[Noah Smith] If you love capitalism, worry about small business

Capitalism has lost some of its luster in the US. The percentage of Americans aged 18 to 29 who say they support capitalism checks in at only 39 percent.

Other polls find similar results, and anecdotes seem to support the story. Meanwhile, openly socialist candidates are winning primary elections in the Democratic Party.

Why is this happening? The fading memory of the Cold War might be part of it. Young people also might simply be more idealistic than adults, and less accustomed to the business world. And who knows -- today’s socialist youth might grow up to become tomorrow’s defenders of the status quo.

But there are also big changes in the economy that might be undermining support for the market system. One of these, of course, is rising inequality. But another related trend might be subtly and corrosively undermining faith in capitalism -- the decline of small business.

US industries are getting much more concentrated, with a few big players dominating markets.

As big companies become more powerful, fewer new companies are being started.

Some of that decline comes from fewer tech startups. But tech makes up only a minor share of small businesses, so most of the decline must come from a drop in non-tech business formation. This also can be seen in the aging of the small business-owner population -- from 2007 to 2012, the share of small business owners less than age 50 fell by 4.9 percent. The same thing is happening in other rich countries.

Nothing is more emblematic of the decline in small business than the struggles of the family-owned store. In a 2016 paper about the decline in business dynamism, economists Ryan Decker, John Haltiwanger, Ron Jarmin and Javier Miranda wrote, “In the Retail Trade sector ... the shift has been away from single unit establishment firms (“Mom and Pop” firms) to large national and multinational chains.” The latter have taken advantage of IT and globalization to build efficient distribution and supply chain networks.

In the modern economy, mom and pop stores have little chance against chains like Wal-Mart. As a result, the decline in dynamism has been especially severe among retail and service businesses. This trend isn’t just a function of the internet; it’s been happening since the 1980s.

But retail isn’t the only area where so-called superstar companies have been pulling away from the competition. Economists David Autor, David Dorn, Lawrence Katz, Christina Patterson and John Van Reenen believe that the big companies are dominating sector after sector because they’re so much more productive than others. That seems to be supported by data showing that a few companies on the frontier of productivity are pulling away from the pack.

If smaller and less productive businesses are driven out of business by bigger, more productive ones, is that bad for the economy? Maybe, maybe not. But it could have profound social and political effects that are hard to measure.

For centuries, small business has been a route to the middle class and the upper-middle class for the enterprising and the self-reliant. Merchants and craftspeople made up much of the urban middle class in preindustrial Britain and France -- the people Karl Marx labeled the “bourgeoisie.” This group benefitted enormously from the advent of modern capitalism, and in communist countries like the Soviet Union they often suffered severely.

As might therefore be expected, small businesspeople make up one of capitalism’s core constituencies. They lean strongly toward the Republican Party, and are opposed to high taxes. And there are a surprising number of them; the number of small businesses was estimated at around 28 million in 2010.

What happens when this class shrinks? What happens when business ownership stops being something anyone can do because access to capital isn’t something normal people have, but something that only huge mega-corporations control? A possible answer is that capitalism will probably lose some of its broad appeal. Smart, self-reliant young people will be forced to dream not of starting their own business, but of securing a good job at Alphabet (Google) or Wal-Mart or Exxon or JPMorgan Chase. And once in the mindset of relying on a large organization for their future, what’s to stop them from turning to an even mightier patron -- the government?

In other words, declining business opportunity may be pushing Americans toward socialism.

Of course, that might not be a bad thing; socialism, of the democratic kind practiced in Western Europe, has much to recommend it. But anyone who wants to preserve capitalism needs to grapple with the issue of big business dominance. They should be thinking very hard about policies to help small businesses compete with the big boys. That could mean stronger antitrust enforcement, lowering the barriers to starting a company, or directly supporting small businesses against their larger rivals.


Noah Smith
Noah Smith is a Bloomberg Opinion columnist. -- Ed.

(Bloomberg)