The Cult of the Small-Business Owner

Preliminary

In America, there has always been a sort of reverence for small business, an idyllic mental conception of the small-business oriented community. The local mom-and-pop shop, busy main-streets and downtowns of stores that don't belong to any chain. Your neighborhood-owned bookstores and cafes and so on. There are many causes for this fascination. Some people enjoy the "local culture" it brings out. For others, it is a reaction against the encroachment and apathy of big capital in all sections of life. There is as well the fundamentally reactionary urge to return to the past, to the "good old days", when America had a strong middle class. This itself can be traced to a current lack of the genuine qualities of life that people did enjoy back then: reliable, full-time employment; strong career progression; a stronger sense of community, family, etc.; and safety nets such as pension plans. For many people, this sense of nostalgia for an (often unlived) past is embodied in the idea of supporting the local "community", as if this is the basis to resurrect this past lifestyle. But ultimately, there is no point to supporting objectively worse business models to try and support "the community". This will not recreate the 1950's.

One such example of this veneration of SBOs is embodied in a 2010 piece published by Michigan State University's Center for Community and Economic Development, titled "An Assessment of the Economic Advantages of Shopping at Locally Owned Businesses".^[1] The paper itself is short, eleven pages in total, with many of the claims being defended with only a single paragraph of argumentation lacking any actual citation.

The opening paragraph, "Why Buy Local", brilliantly exhibits the fantasy that SBO-fetishists seek to actualize, acting as the thesis of this paper, all through a single quote by author of an unrelated work, Michael Shuman:

There are many points of critique to be levelled against this statement. But for now, the claims will be extracted, and then combatted. The general claims are as follows:

1. SBs use local resources sustainably
2. SBs employ local workers
3. SBs pay decent wages
4. SBs serve primarily local customers
5. SBs are less dependent on imports
6. SBs are controlled by the community rather than boardrooms

I. Local Resource Usage

The first claim of the small business owner that supplies his company from the community is largely misguided. For one, small businesses often utilize large-businesses to provide the back-end of their operations. How many local restaurants operate exclusively from local producers and farmers, versus buying their supplies from corporations like Sysco? How many small manufacturers buy their raw inputs from groups like 3M, versus their, what, local screw manufacturer? How many factories buy their uniforms from local tailors instead of Cintas? How many small offices and workshops buy their equipment and furniture from Uline, as compared to local artisans? How many small shops buy their stock from Amazon and other large wholesalers instead of the "local" canned soup factory, the "local" bagged chips factory? Many of these shop fundamentally cannot offer exclusively or even majority "local" goods, and so the idea that they rely on local supply chains is ridiculous. The most you will see in terms of local goods are small artisanal corners of trinkets: candles, soaps, and occasional woodcrafts and foods, tucked away among shelves of recognizeable, brand-name goods.

II. Job Creation

One of the paper proper's first statements talks about the role of small business in job creation. The paper cites small businesses as being "the largest employers nationally" at over 52%, which was probably true at the time of publication. However, as of 2025, that number has declined to roughly 46%^[2]. As another point, they state that small buinesses create two out of every three new jobs. So, presumably, two-thirds of the jobs would be working for small businesses. However, given that the actual employment rate is, as stated, less than half, it is trivial to deduce that many of the jobs created by small business are not lasting jobs. This would be backed up by the fact that, according to the Bureau of Labor Statistics, ^[3], the one, five, and ten year survival rates, rounded to the nearest percent, for small businesses are as follows:

While small businesses do emerge frequently, with 99.9%^[2] of businesses in America being small businesses, the failure rate for them for a significant timescale (10 years) is quite high. They are indeed great job-creators, but these jobs are often ephemeral. Moreover, the actual quality of these jobs for their workers is shockingly low. They pay lower wages on average (sometimes half as much) and offer less benefits than big busineses.^[4] Below are statistics from the BLS on the average (median unavailable) costs per employee for businesses, expressed as hourly wages or equivalent thereof.

Not only is it apparent that larger businesses offer better benefits, notably in terms of retirement, with a nearly 2.5x higher rate for large businesses, but large businesses offer higher base wages and salaries as well. The argument can be made that this is because these larger firms often are the higher-paying sectors that small businesses cannot properly exist in (e.g. banking, information technology). Even taking this into consideration, the total compensation is closer but still points towards big business being better for employees.

So while small business creates many jobs, these jobs usually provide nowhere near the same security, longevity, and general standard-of-living as jobs working for big businesses. Moreover, many labor protection laws have exemptions for small business. For example, the protections against discrimination by race, religion, and sexual orientation have exemptions for those businesses employing less than 15 workers.^[5] Employers with less than 50 employees do not need to provide protections under the FMLA for short-term medical or family leave.^[6], and COBRA is not required for those with less than 20 employees^[7], resulting in those workers who lose their job at a small business being left totally without medical coverage.

The article also describes how small businesses promote entrapreneurship. This is true. After all, big businesses generally start as small businesses. However, these businesses do not succeed by virtue of their being a small business, but by offering a better service than large businesses. In turn, these small businesses then grow to become large businesses and squeeze out the smaller competitors. Capital tends to concentrate. The fact that small business owners are entrapreneurs is not a reason to shop local. What is a valid reason to shop local is if the small business owner offers a better service than the chain.

III. The Community

The sorts of defenses for small business also draw strongly on cultural and national sympathies. There is a concept espoused by this paper, but by many other of the apologists as well, that small business keeps the money in the community. This is somewhat true, but it is very misleading. The paper shows a chart, explaining that 73% of money spent by small business staying within local communities, while the figure among large businesses is 57%. The money staying inside the community is, of course, shaded in green, so you know that this is a good thing, while money leaving the community is in red so we know it is bad. The graph is cited to "Civic Economics" and ultimately is sourced from a commissioned piece^[8] by the Grand Rapids chapter of Local First. There is quite obviously a conflict of interest apparent. Would the "Local First" group accept findings that are in favor of large business, or would they contract a different firm that gives more favorable results? This would be bad practice, but who's going to know? Some disclosures made are interesting, such as classifying a Meijer as a "local independent" grocer, despite being a chain with over five hundred stores^[9], leading to fairly unreliable data for many sections of the study.

Ultimately, their chart only shows a first-step in the chain of transactions. These small businesses are listed as losing about 27% of their money to "imports", that being supplies brought in from outside firms (e.g. Sysco, Amazon) rather than local firms. But the money that is paid to these local sources then become the working capital of those firms, who then must import goods, losing about 27% of their money, and so on. Listing small shops as keeping money "in the community", while they fundamentally require an import of goods and pass the remainder to various other shops that require imports of goods, is ultimately meaningless. A more useful metric would be tracking the net import/export of goods and services, as well as the net investment in infrastructure and construction by small businesses as compared to large business. This would be far more relevant as to whether the money stays inside or outside the community.

Besides this, the money stays inside the community, sure. But it is not as if all citizens of the town draw from a "community fund". As previously stated in section II, the owners are quite hard to part from their money in the form of wages and benefits to workers. So rather than the money "staying in the community" in the form of higher wages and better benefits, the money instead merely circulates among the clique of local shopkeeps and businessmen. The money does not stay in the community, it stays in the community of owners.

The paper also cites how local business owners donate far more in charity in proportion to sales revenue, in comparison to Wal-Mart. The source here is the Institute of Self-Reliance, who like the Local First group is obviously going to have their own biases. For instance, their explanation of the graph displaying Wal-Mart donating 4x less than "Locally Owned Business" is:

It is not that Wal-Mart donates 4x less than local busineses, but instead one singular business had donated, proportionally, $4,000 per $1,000,000 of its sales to charity. It could have made ten dollars in sales and donated four dollars, and the statement would be true. It is also stated that, in total, there were $24,000 in donations from eight local businesses, but the total in donations from Wal-Mart is not stated, only their donations as a proportion of revenue; the proportion of revenue that this $24,000 embodies is unstated. Overall, this graph and section, due to a lack of actual complete data, is pointless and uninformative. We are told the ratios between one select business and Walmart, and then the total donations only by the combined eight businesses surveyed.

The statement is later brought up in the article about chain retailers not actually bringing real economic growth in communities, as compared to small business.

This makes little sense. Yes, much of this money is sent outside of the community. But in turn, much of that money is then used to invest in new projects. A business that merely extracts money without expanding is a poor investment, and shareholders would rather invest in a company that pursues growth. As the saying in business goes, "if you aren't growing, you're dying". So while money is taken from that community, it is often spent establishing new branches in other communities, i.e. putting money into those other communities. As an example, when a chain like Wal-Mart opens in a town, there is quite a lot of money input into the community through construction contracts. So while passively, money is "drained" from a community, it is in turn also invested in communities to continue this circuit. This is the passive process of capitalism, and small businesses do the exact same thing, but on a much smaller scale. Extracting wealth from the general population into the hands of the business owners.

Moreover, the statement about a "sizable loss in [...] sales tax revenues" is a coded way to say that chains sell goods for cheaper. The employment loss brought by chains is quite lamentable for the workers. However, as explored previously, the jobs that are created are higher paying ones. Those who lose their jobs are in a difficult position, but they are often absorbed by other sections of the economy, which is continuously growing. A worker who is unemployed rarely stays unemployed for long, with the median worker staying unemployed for about ten weeks before finding work again.^[10] Regardless of this, we hardly hear complaints about the job losses related with the small-business failure rate, unless it can be blamed on large corporations for, in all bluntness, running a more efficient business model.

There is also a section describing how local businesses can fill niches that large businesses cannot. This is often true. But this is also because these niches are so small that they cannot actually support a large business. The ornamental gourd industry will never be big enough to support a Wal-Mart sized franchise, but it could support some local business owner in a large city. But this point is becoming less and less relevant as time goes on. According to the essay, local stores can offer more variety and goods better tuned to the needs of the community. But in the age of digital retail, Amazon offers the ultimate experience in consumer choice far better than any "in-tune" local business can provide.

And on the topic of online retail, 44% of small businesses sell online-only.[11] In this case, all arguments about local supply, keeping money in the community, and preserving local culture are totally irrelevant. Purchasing from online-only retailers does nothing to protect your local community even in an illusory way.

IV. Nationalism

Many of these calls for localization often use nationalist rhetoric. Defending American jobs, keeping money in our community, and so on. But this is fundamentally a strange attitude. Why should we defend American jobs specifically? Can the Chinese and Indians feed their families without needing a job? Why should the money be kept in our "community"? Circular economies do not exist, all economies interact with other economies. It is fantasy to believe that we can realistically keep money in our community.

V. Profits

The core of the issue with small businesses fundamentally is exposed in a small line in the paper, about how, as compared to big business:

Which seems to be a complicated way of saying these businesses charge more. One study^[12] found groceries being up to 54% more expensive in local shops as compared to supermarkets. Moreover, many large chains such as Target and Wal-Mart are able to offer private labels (Mainstays, Great Value, etc. for Wal-Mart), essentially cutting out the middleman of a wholesaler and offering far lower prices, versus a local shop who does not have the leverage of being a huge chain to cut deals with manufacturers and establish their own private labels. Besides this, large business can get bulk discounts, their own private distribution network, and other various advantages. At the end of the day, large business just does it better.

What this effectively means is that a town with flourishing small businesses, through paying lower wages and driving prices higher, will naturally suck wealth from their workers to their own clique. In return, the workers at these companies often are left unable to purchase the products for sale at these shops, leading to them instead turning to more affordable options such as Wal-Mart or Amazon. This then results in less business to these small shops, who must then raise prices to compensate for the lower volume, in a sort of death-spiral. Small businesses can only exist if they pay their workers high enough wages to actually become their customers. But given the high failure rate of small businesses, they often instead draw their money to themselves as a shield against market fluctuations. This protection paradoxically kills them, as their employees can no longer afford their goods. Local shops die out not because of some moral failure of the working-class, but out of the necessity inflicted by these middle-class small business owners. A local community of shops only really can exist if it is supported from outside, such as by a clique of high-paid salarymen working for some office or firm; these communities are only supported by money from the outside, contrary to their idea of "keeping money in the community". Money must be constantly imported to support this delusion of small business.

The nostalgia for the 1950's and the associated economic conditions is also fundamentally disconnected from the actually existing conditions of the present. American manufacturing was dominant because the rest of the world's manufacturing had been shattered by six years of world war. The decline of American manufacturing continued as these countries underwent recovery. The depression-era policies implemented under FDR (TVA, REA, CCC, WPA, etc.) established the infrastructure for rapid business growth and modernization, laying the groundwork for a great boom when economic conditions normalized. The war provided great business opportunities (disaster recovery is more profitable than disaster prevention) as well as the necessity of wartime production opening women to the workforce, granting a great surplus of labor -- a glut of labor drives down wages, in a basic supply-and-demand sense. The labor concessions granted by the government due to the militant labor movements in America especially in the 1910s-1920s, combined with the threat of Soviet ideological warfare, led to the creation of a well-paid workforce, giving the workers enough money to start their own businesses.

The middle-class "golden age" of America cannot be recreated merely by "shopping local" and "keeping money in the community". It was born of a specific set of historical, and critically global, material circumstances that allowed this system and lifestyle to emerge. Its decline is not some tragic and undoable accident, but merely the natural tendency of capital to accumulate within a smaller and smaller number of hands. The stories of JP Morgan, Rockefeller, and the entire history of the Gilded age are great proofs that the 1950's economic times were the exception, not the prevailing trend of the economy. Many of these pseudo-economists act as if the American economy did not exist prior to 1929. To believe that buying from a local restaurant, tobacconist, and grocer will bring back the good old days is pure delusion. Small business owners do not care about you. They are, at the very end of the day, business owners. They are in it for the money. Get real.

Do not buy from small businesses unless they genuinely offer a better product at a lower price. They are businessmen, they are offering a product. Sympathy and pity is not a viable business model. Do not listen to the rhetoric about the "community". If they really cared about the community, they'd pay the employees in their community higher wages. If you can buy the same or similar product from Wal-Mart instead of a small business for less money, buy it from Wal-Mart, Amazon, whoever. Buy from small business if it's better than big business, not out of "moral duty".

Citations

1. https://ced.msu.edu/upload/reports/why%20buy%20local.pdf
2. https://www.uschamber.com/small-business/small-business-by-the-numbers
3. https://www.bls.gov/bdm/us_age_naics_00_table7.txt
4. https://www.bls.gov/news.release/pdf/ecec.pdf p. 17
5. https://www.eeoc.gov/overview
6. https://www.dol.gov/general/topic/benefits-leave/fmla
7. https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/cobra-continuation-health-coverage-workers
8. https://web.archive.org/web/20111218154550/localfirstaz.com/studies/local-works/local-works-complete-study.pdf
9. https://newsroom.meijer.com/about
10. https://www.bls.gov/news.release/empsit.t12.htm
11. https://www.shopify.com/blog/small-business-statistics#ecommerce-small-business-statistics
12. https://pmc.ncbi.nlm.nih.gov/articles/PMC5580618/