Why Things Aren't As Bad As They Seem

Researcher David Birch says the United States is better at providing services than making products. That adds up to a rosy future.

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Even if David L. Birch's name isn't familiar to you, chances are his work is. He's the Massachusetts Institute of Technology researcher who two years ago established the fact that small companies, not big business, create most of the new jobs in the United States. Firms with fewer than 20 employees accounted for 66% of all new jobs between 1969 and 1976, according to Birch's findings. Companies less than five years old created fully 80% of all U.S. jobs during that period.

Those findings, based on computer analysis of 5.6 million companies, caught the fancy of the press and of politicians. "I didn't set out to prove any such thing," says Birch, "but that's how the numbers came out."

Since 1979, when he quietly submitted his results to the Department of Commerce, Birch's MIT Program on Neighborhood and Regional Change has extracted other startling conclusions from its very large data base. "Most researchers look at the economy and see scrambled eggs," Birch says. "We're the one group that's looked at 5.6 million businesses and can find out how the eggs got scrambled."

In other words, Birch's research methods tell him not just what has happened within industries and geographic regions, but how and to some extent why it happened. The results aren't always what you'd expect to hear, and neither are Birch's projections of trends. INC.'s Tom Richman spent an afternoon with the 44-year-old Birch in his Cambridge, Mass., office, which is sparsely furnished with only a coupld of chairs and a computer terminal.

INC: In your latest study you wrote that the trends in business location decisions show that "the future will not necessarily be like the past." You also said that it's no longer necessary for a company to make things in order to grow and to prosper. Could you explain?

Birch: Well, up to about 1820, most people in New England certainly thought of the world as agricultural one; we grew things. That changed dramatically when the Industrial Revolution hit, and for roughly 150 years we have been a nation of makers of things. But that, too, seems to have run its course. If you look at the 1970s, we created more jobs than ever before in history, something like 19 million new jobs, but only 5% of those jobs were in manufacturing and only 11% of them were in the goods-producing sector at all. So, just as New England no longer grows what it eats, as a nation we no longer make the goods we consume. To a great extent we now specialize worldwide rather than just regionally within the country. Most of what we consume is made for us by somebody else.

Take John De Lorean's car, for example. He conceived it while he was a General Motors executive, he designed it in America, he created all the production drawings in America, but he went to Northern Ireland to build it. He will sell it in America. Our market is a very good one. Our creative ability to design and conceptualize and invent is enormous. However, our relative skills at making things seem somewhat limited.

What seems to be happening is that worldwide we are working ourselves out of the manufacturing business and into the thinking business, out of hardware into software, out of physical capital into human capital, out of high-productivity sectors into low-productivity gain sectors. But in the process we're creating an extraordinary number of jobs. It isn't as though that's a bad part in the play. Indeed, it looks like it's pretty good part in the play. But it's different and that's what I meant by "the future will not be like the past." Furthermore, for individual regions of the country, the more a region was in manufacturing in the past, the more it's going into services today.

INC: If that's true, it isn't likely to be a very welcome truth in industrial areas of the country.

Birch: I can think of few changes in history that haven't been resisted. The fact is, however, that we're one of the most mobile nations in the world. Each area in the United States turns over from 8% to 12% of its population every year. People are free to move from one place to another. That's a plus, I think. The other thing is that the magnitude of the problem may be overstated. We may be reacting more to decibels than to reality. Only 13% of our labor force is engaged in manufacturing operations today. It isn't as though half our work force has this transition problem. It's relatively small percentage of our work force, and a declining one. We're not just thinking about moving out of manufacturing over the next 50 years. We've already done it.

INC: You're suggesting that regions, even the entire United States, can grow and prosper with a service-based economy. That's contrary to conventional wisdom.

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