Driving Up Self Employment Rates

While the political talk has turned from the 2012 elections to the looming fiscal cliff, the focus has become quite short term: What can Congress do to ensure the fiscal cliff is not reached on December 31, 2012?

The answer may very well be another round of stop gap measures to maintain the status quo, which helps Congress avoid finding egg on their faces, but little else. What we need moving forward is a way to generate tax revenues that will not inflict pain on households, and that can only occur in a robust economy.

The long-term solution would be helped, in part, by finding our way back to such a robust economy, but no one seems to have the answers. The jobs offshored over the past 30 years are not coming back, corporations are not hiring due to the present environment of uncertainty, and small businesses still find the going tough when they attempt to secure financing for ongoing operations.

But there is one alternative to regain employment; an option few seem to be discussing: driving up the rates of self-employment.

It won’t be easy, what with the massive loss of middle-income household wealth over the past few years, but it appears to be one of the few remaining options still alive. And self employment was the main state of economic activity for humanity until the late 19th century. The arguments are there in support of self employment.

John Locke maintained that the individual preceded the establishment of government; it should also be noted the individual also preceded the establishment of firms, or places of employment. Self employment is the natural state of humanity, thus individuals’ labor and the ability to provide for themselves and their families, becomes every bit of a natural right to the individual as the natural right to life, liberty and the pursuit of happiness. This is not meant to suggest that an individual is guaranteed successful self employment, but that anything external to the individual that impedes upon his or her efforts to establish self-employment activity is economic tyranny. This tyranny can originate anywhere from regulatory controls that assist multinational corporations yet impede small businesses, to the presence of monopolistic or oligarchic markets that act as barriers to newcomers.

During America’s Founding Era, the merchant, artisan and shopkeeper were held in high esteem, as were landowners: the yeomen (crop farmers), husbandmen (livestock farmers) and gentlemen farmers (landowners who hired hands to tend their farms). Typically, yeoman and husbandmen worked 50-acre farms. In this period, America’s republicanism stressed the role of the independent proprietor, i.e., the self-employed. In 1776, 87% of the working-age population in the colonies were self-employed.

Today, according to the Organization for Co-operation and Economic Development (OECD), that percentage is 7.5% in the United States; only Norway has a lower rate of self-employment (6.7%) amongst developed economies. Despite the entrepreneurship rhetoric to the contrary, the United States has a miserable track record for creating an environment that allows small business to flourish. Modern realities dictate we may never be able to return to an 87% self-employment rate, but we could certainly do better than 7.5%.

As far back as 1835, Alexis de Tocqueville could explain this state of affairs:

“Despotism certainly brings ruin to men, more by preventing them from producing than by taking away the fruits of their labors; it dries up the source of wealth while it often respects wealth once acquired. On the other hand, freedom spawns a thousand times more goods than it destroys and, in nations where this is understood, the people’s resources always grow more quickly than taxes” (Democracy in America, Vol. 1, Part 2, Chp. 5).

It is critical to understand what Tocqueville meant when he wrote “freedom spawns a thousand times more goods than it destroys.” The implications here are that the more independent proprietors an economy launches, the more economic activity this generates. The more economic activity generated, the larger the number of proprietors. With a multitude of proprietors, there are more individuals with the financial and market freedom to pursue interests. Thus, a society’s (not just an economy’s) knowledge base grows: This occurs when the business owner, working to keep his or her business alive, innovates in designing, inventing, managing, marketing, and so forth. The more these innovators populate an economy, the better the chances they will cross paths, pull together ideas, and the proprietors, the economy and society move forward. We never know how or when useful ideas will emerge, unforeseen and non-designed, unless we have independent proprietors with the freedom of doing things.

All too often we read or hear of the business owner who, while perhaps successful, laments past failures that hampered growth or even closed a business. While some of this may be the normal course of human learning, one can’t help but wonder if the few independent proprietors we have in the U.S. are too isolated from one another to truly ramp up the learning curve, and shorten the time necessary to learn how to overcome barriers and enjoy continued success. This can occur with low self-employment rates, since it increases the chance of geographical isolation.

Higher levels of self employment will help drive the establishment of local economies. When first approached with the idea of revitalizing markets using local economies, many quickly express disdain at the idea of returning to the past. No such suggestion is made here, as this is not some neo-Luddite plan. Jefferson used his vision of the agrarian society as an ideal – the independent proprietor, the landowner, operating a self-sustaining farm. Yet Jefferson’s vision was not backward or pastoral in nature; he simply saw the agrarian model as a metaphor for local-based economies. Jefferson did not begrudge the shopkeeper or the artisan, nor was he resentful of the manufacturer; in fact, he embraced the enlargement of manufacturing as hostilities between England and France severely impeded the United States’ trade with those countries. In his eighth annual address to Congress (delivered November 8, 1808), Jefferson underscored the need to establish our domestic manufacturing base:

The suspension of our foreign commerce, produced by the injustice of the belligerent powers, and the consequent losses and sacrifices of our citizens, are subjects of just concern. The situation into which we have thus been forced, has impelled us to apply a portion of our industry and capital to internal manufactures and improvements. The extent of this conversion is daily increasing….

He did, however, cast a wary eye towards unmitigated commercialization, seeing it as a means by which wage labor would increase rapidly and, as a result, become a threat to individual liberty.

Jefferson’s economic model based on the independent proprietor was not antiquated but rather progressive, as it was inclusive of a wide range of entrepreneurial endeavors in rural and urban areas. It did not depend on inherited wealth or advantageous educations, but on the skills and industry of the individual.

The individual, endowed with a calling or passion, established a sense of dignity within one’s self and within the community. “I am the village baker,” or “I am the county’s blacksmith” may seem quaint, but these statements burst with a sense of identity, with a sense of passion, with a sense of pride and meaningful self-esteem (as opposed the veneer of self esteem we create for ourselves today by what we are able to accumulate), with a sense of “I have established a place for myself under the sun.”

When developing their economic writings in the 18th century, Adam Smith and David Ricardo envisioned multiple, small, entrepreneurial producers contending in competitive markets, not large, powerful producers – few in number – operating in monopolistic or oligarchic markets.

“The real and effectual discipline which is exercised over a workman, is not that of his corporation, but that of his customers. It is the fear of losing their employment (i.e., business – ed.) which restrains his frauds and corrects his negligence. An exclusive corporation (i.e., a monopoly or oligarchy – ed.) necessarily weakens the force of this discipline.” – Adam Smith, The Wealth of Nations, Book 1, Chp. 10, Part 2

A monopoly may command a market for a short while, but no one and no entity – in free and open markets – has the right to grant or aid such a monopoly. And so it is today. It is at the local and regional levels that free and open markets work, multiple producers competing within. Large, opaque transnational markets not only lack accountability, they increase the likelihood of monopolistic or oligarchic formations, aided by governments. The competition within truly free markets would not allow the formation, or at the very least the longevity, of monopolies or oligarchies.

The local economy, as Jefferson envisioned it, answered John Adams’ inquiry as to how we keep unbridled greed in check: A local economy provides for our needs, but does not necessarily lavish us with our wants. A local economy trends towards balance, bringing a desired moderation to all things. The local economy tempers the amplitudes of economic boom and bust cycles. A local economy doesn’t signify a lesser quality of life; it changes our idea of “quality of life.”

At the local level, small businesses become more transparent, making it difficult (though not entirely impossible) to be dishonest or manipulative in transactions (see Smith’s quote above). Trust is therefore established in the marketplace, and it is trust that we sorely lack today.

Joseph Schumpeter, however, weighed against local economies being able to survive (from his summary at the end of Chp. 7 in Capitalism, Socialism and Democracy):

In the case of retail trade the competition that matter arises not from additional steps of the same type, but from the department store, the chain store, the mail-order house and the supermarket which are bound to destroy those pyramids (a reference to an earlier discussion on the evolution of local retailing – ed.) sooner or later.

to which Schumpeter added this footnote:

The mere threat of their attack (i.e., the large retailers – ed.) cannot, in the particular conditions, environmental and personal, of small-scale retail trade, have its usual disciplining influence, for the small man is too much hampered by his cost structure and, however, well he may manage his inescapable limitations, he can never adapt himself to the methods of competitors who can afford to sell at the price at which he buys.

Schumpeter, unfortunately, had his eye trained only on the price tag, a very narrow view indeed. For behind those low prices at the big-box retailers we find massive losses of American jobs, employees of those retailers receiving substandard wages and benefits (particularly healthcare insurance), overseas sweatshops hidden from view, farmers dependent on a government subsidy program (in the case of food products), a depleted manufacturing base and diminished lives. Those low prices carry a high cost for the American economy, and for Americans. “Concentration is cheaper,” Wilhelm Röpke recognized in The Humane Economy, but it comes at a dear cost when it opposes decentralization by placing the economic before the individual.

Prices, under local economies, may indeed rise, as could incomes. However, as a local ecosystem, the local economy reduces the obstructions that naturally temper inflation. In part, this would be accomplished by the competition from very large-scale retailing of which Schumpeter speaks, as well as by another competitive variable of which Schumpeter had no knowledge: the Internet. And although Schumpeter was dismissive of the local retailer’s efforts to provide service, this is precisely the point at which proprietors of any firm – not just retailing – can outmaneuver larger competitors. For anyone who has engaged the world of business, he or she knows all too well that finding knowledgeable people, displaying a passion for their business and customers, are rare.

In the other part of this discussion, local economies act as fire stops. Inflation can rise only as much as local buyers are willing to spend. If prices reach too high of a level, buyers can seek lower prices in another local economy, particularly for items not demanded on a regular basis (higher ticket items, for example). Local buyers, however, would tend towards supporting local businesses first, because this support in turn reinforces the local buyer’s livelihood.

In addition, pragmatism will dictate that in our era of scarce energy, decentralization of economies will become a necessity when energy costs increase precipitously. As this occurs, large retailers will no longer be able to retain their low-price strategies. Globalization works only when cheap energy costs exist, and that era is coming to a close.