Friday, 31 December 2010

The Small Business Myth

A few days ago I blogged about the need for systematic lying as part of the functioning of Capitalism. Often though its not a matter of outright lies, but of simply portraying facts in a particular way that perpetuates myths. Usually, these myths are highly ideological in content. One such is the myth about small businesses. Its a very old myth.

In his "The Development Of Capitalism In Russia", Lenin had to contend with this myth. In that instance it was being perpetuated by the Narodniks.
The Narodniks had started out as a revolutionary organisation - Lenin's elder brother had been a member, and was executed for an assassination attempt on the Tsar - and, in theory adopted the ideas of Marxism. Marx himself corresponded with them, and it is one of his comments that was used by the Narodniks as the basis of their argument. Asked if the peculiarities of Russian peasant life, based on the village commune, could mean that Russia could avoid having to pass through a stage of Capitalist Development, Marx had replied very cautiously that in theory it might, but only on condition that Socialism had been established in the developed economies first. The Narodniks, as a Populist organisation were based on the peasantry and other petit-bourgeois layers. As a consequence they played up the progressive and revolutionary role that these sections of society played and could play. The consequences of this were in fact reactionary.

That was so, as Lenin demonstrated in numerous writings - of which the above is the most comprehensive - because it both minimised the role of the working-class, and because of the ideological ties of the petit-bourgeois to the bourgeoisie, meant infecting the revolutionary movement with bourgeois ideas. Those bourgeois ideas were to take their ultimate form in the various parties that in the end replaced the Narodniks, be they the outright bourgeois parties such as the Cadets, or the essentially petit-bourgeois organisations such as the Social Revolutionaries, the Mensheviks, and the Anarchists.

The Narodniks using that quote from Marx, argued that Socialism could be built in Russia without the need for going through a Capitalist Stage. They argued that the Peasant farming, and small handicrafts businesses could be developed on a communal basis, and these would both provide the workers and peasants within them with better wages and conditions, and be capable of developing towards an overall Socialist society where ownership of the means of production remained in the hands of the Producers without every having to pass into the hands of Capitalists.
They produced vast amounts of statistics to demonstrate just how much this peasant production was developing, and so on. The other side of this argument was the idea that Capitalism in Russia was somehow alien, that it was being introduced from the outside unnaturally. The Narodniks placed great store in the idea that the Russian State was and could be utilised to counter this alien development of Capitalism, and could instead be used to foster the development of socialistic peasant production.

Lenin's great merit in the above works was to dismantle this idea, and to do it largely on the basis of the very data the Narodnik economists had themselves collated. First of all, he demonstrates that, in actual fact, the peasantry could not be seen as some single class. It was differentiating - just as it had in every other country on the path to Capitalism. Some peasants were becoming richer and turning into Kulaks, whereas at the other end, a large mass of peasants were becoming impoverished, forced to sell or rent out their land to the richer peasants, whilst they themselves became wage labourers. Looking at the other activities of peasants in handicraft, he saw exactly the same kind of differentiation, but more importantly, contrary to what the Narodniks claimed, the reality was that where peasants were themselves employed in such production, the data showed that they were better paid, and had better conditions the larger the establishment they worked in.

Lenin's conclusions from this were twofold. Firstly, this differentiation amongst the peasantry meant that in Russia as in all other countries that had travelled this path, the peasantry was differentiating into a small group of rich peasants on their way to becoming Capitalists, a larger group of Middle Peasants, and a much larger group of poor peasants who were being destroyed and turned into workers. Although, it was quite true that a lot of foreign Capital was being introduced into Russia, and spurring its development, the process of differentiation showed that the development of Capitalism in Russia was no alien development, but a normal part of its transformation. Secondly, precisely because the facts showed that it was this Capitalist Development, the development of large more capitalised farms and factories, which could be seen to provide the higher living standards, to try to hold back Capitalist Development as the Narodniks wanted to do, and to which they looked to the State for assistance, was actually reactionary.

But, Lenin's analysis went further than that. Looking at the State in Russia, its composition, and the measures it introduced, he also concluded that it was, in fact, already a Capitalist State. Although, the continuation of Tsarism meant that political power rested with the former Landlord Class, the State itself was already committed to having to act in the interests of Capital.
He examines a whole series of measures to prove his point, and basing himself on Marx's Materialist, class analysis, shows how the Narodniks arguments are a negation of Marxism, because like the German Katheder Socialists, the Narodniks, essentially turned the State into a class neutral vessel that could be influenced to act in the interests of "the people", rather than being determined by the needs and interests of the ruling economic and social class.

But we see a similar idea perpetuated today. On the one hand various types of Reformists and Stalinists object to Monopolies because they are seen as in some way unnatural. They argue for anti-monopoly policies to be implemented by the very Capitalist State whose job it is to look after the interests of Capital! They call for the establishment of "anti-monopoly alliances", and so on. Of course, they do not raise the same objections to the worst forms of such monopolies, those established by the Capitalist State itself even though as the current situation with the state-owned Water Company in Northern Ireland they are usually less efficient than similar private monopolies - the regulator in N.I. estimates that Northern Ireland Water is 40% less efficient than the water companies in England.
As with the Narodniks this stems from am ideological commitment to present the Capitalist State as in some way class neutral, or even progressive. But, also the reality is that frequently it is these very Monopolies - private and public - where workers are better paid and enjoy better working conditions. Some of that is due to the fact that in these companies it is easier for workers to organise into Trades Unions, but the larger part - as with Lenin's analysis - is simply down to the fact, that the greater efficiency of these large organisations means that they can afford to pay workers better, and provide better conditions, and in so doing they retain workers for longer, get better productivity from those workers, and in the end make bigger profits. And again, as Lenin argued, it is precisely these very large monopolistic type enterprises that offer workers the best opportunity to take them over themselves and run them efficiently, and to create the conditions for planning production, and integrating it with the production of other large enterprises.

To oppose these very large, monopolistic enterprises in favour of the idea of some return to competitive, small businesses is therefore, reactionary as Lenin pointed out later in his Imperialism, The Highest Stage of Capitalism, where he criticised Kautsky for such an approach.
They both tend to provide worekrs within them with higher wages and better conditions, and they are historically a more mature form of Capitalism, closer to the kinds of forms that will be established under Socialism.

But, of course, its not just Reformists and Stalinists who make these kinds of arguments in relation to small businesses and the State. It is a central part of bourgeois ideology in Tory and Liberal propaganda - and the same theme can be seen in the propaganda of the bosses' parties in the US. The most frequent application of this idea at times like the present is to be found in the argument that small business needs to be supported and assisted, because it is these small businesses that provide the bulk of employment. If unemployment is to be reduced, we are told, then it is these thousands of small businesses, growing rapidly, and each employing a few extra people who will bring it about. But, of course, this argument is as bogus as those employed by the Narodniks.

Of course, its true that a huge number of small business do employ the bulk of the workforce. But, its equally true that a small number of very large enterprises employ a much larger percentage of the workforce than they comprise as a percentage of the number of businesses.
And as the above has shown the wages and conditions in these businesses always tend to be much better than those provided by the frequently, anti-union, penny pinching small capitalists, who continually complain about having to meet the most basic requirements of employment in a civilised society. The economies of scale of the very big business means that they are able to provide education and training for their workers as a means of raising their skills and improving their productivity, and as a result such firms want to protect that investment by retaining those workers. The small employer, however, is happy to see workers laid-off, in the knowledge that, for the small numbers they require, when the time is right they can pick up additional workers, who have often been trained by a bigger employer.

And, this is the main reason that this argument about the small business is a myth. It may well be true that small businesses account for the bulk of employment, it may be true that employment can be raised quickly if a large number of small businesses each take on a few additional workers, but the reality is that the number of small businesses is continuing to fall not increase. In other words, that process of differentiation described by Lenin continues to occur. Moreover, although a large number of additional workers can be taken on by these small firms, the question then arises, how long will that employment last. As stated above, the very large firm has many incentives to retain workers it has spent money on training, even if that is costly in the short term, whereas the small business will lay workers off quickly in order to minimise its costs. Even so, between 20-30% of new small businesses fail within the first year, and around 75% fail within 5 years.

Its all very well telling us about how many more jobs small firms create compared to large businesses, but what is never mentioned is the much larger number of jobs that these small businesses lose each year compared to the very large businesses. During the 1980's, a number of Marxist Economists did some very useful work looking at the way the scale of operation established barriers to entry in various industries. But, the general conclusion was that although these barriers prevented smaller producers from entering, the existence of much higher profits led to other very large firms entering the arena - Virgin's entry into the international airline business could be one example, and the entry of Tesco into Banking could be another. But, also, what was found was that these same barriers to entry, also acted as barriers to exit. A firm that has spent tens of millions of pounds on a car factory, is not likely to simply shut it down, even if its making short term losses. The Capital equipment is pretty specific, and cannot be simply transferred to some other use. This is one reason I'd argue that under modern Capitalism the equalisation of the Rate of Profit occurs initially via the adjustment of share values, and not through the continual movement of physical Capital from one activity to another.

Of course, this barrier to exit does not apply to small businesses, particularly very small businesses. Someone can open a shop selling Car Parts today, and if it fails open a shop selling clothes next year.

In reality, this myth of the small business is perpetuated by the Tories and liberals and other bourgeois apologists for obvious reasons. Firstly, an intrinsic aspect of bourgeois ideology is that there is free and fair competition dominating the market. Orthodox economics sees Monopoly and Oligopoly as an anomaly, just as the Narodniks saw Capitalism itself in that role. Just as we are presented with an idea of a police force of the Dixon of Dock Green, rather than the riot police, type, so we are presented with a vision of Capitalism based on the idea of hard-working entrepreneurs, working long hours in thousands of small businesses, rather than the reality of a small number of huge businesses, managed by extremely well paid professional managers, but owned by an infinitesimally small number of Capitalists, whose only function is to draw off their dividends, and maximising the Capital Gains on their share holdings.

But, the idea of putting forward policies designed to meet the needs of the smaller Capitalists reflects the political base of the political parties. As I have argued, following on from Engels analysis, the Big Capitalists adopted the programme of Social-Democracy as best suited to meet their needs in normal times.
It created the climate of social peace needed for large scale, long-term Capital Accumulation, it socialised many of the major costs for Education and Health required for the reproduction of the kind of Labour Power needed in a modern economy by those large firms, and as Engels points out, at the same time, these measures, which impose tax and other burdens on the small businesses, act to drive them out of business, facilitating the further growth of the large business. And, of course, because these measures, and the general stance of Social-Democracy acts to ameliorate the condition of workers, a ready made electoral base for these parties exists. Its not surprising then that Labour in Britain, and the Democrats in the US have tended to pursue policies which objectively benefit Big Capital, whereas the Tories and the Republicans, at least in their rhetoric, have appealed to their base within the small business class, the middle classes, and backward sections of workers.

That is not to say that the representatives of Big Capital overtly support Labour - though some do - in the way that they support the Democrats in the US. They did not support the ILP at the time Engels was writing either. Rather it is through various other channels that they push for the kinds of social-democratic consensus they require, and whilst the Trades Unions can be relied upon to bolster that consensus within the LP, it is through involvement in the Tory Party that Big Capital can foster that consensus on a bi-partisan basis, which was so eminently displayed in what was termed "Buttskillism" in the 1950's and 60's.


George Carty said...

How would you respond to the argument that small businesses foster innovation, and that most improvements in productivity come not from existing firms upping their game, but rather from inefficient firms being driven out of business and making room for more efficient new start-ups?

Boffy said...

I don't think there is a single linear process. The vast majority of new businesses go bust within the first five years. A lot, especially at the present time, are actually people who've lost their job, and decide to go self employed out of desperation at not being able to get another.

When I was self employed as a consultant - and I did that for similar reasons - I came across lots of small businesses that it was difficult to see how they kept going. They were often people who were hard working, and knew about whatever it was they were doing, but had absolutely no idea about basic business skills.

But, yes, some new businesses, usually in new areas of production, do come up with new ideas. A small number of those businesses succeed. They act as a laboratory for other capital. As Marx says, often when big existing capital then has to reorganise itself, which is related to its turnover of fixed capital, it adopts what has been successful. It often simply takes over the successful small businesses.

But, a lot of the development of existing products is done by the existing large producers, who have the resources to engage in the necessary research and development.

But also, I was watching an Horizon programme on BBC last night - "Tomorrow's World", where contributors pointed out that a lot of the technology etc. that is incorporated in modern products is stuff that was actually developed by or for the State. A lot of the cutting edge stuff attributed to new small businesses is also itself highly related to what has been developed by University Academics - some of who then use it to set up these businesses - for example in bio-technology.

A good example of what we were discussing the other day in relation to Britain, is Graphene. Developed at Manchester University by immigrant academics, but most of the subsequent patents for using it are being registered in China and elsewhere, not in Britain.

The other interesting point raised was the extent to which today open source i.e. co-operative development - using the Internet - is a necessary means of new developments, particularly in science.