Successful small-business experiments fuel local growth
During the past decade, Columbia has realized economic success. Payroll employment increased by 16 percent, total establishments increased by 21 percent, and payrolls increased by 46 percent.
These data indicate two things: the average number of workers per establishment declined, and the average pay per worker increased.
Based on these two facts, one might guess that small business is the engine, or the cause of Columbia’s economic growth. Actually, small business is a symptom of the true underlying cause of economic growth.
Second, worker productivity changes over time as we realize economic growth because we find machines that permit one worker to replace several and because we create better ways to coordinate worker activities. Workers become more productive as new ideas and new technologies expand the amount of goods and services each one can produce.
Getting back to Columbia’s growth facts, small-business creation is a symptom of the true underlying cause of economic growth. The data are like a snapshot. Some of the 4,578 establishments reported to be operating in the Columbia metro area were the same ones that were part of the 3,775 establishments that were operating in March 1999. Some went out of business, and others, obviously, were created. That is what happens over time.
Within the context of productivity, the new businesses were the mechanism by which new technologies were tried. Through some natural law of competition, the ones that experimented and succeeded will show up in the business establishment data in 2021. Other experiments did not work out well enough for the owners to continue operating, and those establishments disappeared.
My point: It is easier to try these experiments in small-scale operations, which thereby accounts for why establishment size goes hand in hand with economic growth; but it is not an explanation for why the economic growth occurred.
Inevitably, someone will latch onto two unfounded predictions that are just under the surface of this argument. One is the idea that new technologies require fewer workers to produce the same amount of output. The other is the fact that some businesses shut down. In the static economic picture, the two strike people with an unwanted consequence: Workers are separated from jobs displaced by new technologies and by companies shutting down.
By focusing on this part of the picture, the analysis leads one to believe that all this progress makes jobs disappear. Such predictions continue to miss the point that the new technologies expand the total resources that society can enjoy.
What is wrong with stopping the analysis at the point where job separations occur? People and other resources are freed up when technological advances occur. This does not mean these people and these resources are permanently displaced. People find new jobs. Matches are more difficult during recessions, but people find a way to find matches. In particular, people know what their skills are and have an idea of the right price for their labor.
Because of the returns to the new technologies, entrepreneurs and workers have additional income. The additional income is spent or saved. If spent, other companies need new employees. If saved, banks lend monies to new entrepreneurs or expanding businesses, which need new employees.
Thus, with resources less constrained owing to the technological progress, the circular flow distributes these resources among households, businesses and government. So the completed picture offers a 360-degree view of growth; through economic growth, resources are freed up, and the total size of the economic pie expands. Growth and technological progress are, therefore, nothing to fear. Rather, our complex economic system strives under opportunities afforded by such progress.
The bottom line is that people find a way to use the engine of economic growth to enjoy higher standards of living.