Big Government vs. Small Business in America

Welcome back to Radio Rothbard. I'm Ryan McMacon, Editor-in-Chief at the Mises Institute.

Visit us online at miscs.org.

In this episode, I want to leave you with a lecture I delivered at our Mises Circle event

in Oklahoma City a few weeks ago.

My talk was on the small business economy, the decline of small businesses in America,

a little bit about the history of that part of the economy and some on small business people

as a distinct socio-economic group, as well as the politics of small businesses to some extent.

But I really also want to look at the issue of how much of the decline in the small business economy

is due to just natural private sector evolution in the economy and industrialization

and how much is due to government intervention.

How much is due to the state basically creating the conditions that have caused small business to go into decline?

So, I hope you enjoy it.

Yes, so to get things started, we would look a little bit at the economic history of small business.

Now, small business is not synonymous with entrepreneurial behavior,

just being a small business person does not make one an entrepreneur.

But certainly there's a significant amount of overlap between the two groups.

And so in looking at this group and maybe just touching a little bit on the social and political significance of this group as well,

get some insights into some of the political barriers to small business,

which gives us insight as well into barriers to entrepreneurship,

as well for getting these businesses off the ground and for engaging in real competitive behavior against established firms.

This works together in this interesting milieu of government regulation, lobbying and economic growth,

which we see a lot of this at work in the small business world.

And small businesses don't get mentioned nearly as much as large firms, large industry,

that alone government action as well. But occasionally they pop up in the narrative,

and certainly they get mentioned at political rallies and stuff, right?

And people want to mention all the things they're doing for small business.

But what we find in the course of our research is that there's really not that much of a focus there.

And it's hard to even define good histories of the topic because scholars don't talk about it as much either.

But for example, we see it gets mentioned toward the end of 2025, for example, Bloomberg covered the topic.

They looked at where the small business economy was heading in late 2025,

and they said that, quote, the prosperity gap between big and small business was getting bigger.

Quote, economists note a divergence between the fortunes of small and large companies,

with small businesses struggling and large companies seeing relentless profit and stock gains.

So in many ways this recent trend in which the small business economy falls behind the big business economy

is a reversion to what's normal really over the last century.

It's not that the small business economy is ceasing to exist, that you can't make any money in it,

but that it's not growing nearly as quickly as the big business economy.

So what you have over time is a decline in the relative importance of small business compared to larger business enterprises.

So I say this is a return to normal then because that has been the trend since really at least the 1920s and maybe even the 1880s.

And it's just a well established historical trend at this point.

And it's a difference from the earlier part of the United States in the 19th century as the United States was slowly becoming an industrialized country.

In the 19th century, for example, the overwhelming majority of Americans worked for themselves either as farmers or in the retail and service sectors within small businesses.

But throughout the 20th century this changed and fewer and fewer Americans proportionally speaking relied on small enterprises to earn a living.

This leaves us with the question of whether or not is a true market free market phenomenon in which the result or is it the result of government intervention that is

as a small business declines and its importance is this markets that are driving this or is it some sort of government intervention.

The short answer to this is both, which is unfortunate from a researcher's perspective.

There's no easy, obvious answer.

So we then have to identify what are the different trends at work on this same process.

Certainly from the point of view of consumers and markets, the value of a firm of any size is found in how well it serves the customers while profiting the owners.

In some sectors, small enterprise can do this better, but not in other sectors.

So in a free market environment, large firms can certainly develop.

And from the point of view of sound economics, a small enterprise is not necessarily any better or worse than a large enterprise.

But what concerns us here is developing a framework for identifying the difference in growth and dominance of large enterprises in terms of what are the causes.

And to what can it attribute this change?

So if we want to find some good business history on small business, there's actually not that many sources.

Certainly it seems that the expert on this is a researcher named Mansl Blackford.

He has a book called A History of Small Business in America, which unfortunately ends around 2000.

So we have to look to some other sources for that, but you will find if you start researching the topic of the history of small business, there's just not that much.

If you think of all the countless books written about big industry and its history and its interactions with the regime over time and space, it's enumerable the number of articles and books that you can find on this much, much smaller when we're talking about small business.

But Blackford notes that throughout the 18th and 19th century in the United States up until the 1880s, which was an important inflection point, the overwhelming majority of Americans either owned a small business or worked in a small business.

Contrary to some caricatures of American farms during this period, few American farmers were subsistence farmers, only the people in the most remote areas away from any sort of transportation to market were subsistence.

So perhaps 75% of farmers produced for the marketplace in the 19th century, meaning that most farms were also small businesses.

This is a distinction that Blackford makes is these people were producing for market. Yes, some of it they grew for their own families, but most of all they were interested in interacting the marketplace.

In this also in most cases meant that they were entrepreneurial in nature in many cases, they were interested in expanding their market share, interested in increasing the value of their farms.

They thought in longer term in terms of not just getting crops out of their market today, out of their farm today, but how would the value of their farm be 10 or 20 years from now.

That was the sort of thing that did concern farmers in this period. Blackford writes, in the years before 1880s small business assumed myriad forms in America's merchandising, farming, manufacturing and service industries.

Small businesses were the norm in most fields of endeavor with single unit non bureaucratic firms dotting the American landscape.

Only in the 1880s and later was the dominance of small business challenged by the rise of big business in some fields.

Those who did not own farms were also in small business. They were artisans that have skilled workers, many of whom own their own tools and shops.

So there was a level of capital investment there as well. They weren't just showing up somewhere and collecting a wage.

Merchants were a key group, of course, very important in moving goods around. And there was a growing sector of small manufacturers as well.

The economy of small enterprise propelled an impressive economic engine during the 19th century from 1839 to 1859, the US per capita output rose by an impressive one third.

It continued to grow into the late 19th century as well. So there's plenty of growth there did not require necessarily large manufacturers, although that arose naturally in many ways through market processes.

With the rise of larger industrial enterprises, however, the centrality of small business in the economy began to decline.

After the 1880s, both small business and big business continued to expand, but small business began to decline proportionally.

By 1904, corporations, a legal structure used almost exclusively by large firms at that time, accounted for three quarters of America's industrial production.

During the early 20th century, the United States increasingly was a home for large vertically integrated firms that operated more than one plant.

And that was an important distinction between small business and large businesses.

You did have manufacturing small businesses, but it was usually just one plant, one place where production took place.

The larger firms had a multitude of locations and structures where they would produce things.

In 1923, at least one third of the nation's workforce found employment in these multi-plant companies.

So this trend really starts in the late 19th century, but we start to see it really flower after the 1920s, and then it's accelerated by war as well in many cases as we will see.

As Blackford notes, right, farms were small businesses, and many farmers were entrepreneurial in their thinking and outlook.

And he notes that between 1945 and 1974, 4.2 million more Americans quit farming than began in it.

In the 1960s, alone some 600,000 independent family farms disappeared.

In 1920, about 27% of all working Americans were engaged in agriculture by 1945 only 14% by 1973 was down to 4.5%.

He says, the post-war decline in small-scale farming had its greatest impact on farms of fewer than 260 acres.

And from 1950 to 1983, average farm size more than doubled from 200 acres to 450 acres.

So there was a significant change here in farming, not just in the non-form sector as well.

During the 1920s, America's transformation into a consumer-based economy accelerated.

This created opportunities for manufacturers of consumer goods to expand as in automobiles, electric stoves, radios, etc.

But this also created new opportunities for small business in terms of services, logistics, distributing goods, in ways that they had not had the opportunity to move into those fields before.

Nonetheless, large enterprises continued to grow relative to small business establishments with more than 250 workers, employed 46% of all wage earners in American industry in 1945.

And that increased to 56% by 1937 and only increased after that.

The total number of self-employed non-form business people in America declined steadily from 1950 to 1972.

From 1950 to 1997, small companies plummeted from 52% to a scant 29% in terms of overall receipts that they received as part of the productive economy.

And this continues today.

In a 2024 report from the Small Business Administration, the authors note that small firms receipts have been on a general decline since 63.

Small firms collected 56% of all receipts in the U.S. economy back then.

And today it has gone down by 20 points down to 35.

So it's a significant drop.

Also, the more over the small business share of GDP has been declining, although by not as much the small business share of GDP fell from 48% in 98 to 43% in 2024.

What you see here is a slowing of the trend, a real drop off from the 30s, 40s and 50s down into the 70s, 80s and 90s.

And since about 2010, the decline continues but not as rapidly.

And even since COVID, there has been some talk about, oh, there may be there's been a small business revival since COVID.

You saw a lot of those articles in 2020 and 2021, especially coming back after the COVID lockdowns and a lot of these disastrous policies for small businesses.

And there's a lot of talk of, hey, look at all of these new startups that are taking place, has a lot new entrepreneurial small business activity.

But since then, that talk has really died off.

Because in 2020, 2021, after printing about $6 trillion that then flooded the economy, there are a lot of people decided to start businesses.

But then came 2022 with 40 years highs in inflation.

And inflation makes things very difficult for small businesses trying to get larger.

And so you don't hear that much about how great small businesses are doing over the last two years, versus 2021 and recent research from JP Morgan, for example, shows that,

quote, revenues in most cities have struggled to compensate for increased inflation in recent years.

And that's specifically referring to small businesses.

So there's a small businesses encountering a lot of problems here in terms of just keeping up with larger enterprises.

And this follows that older trend.

And I quote all of these stats just to really drive home that I'm not saying that small businesses are disappearing.

But it's clear that they are facing structural problems that large industry is not facing.

And so let's look at some of those.

Now, before we do that, let's just note some of the advantages of business, of bigness so we can, so we know what are some of the true market factors in industry getting larger.

We can't say everything is due to government intervention.

So why does large business develop?

Many of these reasons come out of the natural evolution of market economies in the presence of industrialization and growing infrastructure.

So for example, when the United States lacked robust transportation infrastructure, it was difficult for any single firm to forge a large customer base across a vast geographical area.

So outside of goods suitable for export, this meant that most of the goods and services should be selling would be at a relatively local level.

So this prevented the formation of large firms, especially these large mega firms that you know about today.

The provision of services tends to be limited by communications technology as well.

And that was certainly limited back before 1920s, especially.

But improving in these areas will open these areas to new markets in competition.

And the most successful firms will tend to then dominate in larger areas, paving the way for larger firms.

And the formal corporate structure of large firms also tends to give larger firms a longer life.

If for no other reason than the fact that smaller firms often cease to exist when the original founders retire or die, that's your larger firms are able better able to perpetuate themselves over time.

And this brings advantages as well, both in terms of borrowing money and in just attracting capital.

So those firms that are able to grow into larger markets are then able to take advantage of economies of scale, which of course usually comes up when we're talking about large firms and their benefits.

This is true in both agriculture and industry, as well as in retail, where vertical integration and the ability to warehouse and move large numbers of goods is a clear advantage.

Large firms, especially in large public and large public companies, usually can access more resources and with more ease through corporate bonds, stock sales and other methods that smaller firms generally cannot take advantage of.

So loans that relatively low interest rates tend to be easier to get when you're large firms as well, because partly due to their permanence, the more sophisticated record keeping and so on.

But size does not bring advantages in all sectors, the service sector, especially has been a stronghold for small businesses since the early days of industrialization food service, of course, remains dominated by locally owned small enterprises, historically law firms, medical offices, accountants, other services in the professions.

These have tended to be provided at the local level by smaller firms. Sales and brokering in real estate and insurance are generally small and local as well.

Even in manufacturing and retail, experiences shown that small firms have been able to hold their own against larger enterprises through specialization in niche markets.

This is especially true when you think of how some small firms, for example, true value in Ace Hardware, these franchisees that are able to stay in business even when they're located near a Home Depot or a Lowe's.

This is because they found a niche market that's a more service-oriented type of shop.

They have the product they're offering is a little bit different from what is being offered by a giant big box store.

So that's just an example of using innovation to give a small business something different to do so they're not directly competing.

So this all helps us understand why small business is not going to just simply disappear.

But there are government things that are going on, there are policies that are affecting this.

And we have to make note of those as well so that we can be aware of the fact that we can't just say, hey, small businesses are losing ground because big business is more efficient.

Well, it is efficient when it's a product of market action. It's not efficient when it's a product of government policy.

So there are very real advantages for large enterprises that we've seen, but government action is crowding out small businesses in many ways.

So in a broad sense, the mechanism by which governments create an artificial bias toward bigness has been described by a number of classical liberal political theorists over time.

These include the liberals who best understood the ways that certain economic interests are able to capture government institutions in order to suppress free market competition and to engage in what Frederick Bostia calls legal plunder or spoliation of the public in order to favor certain established economic interests.

The concept is further explored through the work of radical free market liberals of the French liberal school, Bostia, Compte, Gustave de Mollenari, but also the American Jeffersonians, followed by William Graham, Sumner, for example, who gave us terms like plutocrats and plutocracy, or we have the work of Alfredo Pareto who uses the term Pluto democracy.

These are all used to describe alliances between government and big business to exploit the overall tax paying competition, but also to exploit small business owners as well.

Now, certainly one of the earliest American theorists to talk about this was John Taylor of Caroline.

He was a true economist and wasn't concerned primarily with things like federalism, but was looking at how different groups of property owners interact in the presence of a state.

And he broke it up into two competing groups that he saw as in conflict and you had the farmers, not necessarily the small farmers, but your medium-sized farmers as well and as well as big farmers.

And then you also had your artisans, people that Taylor called mechanics, these were people who were then being exploited by people he called stock jobbers and the paper aristocracy.

These were often manufacturing firms, large merchants, other major national interests that were more connected to the federal government and they were exploiting their competition through the central bank, also especially through tariff policy and through federal subsidies as well.

And those are the same factors that are used today to advantage certain industries at the expense of others and we'll look at that as well.

So since the very beginning there's been an awareness of this by Americans, especially among Jeffersonians, but by later people who we would generally consider to be the more radical classical liberals were aware of this exploitation process.

And that loosely speaking you could group certain industries and certain groups of people onto one side, the exploiter side, and then the victims on the side that was being exploited.

Now we can even see this persisted even into the late 19th century.

So even in 1893 when Grover Cleveland is giving his second inaugural address, he talks about how Americans need to learn to refuse to exploit the taxpayers to support certain political interests.

And he says that if we finally can get to the point where we refuse to use the government to quote and quote support the people, unquote, then what he says is quote this leads to a refusal of bounties and subsidies bounties being essentially policy that that helps certain groups, so tariffs government spending as well as subsidies and that this all burdens the labor and thrift of a portion of our citizens to aid ill advised or languishing enterprises.

In which they have no stake, these languishing enterprises he's talking about were what he saw as these larger enterprises that were reliant on tariff policy protectionism as well as subsidies and federal spending to stay afloat.

So if Cleveland had been president in 2008, instead of George W Bush, you would not have seen all of these bailouts, the buying up of trillions and mortgage back securities to keep large industry afloat at the expense, of course, of the holders of dollars and the taxpayers.

Now the tools used today then are not fundamentally different from what they were in the 19th century, it was still inflation regulation protection government spending that has not fundamentally changed in terms of these factors that are helping large enterprise at the expense of small.

So any policy that raises costs while reducing competition is going to tend to favor larger enterprises, larger enterprises are better able to endure rising prices through easier access to credit and are able to draw resources through a variety of means that is larger enterprise that more cushion against policies that raise costs.

This factors routinely acknowledged when legislators exempt small enterprises from costly regulatory policy, consider how example, how under the Americans with disabilities act, smaller firms that had a certain number of employees or fewer were exempt from having to fully implement the regulations.

It is known that these sorts of regulatory costs weigh more heavily upon smaller enterprises.

But of course that doesn't solve the problem, all that does then is disincentivize smaller firms from getting larger and from offering real competition against the larger existing incumbent firms.

Now as virtually all the early free market theorists like Taylor understood protectionism raises costs and not just for consumers of course, but for owners of small enterprise or anyone who is not in the protected groups.

And so certainly some small enterprise are involved in manufacturing and might benefit from protection, but most small enterprise are going to be involved in production of their own hundreds of thousands of firms today import goods so that they can produce things in the United States either for domestic production or for export.

And this raises the cost to all of those firms. We talk just we talk of tariffs in terms of oh well, so you can have to pay slightly more for some toy about on team or whatever.

This is extremely limited view of how tariffs work, tariffs raise costs on materials used for production by small businesses very frequently and so this will raise costs for those firms.

Now so we need to keep in mind all of these factors when we're trying to determine what is the real what are the real costs for small businesses that coming from the marketplace or is it coming from government intervention in the market.

And so anytime we look at production and in terms of cost being raised by tariffs anytime we look at tax structure anytime we look at regulation.

We need to be aware of that also central banking how is that a factor in there why are they printing money to buy up trillions of dollars of certain types of securities that help certain types of firms right with all of the bailouts too big to fail the very premise of too big to fail of course is the idea that oh,

there are certain businesses that we can't allow to allow to fail small enterprises do not get mentioned in that equation.

And then there's also something that needs to be considered as well and we can lump all of these policies into one thing called industrial policy which is by its very nature very anti small business anti small enterprise.

Industrial policy is making a comeback in America industrial policy is this idea that the United States government well any government should intervene to invest in certain chosen and selected.

industries and enterprises that are believed to be of strategic value tariffs fall under that as well we need to tear off these goods so that they're produced within the United States we need to raise costs on this we need to buy up portions of companies in the Trump administration has bought up amounts of large significant amounts of stock from 10 different large firms and continues to say that it's going to do more of that.

Trump has very much revived industrial policy in a much more explicit way than the last several presidents although of course it's never gone away and there's always been subsidies and there's always been that policy to some extent but now you hear a lot more talk of it in terms of well we need to support these businesses these technological firms steal we need to pour taxpayer money into these firms in order to get them to grow faster in order to develop in a way that we at the regime have decided is important.

The problem with a truly private sector economy is that could go in any direction you never know what is going what the consumers are going to determine is important and then you can have whole sectors go into decline disappear whole businesses can disappear because that's what the taxpayers want.

Or rather that's what the consumers want industrial policy comes says we don't care what the market is saying in terms of what should be produced in this economy we are deciding that we're geopolitical reasons determined by policy makers that we want these things to be produced that we want these companies to succeed.

So we see we find a lot of research in the literature showing that with industrial policy the government is deliberately trying to short circuit the market and its dynamism to take away from the consumers the ability to determine which sorts of firms get larger which firms are competitive so that we can say that hey look we're now producing these things in America and that's important for making America great and isn't that wonderful.

That inherently favors large firms when you look at the way that it is actually produced in real life yes in theory industrial policy could also funnel funds to some small enterprises but it never does and that's for a variety of political reasons larger firms having a partnership with larger firms is more politically advantageous you can point to these big firms that everybody knows about.

And says hey look they hired all these people because we poured government money into these firms hey look this these firms are producing those things isn't that great obviously what they're not pointing to is all the tax money that they took away from small enterprise in order to give it to these larger firms.

And then of course industrial policy overall is is basically on steroids in wartime where governments engage all the more so in focusing strictly on large firms weapons manufacturers the firms that we know we can partner with and squeeze out huge amounts of armaments or whatever other products it is that we want in a small period of time and we really don't care what the market wants from our production structure.

And so when we look out and we see the small business economy in light of all of those factors at work we need to really make sure and acknowledge that yes there are some factors that are market based but more and more as the United States doubles down on further empowering the central bank on more and more policies in terms of protectionism in terms of speaking of the US economy as if it needs to be a strategic servant of the regime rather than a freewheeling open ended market.

The market process that is going to tend to favor larger firms and cost small enterprise and just as a last thing to consider some people might say well why should we even care about small enterprise hey isn't the government becoming more efficient if it's lending itself more toward large enterprise which we see they can take advantage of economies of scale and all these great advantages well as we've just noted right some of that's unnatural some of that has really nothing to do with.

The consumer wants but there's a political dimension to this as well that I would suggest should be considered so all of the things that we would do that would help small enterprise we should do anyway terms of lowering tariffs lowering taxes lowering regulation getting rid of the central bank lowering government spending and getting rid of a government that primarily functions on war footing these are all things that cost small enterprise relatively and they're all things that are bad for the taxpayer as well.

But you also probably from a political and sociological point of view you want to make sure and foster some sort of middle class to have policies in place that create an economic system that is nothing but a proletariat on the one hand and a bunch of owners on the other which you could create with enough government intervention and we've certainly seen socialist states that are able to do this.

That's probably less than ideal and that's what you actually see in a lot of the discussions from the old classical liberals who tailor and the jacksonians they weren't just speaking economically they were also saying hey it's a good thing to have this middle class in there of people who are self rely and people who have these small firms who are creating their own communities that also tend to be more politically distinct from the regime.

A couple of benefits of this petite bourgeoisie if you will is two things to note survey data has shown one that just came out last year but this should be obvious but it's nice to have the data showing it small business people tend to be more anti government than wage earners.

And as the study concludes because they simply know the realities of government regulation and taxation they know how it affects people that's something we need to consider.

And the other side of it as well which is a little bit kind of humorous is the fact that small businesses are terrible at lobbying and getting favors from government.

So this is a whole class of productive people that are no good at turning government toward advancing them in terms of tax policy in terms of subsidies.

So what you end up with are people who are primarily focused on just reducing government power because they can't figure out how to use government power to benefit them.

So I would say just on a general political and social level you want to make sure and ensure that group doesn't disappear forever.

So those are just some things to think about as we talk about entrepreneurship today. Thank you very much.

Thank you for listening to this episode of Radio Rothbard. We'll be back next time with more so we'll see you then.

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