Three common fallacies in American business in general and in Colorado’s economy in particular are: (A) most jobs are in small business, (B) most new jobs will be in small business, and, (C) we need to support small business as a key to renewed economic success. Within this set of assumptions are several fundamental errors, some of which are embedded in the field of economics, and the rest of which are part of modern American economic folklore.
To begin with, most small businesses are single proprietorships, including many consultants, real estate brokers, truck drivers, cab drivers, farmers and ranchers. This group is reinforced with armies of accountants, attorneys, therapists and multi-level marketing personnel swelling the cohorts of small business enterprises, but not contributing to the economy in substantive productivity gains and unable to supply new jobs with meaningful benefits. Unfortunately, these jobs are all in the service sector; they cannot significantly add to their current level of productivity, and as sole proprietorships, they are unlikely to add employees.
Nevertheless, the myth persists of small business as a major engine of our economy. Why? Small business appeals to our pioneer spirit. From the solo mountain trapper and the cow poke on the cattle drive, to the inventor tinkering in his garage, we see ourselves as a collection of independent spirits, each one boldly striking off into new territory in energetic creative efforts. This mythology conveniently forget the thousands of combined hands that it has taken to build mills, mines, railroads, highways and farms. We like the first version of the story much better, but what we are missing here is the understanding is that in order for a small business to have a meaningful impact on the economy, it needs to grow into a large business, adding to it’s efficiency and performance and it’s payroll.
Small businesses that remain small are not going to make any of this happen. Service businesses are frequently unable to grow and create the excess value needed for long term economic growth. There are of course examples of services businesses that are growing, but they have done so by outsourcing jobs to India, the Philippines and elsewhere; hardly a formula for long-term job growth in the United States. As a rule of thumb, if a sole proprietor is billing on an hourly basis, they cannot contribute to productivity increases; they can only increase their billing rate – or add to their billable hours, generally on a temporary basis.
Further, small businesses are unable to afford the health care, 401k plans and other benefits that are generally within the capabilities of larger businesses. Without sufficient profits and efficiency for providing these benefits, Colorado’s reliance on ‘small business’ brings a hollow benefit to the state with employment, but without benefits. Absent the jobs with benefits, these workers are left on their own to find benefits from the public sector or on their own, or to do without them.
Large business development requires a big business attitude, beginning with an environment that attracts investment capital and knowledgeable investors. This will not happen as long as we deceive ourselves into believing that Colorado has a sufficiently effective business approach. At the moment, Colorado is generally twelfth out of 50 states in attracting venture capital; according to the latest Price Waterhouse survey, at the end of the 3rd quarter of last year, Colorado had attracted just 1% of all the new venture capital expended in the entire United States.
In order for job growth and productivity to converge, Colorado needs to make renewed efforts to increase manufacturing and simultaneously increase investment attraction and management. Manufacturing is a clear source of increased productivity; investment infrastructure is the critical tool for propagating that productivity. None of this critical investment will be drawn to Colorado as long as the state has an approach that fails to recognize the need for large business.
Colorado is mired in the small business mythology, and it is time to get real, and to get serious, about what constitutes an effective business for the state. It is not a non-profit, and it is not small business. It is big business; sophisticated, complex, and competent large business firms.
