% of all new American jobs (see: Employment Scoreboard: March 2012).  As far as innovation, the Small Business Administration (SBA) reports that small business produce 16.5 times more patents per employee than large firms.

There are not 6 million small businesses in the US.  There are 27.3 million small businesses.   The latest available Census data show that there were 5.9 million firms with employees and 21.4 million without employees in 2008. These 27 million small businesses pay 43% of total US private payroll and are responsible for 97.5% of all identified exporters with 31% of export value as reported by the SBA Office of Advocacy.  Just as important small businesses do not export jobs like big businesses.

The perception that small businesses regularly fail is only partly true.  While the failure rate is high, so is their entrance rate.  A recent landmark Census Bureau study showed that small establishments are no more inclined to exit business than large businesses.   This misperception exists because of the high exit rate of micro-firms (1-4 employees), which averaged 18.4% over the last three decades.  While this rate was high, their entry rate was even higher at 21.3%, therefore producing a net gain of 2.9% over the period.  The entry/exit rate difference for all firms was only 1.9%.  Looking at this data from a different perspective, compared to all businesses, micro-firms were more likely to succeed, which is counter-intuitive to common perception.

More recent data, reported by the ADP National Employment Survey, shows that very small businesses with 1-49 employees grew +7% over the last dozen years, whereas small businesses with 50-499 employees and medium/large businesses with more than 499 employees lost -4% and -16% respectively over the same period of time.

According to a recent Kauffman Foundation Study, job growth in the US is driven entirely by startups.  The study reveals that, both on average and for all but seven years between 1977 and 2005, existing firms are net job destroyers, losing one million jobs net combined per year.   By contrast, in their first year, new firms add an average of three million jobs.  According to the Kauffman Foundation, “Policymakers tend to focus on changes in the national or state unemployment rate, or on layoffs by existing companies. But the data from this report suggest that growth would be best boosted by supporting startup firms.”

From a Jobenomics perspective the government’s primary jobs creation role is to create an environment where small, entrepreneurial businesses can flourish.  Unfortunately, government officials are locked in a mindset that a nation of “shopkeepers” cannot compete and the solution to growing the economy is a combination of big business and government. Perhaps the greatest factor contributing to this mindset is the scarcity of business owners working in government.  Furthermore, entrepreneurs and serial-entrepreneurs are almost completely absent in government decision-making.

Bureaucrats tend to view risk as a liability, whereas entrepreneurs embrace risk as an opportunity.  Serial entrepreneurs embrace multiple ideas, get companies started, and transfer leadership to operational managers so they can move on to new ventures.  Steve Jobs is an example of a serial-entrepreneur who created multiple iconic businesses.  Our country is blessed with tens of thousands of proven serial entrepreneurs.  Unfortunately, few serial-entrepreneurs serve on government economic councils that are replete with politically-correct and process-driven corporate chieftains and economists.

If small business is America’s economic engine, and if entrepreneurs and innovators are essential to business startups, then how does America change the government mindset?  The upcoming presidential election debates are a good place to start.

From a Jobenomics point-of-view, neither the President nor the leading Republican candidates have yet articulated a viable jobs creation strategy.  Virtually all of the proposed job creation plans are top-down political agendas oriented to ideologically-driven constituencies.  Almost every political speech contains references to a reformed regulatory environment, better tax incentives and cuts, debt and deficit reduction, helping the middle-class, importance of small business, revitalized manufacturing, green jobs, environment protection, energy independence, stimulation packages, tort reform, reciprocal trade agreements, and increased exports as ways to increase jobs.  While all of these areas are necessary, they are insufficient.

Political focus has to be on business creation, not job creation.  In recent years, small, emerging and self-employed businesses have been responsible for virtually all of America’s new jobs.   Yes small businesses fail, but enough survive to prosper our society.   Seven out of ten startup firms survive at least 2 years, half at least 5 years, a third at least 10 years, and a quarter stay in business 15 years or more.  From an entrepreneurial perspective, these are very lucrative statistics that should be the bedrock for a national business initiative to create millions, or tens of millions, of new small and self-employed businesses by year 2020.

A nation of small businesses empowered by 21^st technology can compete globally in ways never before thought possible.  It is almost inconceivable that today half of America’s GDP is generated by 27 million small businesses.   It is equally inconceivable that 52% of these businesses are home-based.  Jobenomics envisions that the American labor force will continue to be transformed by small, largely self-employed, home-based businesses. This transformation will be lead by 70 million members of America’s millennial generation who will monetize the internet and social networks in ways not yet conceived.  The country that learns how to monetize social networks, like Facebook with 825 million users, will be transformed almost overnight.  Tens of millions of new businesses (mostly small and self-employed) will be created.

American innovation, ingenuity and entrepreneurship are the keys to a prosperous future where everyone who wants to work can find a job.  A national small business initiative starts with an achievable vision.  President Kennedy focused American science and technology on getting to the moon in a decade.  In comparison, the Jobenomics 20 million new private sector jobs by year 2020 (20 by 20) goal should be very achievable.  If China can lift 400 million peasants out of poverty in two decades, America can create 20 million new private sector jobs in one decade. Adding millions of new “shopkeepers” to a nation that is already of nation of small businesses could boost our commonwealth to new economic heights.