INTRODUCTION

Because American enterprise spanned a continent, a feeling arose among many of our people that "big is beautiful." In recent years we have perceived more clearly that, while large-scale is functional in some areas, it may be unwieldy in others.

In the three decades since World War II, a band of scholars has begun to examine the relationship of bigness and efficiency; to search for the end-points of economy of scale, and to catalogue the implications of bigness for our economic affairs, social structure, and national values.

In many instances, these studies conclude that small-scale is better for our economy and society-that small firms often produce superior goods and services at lower costs, and that they strengthen the individuals and communities involved in ways which the impersonal nature of large-scale institutions cannot match.

The purpose of this Print is to compile an anthology of these studies, in order to illuminate the question of how "small business"-or more accurately the community of new, small, family, locally owned and operated, and medium-sized independent businesses directly affects the quality of our everyday life. The observers whose works are reproduced in these pages believe that if we are to preserve a society on a more human scale, small business must continue to fulfill an important role. The Small Business Committee hopes that the careful research gathered in this volume will be helpful to all of those in public and private life who are similarly concerned, and can point the way toward an overall "enterprise policy" in this country.

STRUCTURE OF U.S. BUSINESS

Standard statistics provide some impressions of the structure of our domestic commerce. There are only about 3,000 companies listed on U.S. stock exchanges and another 3,000 corporations whose stock is nationally traded over-the-counter. These are the firms which are likely to have access to national financing through both equity and debt markets, and which engage in national or international marketing, nationwide advertising, and nationwide personnel recruitment. In numbers, those 6,000 national companies constituted four onehundredths of 1 percent of the total business population of 13.9 million enterprises tabulated most recently (1974) by the Internal Revenue Service as follows:

Corporations

(Subchapter S

Partnerships

Proprietorships

All returns_

1,978, 059

330, 418) 1,062, 282 10, 873, 822

13, 914, 163

Often cited as at the top of the pyramid, according to the Statistical Abstract of the U.S. (document No. 9 of this print) are the 137 largest U.S. manufacturers, who in 1974 accounted for 50 percent of manufacturing assets and 54.8 percent of the net manufacturing profits. These tables similarly reflect that the 100 largest manufacturers increased their share of manufacturing assets from 39.7 percent in 1950 to 44.4 percent in 1974.

Most experts would regard manufacturing as the heartland of the U.S. economy. In 1974 the 212,864 manufacturers constituted the largest source of employment among the major Standard Industrial Classifications, with a total of 20 million jobs out of a workforce of 93.2 million (212 percent, and declining). It also contributed the largest share of net profits-$73.9 billion in 1974 out of total U.S. profits of $200 billion (about 37 percent). All of the other diverse segments of the economy accounted for the remaining 63 percent, as illustrated by the following table excerpted from Internal Revenue Statistics of Income for 1974:

Transportation, communication, electric, gas, and sanitary serv

ices

Wholesale and retail trade____.

Finance, insurance, and real estate_

Services

Nature of business not allocable_____

Total

Source: Statistics of Income, Business Income Tax Returns, Tables 1.1, 2.1; Corporation Income Tax Returns, table 3, page 15, Internal Revenue Service, 1974.

VALUE OF SMALL BUSINESS

Less attention has been devoted to the smaller end of the spectrum. Few people realize that small business in the U.S. accounts for about 55 percent of nonagricultural jobs in the private sector and nearly all of agricultural employment. Small business, as defined by the Small Business Administration also produces 48 percent of business output, and 43 percent of GNP.

The resourcefulness of individual inventors and small firms is demonstrated by a U.S. Department of Commerce Study (document No. 17) concluding that these small units account for more than onehalf of all inventions and innovations. The Massachusetts Institute of Technology has recently completed research (contained in document No. 8) showing how innovators and young technology firms can contribute a disproportionate share of economic growth.

The efficiency of family and smaller farms has given the U.S. the world's most productive agricultural system. In industry, as well, the efficiency of modest sized manufacturing units has been strongly in

dicated in a study performed by Dr. Barry Stein (document No. 3), revealing that industrialists have been planning their new, and presumably optimum, plant sizes to cluster between 66 and 455 employees. This range is well within the Small Business Administration's definition of small manufacturers (which has 500 to 1,500 employees, depending upon the scale of the particular branch of industry). In existing facilities 55.9 percent of the workers are found in units of less than 250 employees. In new plants producing consumer goods, an even higher proportion-70 percent-were started up with less than 250 employees; 44 percent required less than 100.

The opportunity to begin, or engage in, a small enterprise permitted waves of immigrants to gain financial security, self-respect, and often affluence. This self-reliant spirit of private enterprise has paid our nation handsome dividends, both as to material wealth and national character. Thomas Jefferson perceived the value to democratic government of the economically self-reliant farmer-businessman. Americans take as commonplace the glory of the system that permits new ventures as a vehicle for upward mobility in this "land of opportunity." The American dream of having one's own business is widely and powerfully felt. Together with democratic process and the rule of law, it has been a major factor in creating a society that is admired in many parts of the world.

These are the traditional values of an open enterprise system.

More recent commentators included in this print, such as Carter Henderson (document No. 4) and Dr. E. L. Schumacher (document No. 12), especially those writing since the energy embargo, stress the value of small business in pioneering techniques of producing renewable energy from the sun and wind; developing intermediate technologies valuable to the less-developed world as well as the less-favored areas of our own country; taking up the slack in structural unemployment; compatibility of smaller enterprise with the earth's ecology; and facilitating decentralization into smaller, more manageable, and more personal economic and governmental units.

Mr. Schumacher's point is that the success of economics should be measured primarily by the fulfillment of the needs of people, rather than the output of goods and services. To the extent this is a valid and practicable idea, Mr. Schumacher argues quite pursuasively that "Small is Beautiful" and vitally important in many areas of business and modern society.

DECLINING CONDITION OF SMALL BUSINESS

During the past three years (1975-77), the Senate Small Business Committee has held over 150 days of public hearings to inquire into the problems of this enterprise community. These hearings and the Committee's annual reports, amply document that, despite the brilliant record of small business contributions to the American economy and society, the climate for new, small and independent enterprise has been allowed to deteriorate badly over the past 30 years.

The statistics show an increase in industrial and financial concentration during that period, and a comparable diminution of opportunity for individual and local entrepreneurship. More than one-fifth of the

500 largest U.S. corporations may have disappeared through merger during the 1960's.

There are greater difficulties in creating a new business, and also in maintaining its existence, especially in the early years.

For example, going into farming in 1960 took a financial commitment of about $51,000-the worth of the average farm, and about five times the median U.S. family income. Today the average farm costs $171,000, 1211⁄2 times current median family income. It has thus become more difficult for young couples to go into farming. Not surprisingly, the number of farm families has declined from 5.9 million to 2.8 million in the last 30 years.

A profession venture capital financier testified in Committee hearings that, although the venture capital companies formerly organized 10 to 15 promising high-technology companies each year, it will be virtually impossible to do this in (the) future because of a discouraging capital situation, the restrictive effects of the "prudent man rule" of ERISA (the Employee Retirement Income Security Act or Pension Reform Act of 1974), and other factors (Document No. 10).

A tabulation on stock flotations during the past decade confirms that, as to smaller companies; in 1969 there were 698 newly registered stock issues by firms worth less than $5 million. This number shrank to 101 in prerecession 1973, and came to a virtual standstill with nine in 1974, three in 1975, and 29 in 1976.1 For companies making new starts, the maker of "unseasoned" (first-time) registered stock offerings fell from 62 percent to 16 percent of the yearly totals in the 5 years between 1971 and 1976.

The acute difficulties of remaining in business are reflected in the following statistics on turnover:

Over the past three decades, about 30 percent of all new enterprises failed within a year, while about 50 percent went out of business within two years. Treasury figures show that although four million corporations were organized between 1956 and 1973, the net increase was only about one million-a 25 percent chance of success.3

In 1976, there were 35,000 business bankruptcies; more than twice the average of the late 1960's.*

Irving Kristol, writing in the Wall Street Journal (document No. 5), remarked that: "it is astonishing and dismaying how little interest there seems to be in the condition of small business in the United States today." Kristol labeled the small businessman a "forgotten man" in today's world; "an invisible figure”—

No one is leading a crusade against him and *** no one really wants to. He is merely being chivvied, harassed, ruined and bankrupted by a political process that takes him for granted and is utterly indifferent to his problematic condition."

1 SSBC 27th Annual Report (Rept. 95-30), p. 63. updated in "Small Businesses Disappearing from Nation's Securities Markets." statement on the floor of the U.S. Senate by Sen. Gaylord Nelson, Congressional Record, September 27, 1977, page S15731.

2 The Future of Small Business." Edward D. Hollander and others. Praeger Special Studies in U.S. Economic and Social Development, prepared by Robert R. Nathan Associates, Inc., 1967. 3 Hearings before the Select Committee on Small Business, U.S. Senate, 94th Cong., 1st sess.. on "Small Business Tax Needs." February 4, 5, and 20, 1975.

Administrative Office of the United States Courts, Division of Bankruptcy, 1976.

"The New Forgotten Man." Irving Kristol, The Wall Street Journal. November 13. 1975. Reprinted in Congressional Record, daily edition, November 14, 1976 (remarks of Senator Nelson), p. $20080.

RECOGNITION OF PROBLEM AND RECOMMENDED ACTION

The scholars of different disciplines whose works are collected in this publication have observed and measured the decline of new, local, and independent enterprise in this country, and the consequent effects on our communities, our families, our individual lifestyles, and national substance.

From time to time, Congress has made legislative declarations recognizing the worth of competition and free enterprise in such statutes as the Employment Act of 1946, the Small Business Act of 1953, and the Small Business Investment Act of 1958. But such sporadic attention has not been adequate to the tempo of change.

The Small Business Committee has stated that "If we do not act soon, the economic (and political) freedom and diversity (represented by) small enterprise-which have been such strong and beneficial forces in our national success-will become part of American folklore." 6

Accordingly, the committee's most recent annual report has called

for:

a national policy-in each branch and on every level of government— that will make small businesses more visible, give them higher priority, and preserve traditional small business values."

8

To develop such a national policy, the committee and the Senate proposed, by way of a Senate Resolution, that President Carter convene a White House Conference on Small Business. Such a conference could give America's independent entrepreneurs, including its family farmers, an opportunity to place before the Government-in a forum that would command attention-the problems that are troubling them and undermining the enterprise system.

Such a forum would be likely to possess sufficient scope and prestige to encourage the best minds, in the many disciplines which are involved, to systematically identify and analyze the problems of small and independent enterprises and the conditions needed to make them thrive again.

The most recent Presidential level study of small business was in 1956, with Arthur Burns (then chairman of the Council of Economic Advisors), presiding. Its deliberations and model reports (documents Nos. 18A and 18B) laid the basis of significant legislation such as the Small Business Tax Act of the same year.

This Committee has offered to do all it can to make such a White House Conference a success, and hopes there will be an affirmative response on the part of the executive branch which would make this event possible.

The Small Business Committee has also offered to share its many years of intensive research in the area of taxation with policymakers in the White House and the Treasury Department in the hope that the Administration's tax reform proposals and the resulting legislation to be considered by the 95th Congress may be a vehicle for "tax reform"

"A Glorious Past and Uncertain Future," Senator Gaylord Nelson, NAM Reports, Vol. 21. No. 18, December 1976, p. 8.

7 Twenty-seventh Annual Report, loc. cit., p. 3.

Senate Resolution 105, Approved by the Senate on March 28, 1977.