The Disciples of David Birch

A new generation of researchers discover the effect of small business on the economy.

Tweet

A new generation of researchers is out to discover how the U.S. economy really works

The debate keeps raging: How important are small, growing companies to the U.S. economy? Do they really create most of the new jobs? There's a lot of bad information on the subject being bandied about -- but increasing numbers of researchers are assembling hard evidence, even going out and counting companies themselves. Let's talk with them and report what they're learning. -- J.C.

At first glance, it could be just another scholarly skirmish -- a dispute among professors over the reliability of certain job-generation statistics. But the real subject of the debate is something far more important: the role of entrepreneurship in the revitalization of the U.S. economy.

The statistics in question first surfaced nearly 10 years ago, when Massachusetts Institute of Technology researcher (and INC. columnist) David L. Birch wrote that small businesses create 82% of new U.S. jobs. It was a preliminary number, based on a pioneering method of study, and it has long since been revised and refined to reflect variations of time and place. But Birch's critics are still gnawing on that old figure. "Small businesses do not create 82% of all new jobs," trumpeted a headline on a May 1988 Chicago Enterprise article by George Kalidonis, a professor at the Keller Graduate School of Management, in Chicago. Alleging "faulty methodology" -- misinterpretation of data and other statistical sins -- Kalidonis the following month announced that 82% was a "dubious claim." In April two Harvard economists published an article in The Washington Post purporting to debunk small-business mythology. And what was Myth #1? You guessed it -- that small businesses create 8 out of 10 new jobs.

As it happens, these particular critiques themselves reflect a breathtaking combination of misunderstanding and sloppy research (see "Birch's Revenge," page 6). But the critics' ineptitude is perhaps less telling than the passion and thrust of their arguments. If there's going to be a backlash against the Age of Entrepreneurship, we may be witnessing the opening salvos.

Consider: For most of the postwar era, the well-being of the U.S. economy seemed to depend on the health of its large companies. When some of the biggest ones found themselves battered by foreign competition, the economy as a whole felt shaky. But in the 1980s the picture changed dramatically -- and quickly. Hot new growth companies flooded the market with everything from clothing to computers. Wall Street's over-the-counter market woke up. Venture investing boomed. In this climate, David Birch's widely publicized figures about small-company job generation were electrifying. They alerted both Congress and local economic-development officials all over the nation to the importance of these new companies, thereby helping to spawn a range of policies favorable to entrepreneurship. They encouraged big corporations to seek out new businesses as customers, suppliers, and joint-venture partners. Before long, small business wasn't just an economic sideshow. It was the Main Event.

But the change in the program has left some members of the audience feeling restive. A front-page New York Times story last June reported a "reappraisal" of the value of entrepreneurship by a "growing number of influential scholars and business executives." The reappraisal, said the article, "marks a sharp departure from the years in which entrepreneurs were lionized by virtually everyone as innovators, and small companies were praised as the source of most new jobs." Washington, too, has witnessed a noticeable cooling of enthusiasm. "People on Capitol Hill used to sit up and take notice when you showed how a program would benefit small business," said one recently departed Small Business Administration official. "But lately I've been getting the response, 'Don't talk to us about helping small businesses. They already get too much.' "

In this context, potshots such as those against Birch echo well beyond the halls of academe. For the reality of entrepreneurship is that it flourishes best in a climate of support -- when financial institutions provide capital, when large corporations pay attention to small ones, when governments at least don't obstruct company founders and at best offer them helping hands. That climate of support, in turn, depends in good measure on what scholars tell us about economic reality. If someone were to show that the whole entrepreneurial phenomenon is overblown and overrated -- that the U.S. economy still depends, as it has for most of this century, on the health of its giant corporations -- then the climate would turn chilly. And a lot of fledgling companies would be frozen out of the marketplace.

All of which makes the work of an eclectic collection of researchers -- sociologists, political scientists, economists -- of more than passing interest. For according to the mosaic of information this group is beginning to assemble, the entrepreneurial revolution may run far deeper than anyone has so far suspected.

 1 | 2 | 3 | 4 | 5 | 6 | 7  NEXT 

Read more:

Sign-up for our Finance Newsletter

Email Address: