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Small Firms Reconsidered

Updated: Apr 9, 2020

We need better tools to properly value their true social and economic benefits.

By Peter Elmlund.

Saving small firms has become a mantra in many countries during these turbulent times. It seems that it takes a crisis and a threat of massive destruction before the establishment pays attention to the profound value of the smallest business activities in our societies. What is at stake is so much more than just the immediate economic transactions. The undervaluation and very often contempt of small businesses and their owners has a long history. In the 19th Century, Marx and his associates derided them as "petite bourgeoisie" – a class doomed to extinction by industrialism and, therefore, likely to develop conservative or reactionary views even though economically and socially, their interests were close to those of the working class. Later on, in the 20th century and up to the 1970s, state-led growth, big capitalism, and an era of collective compromise created a cultural climate that belittled small firms as less efficient producers. I think that is one of the reasons that Jane Jacobs' masterpiece The Death and Life of Great American Cities, and her following books about urban economy, had remarkably little influence on contemporary economists and policymakers. To them, her analysis of the social and economic value of small enterprises seemed obsolete. But today, with the growth of entrepreneurship, start-ups, the "gig economy," etcetera, and the massive trend towards livable and sustainable cities, Jacobs seems more relevant than ever. Yet her strong point about the social value of small firms in urban settings is still overlooked. There are exceptions, of course. In 2007, voters in San Francisco passed Proposition G, which was about the protection of the city's small business sector. That resulted in planning codes (303.1, 703.3, 803.6), which forbid the establishment of retail chains in specific neighborhoods. What is interesting here is that the main arguments for these planning codes are non-economic. The underlying planning documents refer to goals like diversity, walkability, and local character (for example, in the "Commission Guide for Formula Retail"). In other words, San Fransisco's voters and leaders see a greater value of the small, independent stores than just economic transactions; they see social and cultural benefits for the city as a whole. This was Jacobs' argument, that social and cultural goals also pay off economically in the long run; yet we have not developed many tools that measure and validate that vital long-term economic benefit. Maybe a little bit surprisingly, American Express has done some illuminating research in this field. The company examined the success of independent local proprietors in 15 major American cities over 20 years, from 1990 to 2009. They found that "Residential neighborhoods served by a successful independent business district gained, on average, 50% more in home values than their citywide markets" . For a gentrifying neighborhood, this may be a problem requiring tools to attenuate the growth of home values - but I leave that discussion to another post. There are quite a few academic research papers that investigate the social impact of small firms, especially those who operate in streets and markets. But this matter deserves much more attention. We will come back to the social and cultural impact of small firms in urban settings in this blog. If you are aware of any good studies or cases from cities around the world, please let us know.

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