The Disciples of David Birch

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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?

If the hypothesis was correct, he reasoned, the evidence would lie in measures of value added. A vertically integrated company adds immense value to its inputs, taking raw materials in one end of the factory and pushing finished products out the other end. In the new, more specialized environment, companies would be focusing on individual parts of the production process and therefore adding less value. Sure enough: when Carlsson tabulated the numbers, the ratio of value added to shipments had declined over a 10-year period in 88 of the 106 metalworking industries.

Carlsson had also begun an intensive study of machine tools while he was at MIT and had noticed another phenomenon. "For more than 150 years, most changes in production technology favored large-scale manufacturing relative to small-scale production," he says. By contrast, today's computer numerically controlled (CNC) machines operate economically at lower production levels and can easily be reprogrammed to turn out a wide variety of customized products. That gives small companies a key advantage.

John Jackson, who studied the Michigan economy, in-dependently confirmed Carlsson's thesis. Michigan's machine-tool industry, he discovered, was split right down the middle: declining or dying companies lost 18,000 jobs over a six-year period, while new or growing companies created 15,000 new ones. Jackson and two colleagues had surveyed the industry separately in 1984, asking not only about changes in sales and employment, but also about the type of technology used. By far the greatest growth, both in jobs and in sales, took place among companies that utilized only CNC equipment. These companies, moreover, were significantly younger and smaller than the industry average.

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