The Disciples of David Birch

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To Jackson, it was an astonishing picture. Everyone knew that Massachusetts had plenty of young, growing companies -- but the Bay State was world famous as a hotbed of high technology. This was Michigan, a state that had always depended on durable-goods manufacturing and that was regularly berated for having one of the worst business climates in the nation. Moreover, though some of the new jobs were in predictable sectors such as computer services, many were in the same industries that seemed to be in decline.

In machine tools, for instance, Michigan began and ended the six-year period with roughly 1,850 companies. Behind that picture of stability, however, was a business maelstrom. Some 660 companies shrank. More than 400 went out of business entirely. But as many companies were born as died, and more than 700 of the existing companies expanded. Machine tools were not what Jackson or anyone else would call a sunrise industry, but it was, he found, a fertile ground for entrepreneurship and growth.

At the state level -- the only level, for the moment, where ES-202 data are useful -- such findings echo loudly. "Jackson's study helped convince us to keep supporting manufacturing," says Mark Haas, chief economist with Michigan's Department of Commerce. "We also learned to look not just at industries but at individual companies. Some businesses will be growing even in industries that are shrinking, and state economic-development policy has to take this into account."

What unemployment files or D&B listings provide are raw data, much like that in a census. The data tell the researcher how many businesses are starting up, what industries they're in, where employment growth is taking place. Surveys such as Reynolds's add information about the entrepreneurs and how they're building their companies. But such information isn't easy to evaluate. It raises as many questions as it answers. Would any state in any period show lots of new companies starting up? Do newer, smaller businesses have any advantage that older, larger ones lack? Historically, big companies in many industries have simply muscled out small ones. If that is changing, there must be reasons. The reasons, in turn, should shed light on how durable the current entrepreneurial trend is.

For better or worse, it's likely to be economists who answer such questions. They're the ones who are supposed to have both an overview of the economy and the theories to explain why it works the way it does. In the past, however, economics would have had surprisingly little to contribute. Most economists have been content to study inputs, such as employment trends and capital flows, and outputs, such as production figures and trade patterns, without examining the organizations that turn one into the other.

It may be no accident that Reynolds, Jackson, and nearly everyone else counting new businesses are not traditional economists. (In fact, David Birch was trained as a physicist.) When real economists study individual companies or industries, acknowledges Zoltan J. Acs with a smile, "they concern themselves almost entirely with the large companies."

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.

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