Neglected amid much of the talk about our economy's changes -- the commentary about one sector's health, say, or another's weakness - is a simple and underlying statistical fact: the American economy is breaking into pieces. More and smaller businesses now do what fewer and larger ones did before. Our economy is "atomizing," and the process is packed with consequence.
At Cognetics, we've seen the phenomenon come clear under the scrutiny of our "economic microscope," a tool first developed at MIT to help analyze economic patterns statistically. With the help of Dun & Bradstreet to keep the data current, the microscope now enables us to examine the histories of more than 15 million individual business establishments in the United States over the past 17 years. And atomization is only the first of the often surprising phenomena the inquiry reveals. The microscope suggests, for instance, that the single largest contributor to a region's economic health is the strength of its educational community; that America's muchabused manufacturing sector is in fact demonstrably sound; and that the empty office buildings in so many of our cities illustrate a classic misunderstanding of the new economy's changed market needs.
A database of unprecedented scale, the microscope provides an unusually accurate description of how the atomization process is happening. It offers causes, effects, and the sometimes bewildering, sometimes enthralling view of how the economy actually works -- one piece at a time.
To see that there are more of these pieces than before, and that they are proliferating, consider the numbers. In 1985, almost 700,000 new companies were formed, compared with 90,000 start-ups in 1950 and only 200,000 even as recently as 1965. These 700,000 new businesses are in addition to approximately 400,000 new partnerships and 300,000 newly self-employed people. In short, about 1.4 million new enterprises of some sort were created last year. Now, consider that we're creating on average around 1.4 million new private-sector jobs each year in the American economy -- or one new enterprise started for each net new job created. We are practically carrying our jobs around on our backs.
This degree of atomization is a relatively new phenomenon, and it represents a major structural change in the way America does business. A plot of real growth in the gross national product against the number of new incorporations per year shows that the atomization process began in earnest during the mid-1970s (see figure 1). Since then, at an increasing rate, we have been counting on more and more businesses to get the nation's work done.
Why? What has happened in America and elsewhere to generate such a sweeping change in the structure of our economy? As with most fundamental changes, this one is the result of many things happening all at once. At the heart of it, though, is competitiveness -- and the things Americans are good at.
It used to be that we were good at growing things. We still are, but with virtually no people involved. Agricultural employment has gone from well over half of all jobs to about 2% of them.
It used to be that we were good at making things. We still are, but with very few people involved. Though we make much more now than we did in 1966, we use fewer manufacturing employees to do it. The Japanese and Koreans and Mexicans have seen to that. Today, only 9% of American workers actually labor in factories. Competition both at home and from abroad has pushed American companies to make impressive productivity gains -- and equally impressive labor reductions.
Yet we have created millions of jobs -- 36 million since 1966, to be exact. It's not surprising that what these people are doing instead of making things is providing services (see figure 2). It is clear that in the mid-1970s, when atomization was accelerating, we became quite good at selling our services abroad. So we are not just taking in each other's wash; at a minimum, we're taking in the world's wash. And what we are really doing is selling our wits overseas -- I call it "thoughtware." These high-tech and professional skills are just as exportable as hardware; we sold $145 billion worth of them abroad last year alone.
What does all this have to do with atomization? It's quite simple. The large companies that dominated world trade in hardware -- the Fortune 500 and the like -- are under great competitive pressure and are getting leaner and more flexible. The Fortune 500 companies alone employed 2.2 million fewer people at the end of 1985 than they did at the beginning of 1980. They are subcontracting more. They are encouraging more leveraged buyouts. The bigger, older ones are getting smaller.
At the same time, the newer kinds of companies are not getting so big. Thoughtware merchants don't require the resources that their hardware counterparts do. It doesn't take 50,000 people to devise and manufacture computer software or provide engineering-design services. The largest software companies today employ only slightly more than 1,000 people, and the vast majority employ less than 50. Obviously, setting up a service company costs less, too. With some exceptions, such as Federal Express Corp., large investments of capital are not required. A few hundred thousand dollars will get most service companies going, and the majority of the 1.4 million new starts last year probably started with a hundredth of that.
Complementing the atomizing influences both of competitiveness and of the special nature of the new thoughtware industry are the forces of demography. Smaller families and two-worker households in which one partner can support the entrepreneurial drives of the other certainly fuel the process. In particular, women with better education and stronger career drives have played a major role in atomization. Of the approximately 10 million enterprises in America, about 3 million today are owned and managed by women.
All of these factors are working together to facilitate and encourage atomization, and atomization is affecting all of us. Examples abound. If you work for someone else, you feel it. The days of the one-company career with the gold watch at retirement are virtually gone. One out of five American workers leaves his or her present job each year. To stay alive economically, you must be prepared to switch careers and employers often. Atomization means much less personal security and a constant need to stay current in what you do.
If you sell to a business, you certainly feel it. The accountants and lawyers find their large, bread-and-butter clients evaporating out from under them. Fully 29% of the Fortune 500 audit accounts in 1970 had vanished as companies (and accounting clients) by 1981. IBM Corp. isn't bailing out real estate developers the way it used to. A Fortune 500 company disappears only two and a half times less frequently than a garage start-up.
If you are responsible for job creation in general, as a mayor, or a governor, or a president is, you too feel atomization's effects. You begin to convene White House Conferences on Small Business to try to figure out what this process is all about and how you can assist it. Which you find you can't do, at least not directly -- the setup costs are prohibitively high relative to the size of the deals. So, in many instances, you are frustrated. I hear regularly from genuinely concerned officials in Nebraska and Montana and Iowa who read the INC. rankings on the levels of entrepreneurship in their states and want to understand how to stop the drain of bright young people, and trap them locally as entrepreneurs instead.
Solutions, whether for government officials or businesspeople, are not always forthcoming. But in every case a better understanding of the new economy will help.
In the columns to follow we will view this beast from several different angles. We'll examine the new service economy. We'll see what kinds of jobs these new firms are creating. We will look at growing companies in declining sectors -- our British friends call them "cuckoo birds." We will try to determine the extent to which certain groups are participating in and capitalizing upon atomization, women and minorities in particular. And we will look carefully at what atomization means for careers and job security.
From whatever angle we approach it, the perspective will always be the same: how are millions of corporations, each following its own instincts and ambitions, causing this fracturing of the American economy, and what does this mean for you?