A THEORETICAL FRAMEWORK FOR SMALL BUSINESS POLICY
Authors: Berney Robert E. , Owens Ed 
Published: September 2005

A number of public policy issues have been discussed in this article, the most important of which are:

1. Small business would not need special consideration if our economy were basically a competitive one.

2. A large and growing segment of our economy has sufficient market and political power to make our economy basically non‐competitive.

3. Small firms tend to provide price competition, to lead in the development of new products and processes, and to generate new innovations and new employment.

4. Government policy tends to create artificial economies of scale, giving an unwarranted advantage to the very large firm.

As a first approximation, a policy of government neutrality on firms of varying size is needed. But, because of discriminations which already exist which favor large firms over small firms, special small business programs may be necessary to provide an equitable policy base.

Unfortunately, programs designed to benefit all business, like the investment tax credit, tend to primarily benefit larger firms (Berney, 1979). This is the case for two reasons. First, there is a basic difference in production relationships: large firms tend to be more capital intensive and small firms more labor intensive. Second, the more complex a rule or regulation, the more costly it is for small business to use it. Consequently, even the employment tax credit, which should benefit the small firm is not used by them. Instead, it tends more to benefit the larger firm.

Neutrality, as a governmental policy, would appear to demand different treatment for firms of varying size. As an example, the “regulatory flexibility” concept applies different standards to different sized firms so that the burden of regulation is more equitably distributed. The concept of encouraging or requiring financial institutions and other lenders to establish “dual prime rates” is a further example. Since small firms appear to have much higher debt to equity ratios and rely more heavily on shorter‐term bank credit, they are more heavily burdened by a tight money policy which forces increases of interest rates. Thus, dual prime rates help to spread the burden of rising interest costs more equally.

As many people prefer to work for themselves, equalizing the burden of government policy could only serve to increase the basic growth rate for small business, thus providing an easier start for entrepreneurs and would encourage a more rapid rate of economic growth.

None of these discussions, however, argues that small business should be protected from failure. The more efficient firms will succeed and prosper, and the least efficient will not. Many currently successful entrepreneurs learn how to improve their production processes or managerial skills from their failures.

What is being recommended as a first step is that government should concentrate on equalizing burdens and benefits in order to achieve true neutrality. If private economies of scale do indeed exist, new firms must grow to survive; what the government should not create are artificial economies of scale with public policy.

A strong argument for further action can also be made: it appears that significant external benefits are produced by an economic system with a dynamic small business sector. Since these benefits go to society as a whole rather than entrepreneurs alone in the form of increased profits, a freely operating market without government assistance does not generate as many new small businesses as would be optimal for our society. To internalize the benefits that come from small business, governmental programs need to be devised to increase the rate of return on new, innovative small businesses. Should this happen, we could then anticipate increased rapid rates of innovation and technological change, more rapid rates of employment growth, expanded price competition in all sectors of the economy, and improved export capabilities, in short, true flexibility in our capitalistic system.