Sunday, April 20, 2008

A Stimulating Proposal

Suppose you're a municipality searching for ways to encourage and enable small business success in your community. What type of incentives should you provide? To whom should you offer them? You can't answer these questions without an understanding of the role of the small business in the economy.

First of all, you have to understand what makes a market. Transactions take place when I have something that is of more value to you than it is to me. For example, I have a marble handled widget polisher. In my opinion it's worth $1.80. In your eyes it's worth $2.20. I offer it at $2.00. A transaction takes place. Difference of opinion in regard to value is what makes a market.

Second you need to understand what types of businesses are necessary for the local economy and how you go about determining "what we need". Too often this is done in meetings or even public forums. Neither of which is more efficient than the market. It has been conventional wisdom that for a business to thrive, it must grow. However, as Doug Tatum points out in his book "No Man's Land", not all business models are conducive to growth. Some work better on a small scale. Indeed there are a number of businesses that have existed for decades that never have had more than a couple of people working them. Are they not valuable? How do you know? The fact that someone is making a living doing something is evidence in and of itself that the activity has value to the community. You cast a vote every time you buy something. You're saying "I like that" "Keep doing it".

Third you must look at how the small business fits into the overall economy. Large businesses need small businesses. Even big call centers need their carpets cleaned, their windows washed, they need phone techs, somewhere for people to eat lunch, office supplies and a host of other support products and services. These things cannot always be efficiently provided by other large businesses. In addition, the small business market offers a place for employees of large business to go when they decide it's time for something new. The typical large business has a few great paying jobs and a lot of not so great paying jobs. The supply of opportunity does not meet the demand. The small business market provides a venue for new ideas and innovation that may not fit the bill for the company someone is currently working for. The economy is not a big business vs. small business proposition. They work in tandem.

How can government help? Primarily by understanding and being aware of the principals above. Let's look at the marble handled widget transaction again. Suppose I were required to collect a sales tax, have a pre-sale safety inspection and file a widget sales registration for a fee. Now the price of the widget has increased by 50 cents, the "cost of commerce". Remember in my mind the widget was worth $1.80. For the transaction to make sense from my end I have to get more than $2.30 for it. But, in your mind the widget is only worth $2.20. You'd have to get it for less than $2.20 for the transaction to make sense to you. The transaction doesn't take place. The cost of commerce has squelched it. It is an obstacle to the free market. Governments interested in promoting commerce should focus on minimizing the cost of commerce.

Which businesses should be helped? All of them, and equally so. As explained in point two, the free choices of free individuals will determine which products and services are needed or wanted. The role of government in this dynamic should be limited to restricting products and services that are for some reason undesirable to the community. All legal entities should be equally enabled in the marketplace. No one needs a gaurantee of success. Only the opportunity to put forth their ideas on a fair playing field.

Finally, all decisions on creating a thriving market environment should start with the premise that every business is valuable. A business that employs one person is of great value to that person. If the market deems them unworthy, they will fail. You don't have to push them out or encourage them to take on a growth strategy that doesn't make sense for their business model.

In the short term it is politically tempting to tamper with the mechanics of the free market. After all, if a policy is implemented with your name on it and it leads to some measure of success, it can greatly further your career and your stature. However, the market doesn't respond well to tampering in the long term. One of the best things a municipal govenment can do to stimulate creativity and energy in the local marketplace is to understand and trust the free market and occasionally send a message to participants: "Thanks for participating. We're glad you're here. Keep up the good work." Then, just let the market do its thing.

No comments: