Small but Mitty

The trailers for Ben Stiller's Mitty (which looks pretty awful, in truth) remind me that the irresistible rise of Grant Shapps to the heights of Conservative Party Chairman has been one of the more amusing sub-plots of the coalition government. The arch-fantasist has become the champion of small capital, not to mention the hammer of Labour and the BBC. If you wanted to construct a fictional dodgy-dealer - part Arthur Daley, part Kim Dotcom - to give the small business sector a bad name, then you'd probably reject Shapps's history of inept content-scraping, sock-puppetry and multiple pseudonyms as way too implausible. Though he escaped prosecution for fraud, he is clearly an unscrupulous idiot with a cavalier attitude towards the truth. He makes the delusional psychosis of Jeffrey Archer, a former Tory Chairman, appear almost benign.

Shapps's fast-and-loose style is in evident in his latest thoughts on the positive role of small businesses, where he expands on the traditional myth that SMEs power the economy (they don't) to claim that they are also the facilitators of social mobility: "[it is] flourishing businesses – the opportunity of owning, running or working in one – that ultimately help people to escape the circumstances of their birth" (that use of the cliché "circumstances of their birth" had me thinking fondly of the Master of Granchester). In support of this bold claim, he refers to a World Bank study that links "the rise of small business ownership among women in India with greater legal and political rights" and also points to Eastern Europe, "where small firms are repairing the damage left by decades of socialist stagnation".

No link is provided for the Indian "study", though it is likely (if it exists) to relate to the growth of micro-finance. Though this can provide the seed-corn for a new business, most loans are used for consumption - i.e. this is mainly micro-credit rather than capital investment. The growth of the Indian economy over the last thirty years has been powered by globalisation, beneficial demographics, and improvements in productivity. Flourishing SMEs are a consequence, not a cause. The claim in respect of Eastern Europe is simplistic, ignoring the existence of small businesses in Hungary and Yugoslavia before 1989, as well as the mixed economic record since. The reparative contribution of SMEs in Russia in the 90s was negligible, in the face of oligarchic looting, while the story of the former GDR is of West German corporations buying up and often dismantling large businesses, with the countervailing growth of SMEs dependent on state-directed investment, notably via the KfW development bank.

Shapps's fairy story also ignores the reality of how small businesses are formed. While some skilled workers are able to translate their experience (often acquired working for a large business) into self-employment, this rarely leads to the employment of others. 75% of the businesses in the UK in 2012 had zero employees (see table 1, page 3). SMEs with employees tend to require working capital to start and grow, which immediately gives an advantage to the already wealthy or those with access to credit (i.e. possessing assets for collateral or having guarantors). The stirring tale of "entrepreneurs and inventors who work all hours in their own garage [and] ex-apprentices who start out with a mobile business" is a consoling fiction for wage-slaves. Most SMEs fail, and those that start without premises or in a garage tend to fail faster.

To be fair to Shapps, even Labour MPs are suckers for tales of the little guy beating the odds: "There are countless examples of working-class people climbing a ladder of opportunity through high street businesses that have gone on to become international success stories". They seem unable to understand that once a business expands it denies market share to others. An "international success story" is usually a chain store that drives out local variety. This is not necessarily a bad thing - so long as the better drives out the worse - but it does not grow the population of successful entrepreneurs who started out as market traders, it actually shrinks it.

Small businesses are inherently inimical to social mobility, if viewed from the perspective of someone seeking to advance from the working class to the middle class, though they can provide a route for progression through the various levels of the middle class - i.e from the petit bourgeois to the bourgeois, in classical terms. A talented working class kid is more likely to progress to the middle class by working for a large company, e.g. by reaching middle management or a professional role, than by working for or founding a small business. The great enabler of social mobility in the 1945-75 era was the expansion of the public sector.

At times, Shapps's chutzpah can only be admired. For example: "Businesses create every penny of the wealth we need to pay for our nation's schools, our NHS and our pensions". The obvious rejoinder is that wealth is created by people, i.e. workers, not by businesses. Businesses create nothing, because that is not their purpose. Their function as legal entities is to distribute wealth. This is why company law deals with shares, dividends, limited liability, and social obligations such as tax and externalities like pollution. This is not a pedantic point. By privileging businesses (wealth distributors) over workers (wealth creators), we privilege business owners (capitalists) who are in a position to secure the lion's share of profit.

Shapps ends his eulogy thus: "Conservatives don't love business for some abstract reason. We love it because of what it offers our children. Hope". If you substituted "inheritance" for the last word, you'd have a more honest statement of the Shappsian worldview.