Why we should support small businesses even if they are inefficient and pay badly

Why do David Cameron and Ed Miliband love small business so much? As Ben Dellot points out, there’s an increasing number of votes in it but beyond that both leaders are clear about the two reasons they are falling over each other to back small business.  Firstly, SMEs create more jobs than big business. Secondly, they will help the UK economy win the “global race”.

The problem with both of these claims is that they have two rather ugly cockroaches in the rhetorical ointment.

Firstly, small business may well be a good generator of employment but jobs there pay less than in big business. Even if you’re the top dog in your own SME, it’s hardly a sure-fire route to a yacht and a Lamborghini.

Secondly, as for the global race, small businesses are very rarely as productive as big business. That’s one reason, after all, why small businesses have an exceptionally high tendency to stay small.

Logically, one might think this means politicians should end their love affair with small business and cuddle up to the big players instead. It’s not that simple of course.

Small businesses are growing apace – not far shy of five million in the UK and growing at a rate of 100,000 a year. As a result, they account for a big wedge of GDP (now around 40%) and a significant slab of the labour market (no less than 60% of private sector jobs).  The internet is also allowing small businesses to raise their visibility and reach out to markets once closed to them. The truth is no policy maker could or should set themselves against trends of that scale.

But while politicians fail to acknowledge the two inconvenient truths above, their small business policy will remain incomplete. Why create complex policy frameworks to encourage more start-ups and a bit of SME growth if all this means is a less productive economy and lower paying jobs? I'd suggest three steps that might begin to resolve this problem.

1. Accept most small firms will never be highly productive

Politicians could begin by admitting that the majority of small businesses will not be highly productive, high growth operations. They should also accept that’s not a disaster. The rise in small business should be welcomed because it is about millions of people turning their ideas and vision into reality – what we at the RSA call ‘unleashing the power to create’.

It’s because of this that surveys show that people who run their own small business feel more satisfied and autonomous. Productive or not, that’s a good enough reason to support small business.

2. Free the small firms that are highly productive

However, there are a small number of SMEs that are highly productive. If you want to ‘win the global race’, this is the place to look.  What is needed there is not the current policy vogue for lots of advice and state-sponsored finance, it is making sure these firms have the power to be creative free of any blocks. One of the reasons the US is more productive than Europe is because of a dynamism which means sluggish uncreative whales are quickly replaced by hungry innovative piranhas who themselves get replaced once they run out of ideas.

In short, it is about an economy where those who exercise their creativity to the max get justly rewarded. Achieving this means stripping away the regulations, tax arrangements, public sector procurement and monetary policies which keep unproductive bigger businesses alive at the inevitable expense of new smaller players.

3. Address low pay in small businesses

Finally politicians need to acknowledge and help resolve low pay amongst entrepreneurs, the self-employed and those who work for them.  The truth is you won’t create a new generation of ambitious entrepreneurs or create good jobs in the burgeoning small business sector without making it a place to earn more.

The key here is not byzantine tax breaks for living wage deals - a policy that will probably favour big over small business anyway. A more straightforward route would be to create an extremely favourable tax environment for small businesses and for the people who work in them.

More important, however, is the establishment of that creative, dynamic economy where big business is less featherbedded. The truth is that when 60% of the economy is shared out between the public sector and 6,500 large corporations and the other 40% is left for 4.8 million firms, it is hardly surprising there is less cash to splash around for those smaller businesses.

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