Acs (rhymes with scotch) is one of a couple dozen academic and government economists who have been trying for several years to change this situation: to study how individual companies, small ones in particular, actually operate and thereby to evaluate the role that entrepreneurship plays in today's economy. As Acs and others describe it, creating such a field of study is remarkably similar to building a company. It takes money, a research technology, and a method of establishing yourself in the marketplace.
Money, in this case, was provided partly by the SBA's Office of Advocacy, created in 1976. Like many government agencies, the SBA disburses funds for studies it expects will bolster its mission. The technology, of course, was computerized data processing. "Only in the late '70s and '80s," explains Bruce Kirchhoff, former chief economist for the SBA, "were computers powerful and cheap enough to look at all the individual elements. You could tell the computer, 'OK, look at this list of a million firms and tell me which ones have added employees.' This was a revolution in methodology."
In academia, establishing yourself in the marketplace requires a combination of entrepreneurial marketing and rigorous quality control. Most of the entrepreneurship, everyone acknowledges, was provided by David Birch. "Birch did pioneering, path-breaking work," Acs observes, "and not only that, but he publicized it widely." Quality control, however, was another matter, at least in the view of some. Birch came under attack for the reliability of his data. He was criticized for not publishing his work in refereed economics journals, where it would be subjected to professional scrutiny before publication. "Mainstream economists are quick to jump down other people's throats for doing something differently," one says, "and Birch was doing things differently. A lot of economists were skeptical."
Slowly, however, much of the skepticism about this nascent field of study has abated. Two well-respected economists, William Brock, of the University of Wisconsin, and David Evans, of Fordham University, published a book entitled The Economics of Small Businesses in 1986, a volume that one practitioner says "put this field on the map." Brock, Evans, Acs, and others have published several articles in leading economics journals. The first issue of an international journal called Small Business Economics appears this month. Acs is one of two managing editors, and professional luminaries such as MIT's Lester C. Thurow serve on the editorial board.
As a field, small-business economics is still young. But the findings these economists have come up with, so far, shed light not only on how extensive a role entrepreneurship plays in our economy, but also on why. According to the new journal's lead article -- written by Brock and Evans -- we are witnessing a historic reversal in the century-old trend toward bigness in the U.S. economy.
The figures they cite are striking. For roughly the first three decades after World War II, the average size of U.S. companies increased. The self-employed -- a category that includes many small-company owners as well as sole practitioners -- dropped from about 20% of the work force to only 7%. The small-business share of value added dropped 4%, its share of employment 6%. Sometime during the '70s or early '80s, however, nearly all of these figures turned around. Average company size decreased, self-employment rose, and small companies accounted for a slowly increasing fraction of the labor force.
This phenomenon, other economists have discovered, doesn't simply reflect the continuing transition of the U.S. economy from manufacturing to services. On the contrary, the growing importance of small companies shows up as strongly in manufacturing as elsewhere. Edward Starr, an SBA economist, combed the agency's database of companies for the years 1976 through 1984 and found that small manufacturers' share of output and employment was increasing in nearly every broad industrial category. Nationally, according to Starr's figures, small manufacturers added about 1.2 million jobs during the period, while large manufacturers were cutting some 300,000 positions.
Bo Carlsson, an economist at Case Western Reserve University, in Cleveland, turned up even more striking data on changes in the metalworking industries between 1972 and 1982. (Metalworking includes machinery, aircraft, automotive industries, computers, and nearly everything else we generally think of as serious manufacturing.) During that time, both average company size and average plant size, as measured by employment, declined in nearly three-quarters of the category's 106 classifications, while the number of companies and plants in the industry as a whole increased more than 25%. In a working paper, Carlsson, Acs, and David Audretsch had shown that companies with fewer than 500 employees increased their share of metalworking production from 30% to 40% in 10 years, while companies with fewer than 100 employees jumped from 16% to 23%.
"That's a tremendous change," Acs says. "It shows there's a change in industrial structure that's taking place, from larger firms to smaller firms."
The reasons for this change are still largely a matter of speculation. An account of possible causes reads like a list of the past decade's megatrends: A culture of entrepreneurship. A more competitive economy. Deregulation. The fragmentation of markets. In effect, figuring out the causes of these ongoing changes is the task that the new field of small-business economics has set for itself.
In the meantime, some of the directions this research might take can be gleaned from the work of Carlsson. Back in 1982, as he tells the story, he was a visiting scientist at MIT and wondering what had gone wrong with the U.S. economy. It was buried in a recession. It had been battered by foreign competition. In such a climate, Carlsson felt, companies might be inclined to "deglomerate" -- to divest themselves of ancillary businesses and product lines, to shed divisions and departments, to trim their work forces, and to focus on their core markets. Certainly there was plenty of anecdotal evidence to support such a hypothesis -- but how could it be tested?
