Monday, 11 March 2013

Dear Vince: small business creation can be chaff as well as seedcorn

The United Kingdom's economy is showing some signs of life. There's a strong set of attributes there, under the permafrost. Film, theatre, the arts, universities, aeronautics, computer games, animation, financial services - it's not a bad list of things that the British do well. 

And there are some positive indicators. Unemployment has been drifting downwards for many months. Inflation is likely to stay low, as I've explained elsewhere. Most commentators expect the UK to avoid a triple-dip recession... though I wouldn't count on that if I were you.

One number that you definitely shouldn't rely on is small business creation. The rapid rate of new business formation is often trundled out by Ministers desperately grasping for some straw in the economic wind - the Business Secretary, Vince Cable (above), did so on this week's BBC Sunday Politics.

But you know what? Any economic historian knows that this is nonsense. Throw lots of people out of work, as misguided financial and macroeconomic policies have been doing since 2007, and you'll get lots of people sitting around with lots of skills. Many of them will inevitably set up on their own, given low demand and not much call for their labour in the more traditional economy. Most of these new businesses will fail, by the way (especially in services) - something I hate to see, actually, but there it is. There's actually a very good article on this by James Foreman-Peck, an academic from Cardiff Business School, who taught me when I was a Masters student: it's called 'Seedcorn or Chaff', and it focuses on just this phenomenon during the Great Depression. Which is an inauspicious parallel, and the dynamics change all the time when you come to think about it, but there you are.

What we're seeing is the chaff cast out by the great growth-mashing machine of deflation. One that leaves people little option but to try to earn a little money in any way they can think of.

And all the while it'll be undermining the most efficient large-scale parts of the economy - preventing their reorganisation, their restructuring and their drive for better conditions among their workforces... which is not an unconnected ambition, actually, but that's a point for another day. Industries that do the real heavy lifting - like construction, which is still in real trouble, and might prevent us escaping the austerity fundamentalists' black hole for some time yet.

Small business creation may or may not be a good sign. But it isn't one of those green shoots we should be paying most attention to. Until we get properly positive growth numbers, all the man-in-a-van startups in the world will be like March snow in April. They'll melt away and leave little behind but the memories.

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