If we as a nation truly believe in entrepreneurship the very thing that made America an economic success we need to proactively encourage and provide help and incentives to small businesses.
For some people... the local mall or big box retailer or superstore is an important part of their social lives. They get exercise by walking up and down the aisles, greet friends they see only there, and have a special and often inexpensive meal. They notice what’s on sale and what’s new in stock, making both intentional purchases and the occasional impulse buy.
In a way, a mall or superstore is like a small town’s downtown. Instead of a library, there’s the bookstore where you can browse books, thumb through magazines, and read today’s newspapers. Instead of the old corner coffee shop, there’s the food court. Most of the retail categories in a traditional downtown area are represented, from the clothing stores to the drugstore to the optometrist. The mall has its own police force and its own street-
sweepers and maintenance crew. There are even sitting areas—the equivalent of the old parks—although they’re usually lacking in squirrels and pigeons.
Shopping malls and bigbox retailers are so much like downtowns that in most of the world’s suburban communities where they exist, they’ve replaced the downtown areas of previous centuries. From the outside it looks like a change of location and style, but not one of great significance. So people now shop at the mall instead of downtown. So what? Isn’t it just one business replacing another? Isn’t that the way of commerce?
Well...no. It’s not the same thing.
The Local Money Recycling System We Lost
There is one huge difference between a mall full of chain stores or a bigbox retailer and a downtown area full of small businesses, and it’s a difference that is destroying local communities on the one hand and creating mindboggling wealth for a very few very large corporations on the other. Here’s how it works.
When I shop in downtown Montpelier, Vermont, and buy a pair of pants, for example, at the Stevens Clothing Store on Main Street, at the end of the day the store’s owner, Jack Callahan, takes his proceeds down to the Northfield Savings Bank and deposits them. From Stevens, I walk next door to Bear Pond Books and buy today’s newspaper, a magazine, and a copy of Thomas Paine’s Rights of Man, a book that is as fascinating today as when it was first written in 1791. At the end of the day, Bear Pond’s manager, Linda Leehman, will take my money down to the Chittenden Bank and deposit it. From Bear Pond I go to one of the dozen or so local restaurants and exchange some of my cash for a good meal. At day’s end that cash, too, will end up in one of Montpelier’s local
The next day Montpelier’s banks are richer by my purchases, as are Stevens, Bear Pond, and the restaurant. If my daughter the Web designer wanted to start her own design firm in an office on Main Street (or from her home), she could visit one of those banks, and, if her credit was good, they could loan her some of the money that was deposited with them the night before from the townspeople’s purchases.
If her work is good, Stevens or Bear Pond or the restaurant may decide they want to hire her to design their Web site, using the profits they made from my and others’ purchases to pay for her work. She’ll put her money into the local bank, increasing its deposits available for local lending. Thus, by keeping money within the community, the community grows. This is how communities in America and most of the rest of the world have historically grown.
In the process of patronizing local businesses, people get their social and exercise needs met by walking into and around in downtown areas, and they contribute wealth to the local community, which eventually recycles back to them in the form of an improved quality of life, local taxes for local services like schools and police and parks, and a thriving entrepreneurial environment. That’s a healthy local economy.
The Out of town Money Vacuum
Consider, though, if my shopping trip had been to a mall full of chain stores or to a national superstore. Strict management of cash flow is the name of the game for such businesses, and some of them make deposits several times a day. But the money stays in town for only a day at best.
At the end of every day, somebody somewhere pushes a button and all the money from each of the national or international chain’s outlets all over the world goes whoosh to a distant location (usually near the headquarters of the chain). Of course, some of the money comes back into the local community in the form of wages, rent, taxes, and purchased services, but it’s a fraction of what it would be had it all stayed in the community from beginning to end. And none of the profit ever finds its way back into the local community unless, coincidentally, there are local stockholders (and except in the most extraordinary of cases, the amount would be minuscule).
At the moment one of the main things that prevent local communities from defining and protecting their own local economies from these cash vacuums is based on the concept of corporate personhood.
How Corporate Personhood Set the Stage
When Thomas Jefferson pushed so hard for two years for the Bill of Rights to include “freedom from monopolies,” he may well have anticipated the very problem I just identified: the dominance of distant megamerchants (such as the East India Company) over local merchants. On the other hand, his Federalist opponents thought a strong central government could prevent the rise of monopolies while controlling the entrepreneurial engine that could drive great prosperity for a new nation in a vast, relatively untouched commons.
As America industrialized through the 1800s, it went from a minor agricultural nation to an industrial powerhouse central to the world’s economy. This brought vast and rapid leaps in what we would call progress, but it also left huge areas soiled by industrial waste and stripmining and resulted in one of the most rapid and dramatic losses of topsoil in the history of the world. Overall, though, most Americans today would consider it a good foundation laid for contemporary comforts.
While our history books tend to focus on the rich and powerful of the past—the John Rockefellers, Andrew Carnegies, and Prescott Bushes—the reality is that hundreds of thousands of small businesspeople built much of America and the rest of the modern industrial world.These small businessmen and women didn’t just create personal wealth for their families; they also kept wealth circulating in the communities where they lived.
They provided employment, improvements, and economic vigor to their towns or neighborhoods, and they responded to the needs of those communities—because they lived in them.
State and local governments recognized the value and the importance of having local entrepreneurs responsible for the local business, rather than out ofstate monopolies, chains, or multinational corporations. During the 1920s and 1930s, in a wave of anti-chainstore populist sentiment, more than twentyfive states passed laws that taxed out-ofstate or multinational businesses at a higher rate than local entrepreneurs, to discourage the distant and encourage the local.
But this was overthrown in 1935 when the Lane Drug Store chain sued the state of Florida, claiming that because its corporation was actually a person under the Constitution it was illegal discrimination under the Fourteenth Amendment for a state to give preferential treatment to a person in that state while not offering the same treatment to a person from out of state. The Supreme Court, looking back to 1886, sided with the Lane corporation, and now states and local communities all over the nation find themselves without the legal tools to encourage and nurture local businesses.1
Like the Santa Clara case, this one too went all the way to the Supreme Court because a very large corporation could litigate over an astonishingly small amount of money: $25. At that time local businesses were assessed a $5 annual fee and outofstate businesses were charged up to $30 in Florida.
Chains and Category Killers: No More Building for Posterity
The fallout from that 1935 decision has been farreaching. Just as individual humans are woefully outmatched by a corporation that wants to fight them, so are local communities outmatched.
A related effect is that individuals today are far less able to build an enterprise that will last in their community. And due to the attraction of enormous amounts of money from distant areas, they’re often not even interested in doing so. I first noticed the change in the mid 1980s, although it was probably under way for a decade or more. A young friend was pursuing the American Dream—starting his own business—and as a fellow entrepreneur he had adopted me as a mentor.
“People who start businesses aren’t always the best to run them as they get larger,” I advised him. “Leadership and management are two different skill sets, and only in very rare individuals do you find both together. When your company gets large enough that it needs real, day to day management of the details, I recommend you plan in advance now to hire somebody to replace yourself so that you can move into sales, idea hatching, or some other function that you still find fun but that doesn’t get in the way of the bean counters you’ll need to bring in.”
“Not gonna be a problem for me,” he said. “I have no intention of keeping this business beyond its initial growth phase.” “Why not?” I said, reflecting that small businesses were what had built and sustained virtually every American community over the past three hundred years. Why go to the trouble of starting one if you weren’t going to let it sustain you for your lifetime? “Because that’s not how things work anymore,” he said, reversing our advice giving roles: People don’t start businesses anymore thinking they’ll have security for their old age or something to pass along to their children. Whether it’s a restaurant or a retail store or a software company, the plan now is to grow big enough and fast enough to be noticed by one of the big guys, and then cash out before they squash you like a bug. Make it easier and cheaper for them to buy you out than for them to spend the time and effort running you out of business or simply stealing your idea. And to succeed, you’ve gotta do it quickly.
After that meeting, while driving home in suburban Atlanta, I noticed with new eyes the stores that lined the main roads. Nearly all were large corporate chains, from the video stores to the bookstores to the fastfood outlets. The crafts store was a chain, as was the bicycle store. Nearly all the entrepreneurial ventures that had populated the area up until the late 1970s and mid 1980s had died, replaced by such a numbing sameness of
product and presentation that I could just as easily have been driving down a suburban street in Dallas, San Diego, Seattle, Memphis, Detroit, or Boston. Or, increasingly, Paris, London, Frankfurt, Rio, or Taipei.
Retail has been taken over. There’s a good reason why national superstore chains are known in the business press as “category killers.” When such a chain enters an industry, whether it’s hardware or stationery or anything else, it typically puts dozens to hundreds of local, family owned businesses into bankruptcy. Other local merchants, having seen the fate that awaits them, “get while the getting’s good,” closing down before they lose everything they’ve earned in decades of business. In either case, the category killer relocates locally generated profits to its distant corporate headquarters, and the local, community oriented, full service merchants are gone.
Manufacturing too has been moved far away from the local economy to labor cheap countries. Taking Amtrak from Boston to New York, you see miles of empty, decaying, vandalized factory buildings once serviced by the railroads, their products now manufactured in China or Indonesia, their former workers now flipping burgers or
unemployed. And even when the foreign companies do their manufacturing in the United States (like Toyota and Kia have done—and extol in their advertising), the profits from all that manufacturing effort go back to Japan or South Korea or whatever the corporation’s country of origin may be. The principle is pretty much the same.
Big, nonlocal corporations have largely inhaled even service industries, traditionally the last bastion of lowerpaying local labor: fast food chains, day care and learning center chains, home service franchises, and hospital and medical chains.
Relocalizing Our Economies
In summary, consider these benefits of local communities being allowed to give special breaks to local companies, or to regulate outoftown companies, to support their local economy:
• They keep cash local.
• Local companies are more sensitive and responsive to regional issues— they are far less likely to be “bad citizens” because their families have to live with the consequences.
• They are more heterogeneous and responsive in the services and the products supplied.
• They preserve regional culture, personality, and perspective.
• They provide greater stability, given that the economies become more self contained.
The demise of a business or two won’t prove nearly as devastating as when a large employer decides to shut down a plant and move production to Mexico. This is not to say we shouldn’t have large businesses. Instead, as Teddy Roosevelt pointed out, they must be kept in an appropriate context and submit to regulation by the local communities in which they operate.
Recovering an Entrepreneurial Boom
According to the U.S. Small Business Administration (SBA), “Industries dominated by small firms created jobs at a rate almost 60 percent faster than those dominated by large businesses.” The report adds, “Approximately 86 percent of small businesses are legally organized as proprietorships or partnerships.”2
The same trends are found worldwide and attested to by the enormous success of micro lending projects such as run by the Grameen Bank in Bangladesh, which was started in 1976 when Bangladeshi economics professor Muhammad Yunus loaned $26 to forty two Bangladeshi villagers, thus starting the Grameen Bank. As of January 2010, Yunus’s bank has more than 8 million borrowers, 97 percent of whom are women. Since its inception it has loaned $8.74 billion, with an average loan size of $160 and a repayment rate (including interest) of 97 percent. Through the small businesses that have been started with these micro loans, more than one third of Grameen’s clients have now been raised out of poverty, and micro lending is a growing tool of non profits and charities around the world.3
The challenge to a new entrepreneurial boom is found in the type of neoliberal corporate person–based economics practiced by the World Bank, WTO, and big business advocates of what is called free trade. It’s a system that does exactly what corporations are chartered to do: move and aggregate wealth into the corporation. But with corporate personhood openly allowing corporations to corrupt political processes and roam the world unrestrained, the consequences have been unhealthy for humans. The result of today’s situation is well summarized by Jeff Gates, author of Democracy at Risk, in an article published in Reflections, MIT’s journal of the Society for Organizational Learning.4
Gates notes the following nine clear and troubling trends, which all track back to the current corporate laws and structures for the very largest of the corporations we allow to do business here:*
1. From the bottom to the top. The wealth of the Forbes 400 richest Americans grew an average $1.44 billion each from 1997 to 2000, for a daily increase in wealth of $1,920,000 per person.5 The financial wealth of the top 1 percent now exceeds the combined household financial wealth of the bottom 95 percent. The share of the nation’s after tax income received by the top 1 percent nearly doubled from 1979 to 1997.6 By 1998, the top earning 1 percent had as much combined income as the 100 million Americans with the lowest earnings. The top fifth of U.S. households now claim 49.2 percent of the national income while the bottom fifth gets by on 3.6 percent.7 Between 1979 and 1997, the average income of the richest fifth jumped from 9 times the income of the poorest fifth to 15 times.8 The pay gap between top executives and their average employees in the 365 largest U.S. companies widened from 42 to 1 in 1980 to 531 to 1 in 2000.
2. From democracies to plutocracies. Today’s capital markets–led “emerging markets” development model is poised to replicate U.S. wealth patterns worldwide. For instance, World Bank research found that 61.7 percent of Indonesia’s stock market value is held by that nation’s 15 richest families. The comparable figures are 55.1 percent for the Philippines and 53.3 percent for Thailand. Worldwide, there is now roughly $60 trillion in securitized assets (stocks, bonds, and so on), with an estimated $90 trillion in additional assets that will become securitizable as this model spreads.10
3. From the future to the present. Unsustainable production methods are now standard practice worldwide, owing largely to globalization’s embrace of a financial model that insists on maximizing net present value (chiefly, what stock values represent). That stance routinely and richly rewards those who internalize gains and externalize costs such as paying a living wage or cleaning up environmental toxins.
4. From poor nations to rich. This version of globalization assumes that unrestricted economic flows will benefit the 80 percent of humanity living in developing countries as well as those 20 percent living in developed countries. Yet the U.N. Development Program reports that the richest fifth of the global population now accounts for 86 percent of all goods and services consumed, while the poorest fifth consumes just over 1 percent.11
5. From developing nations to developed nations. In all three ecosystems suffering the worst declines (forests, freshwater, and marine), the most severe damage has occurred in the southern temperate or tropical regions. Industrial nations (located mainly in northern temperate zones) are primarily responsible for the ongoing loss of natural capital elsewhere in the world. In its July 2001 report, the International Panel on Climate Change confirms that relentlessly rising global temperatures—due primarily to hydrocarbon use in the 30 most developed economies—are poised to create catastrophic conditions worldwide. Agriculture, health, human settlements, water, animals—all will feel the impact on a planet that is warming faster than at any time in the past millennium.
Throughout the panel’s 2,600 pages of analysis, one theme remains constant: The poor of the world will be hardest hit. According to GEO 2000, a U.N. environmental report, “The continued poverty of the majority of the planet’s inhabitants and excessive consumption by the minority are the two major causes of environmental degradation.”12
6. From families to financial markets. The work year for the typical American has lengthened by 184 hours since 1970. That’s an additional 41∕2 weeks on the job for about the same pay. Parents in the United States also spend 40 percent less time with their children than in 1970.
7. From free traders to protectionists. OECD nations channel $362 billion a year in subsidies to their own farmers while restricting agricultural imports from developing countries and insisting that debtor nations repay their foreign loans in foreign currency, which they can earn only by exporting.13
8. From debtors to creditors. In 1999, leaders of the G7 nations agreed to a debt initiative for Heavily Indebted Poor Countries, aiming to cap debt service for the world’s 41 poorest countries at [a steep] 15 to 20 percent of [their] export earnings. By comparison, after World War I, the victors set German reparations at 13 to 15 percent of exports.14
From law abiders to law evaders. Roughly $8 trillion is held in tax havens worldwide, ensuring that globalization’s most welltodo can harvest the benefits of globalization without incurring any of the costs.15
Denying corporate personhood isn’t a panacea, but it’s a huge first step. Corporations will still have extraordinary constitutional protections (the contracts clause and the commerce clause, for example), as they have had from the founding of the United States.
Personhood status won’t by any means leave them unprotected in court any more than they were before 1886.
But when states, counties, townships, and communities can once again define corporate behavior, they can again encourage entrepreneurial activity. Then people can start and run small businesses without worrying that a giant corporation will come along and crush them without the slightest thought.
Communities will see the money spent in their neighborhoods circulate and be reinvested in their own area, building strong and vital towns, counties, and states. And corporations won’t be able to intimidate local politicians by suing them personally for violations of the very civil rights laws that were first enacted to protect human beings.
An Entrepreneurial Boom Awaits America
• The U.S. State Department notes that only 1 percent of the corporations in America (and most other developed nations) are “large” (more than five hundred employees); 99 percent of all American companies are small businesses.
• That 99 percent accounts for 52 percent of all non farm jobs (keep in mind that about one third of all other workers are employed by governments and nonprofits) and 47 percent of all sales.
• America’s five hundred largest manufacturing firms cut almost 2 million workers from their payrolls in the United States between 1986 and 1994 (after that the statistics gathering system changed, and it’s not broken out anymore) as the focus of large companies moved from making things in America to selling them in America.
• But during the years 1990 to 1995 (the last years for which there are current statistics broken out in this fashion), more than three quarters of all new jobs were created by small businesses.
• The U.S. Small Business Administration says, “Overall, employment in establishments owned by small firms grew 10.5 percent over the period (noted above), compared with 3.7 percent employment growth in establishments owned by firms with more than 500 employees.”
• Small businesses obtain more patents per sales dollar than large firms and produce 55 percent of all significant innovations.18
• As the SBA notes in its “Annual Report on Small Business and Competition,” small firms make two indispensable contributions to the American economy: First, they are an integral part of the renewal process that pervades and defines market economies. New and small firms play a crucial role in experimentation and innovation that leads to technological change and productivity growth....
Second, small firms are the essential mechanism by which millions enter the economic and social mainstream of American society. Small businesses enable millions, including women, minorities, and immigrants, to access the American Dream. In this evolutionary process, community plays the crucial and indispensable role of providing the “social glue” and networking opportunities that bind small firms together in both high tech and “Main Street” activities. And few to none of these small businesses would be affected in an adverse way by the elimination of corporate personhood.
• Small businesses don’t have the time or money to field full time lobbyists in Washington or to funnel millions of dollars to presidential or congressional campaigns and thus don’t assert First Amendment personhood rights. (Or, if they do, it’s usually the business owner who contacts an elected official as a private citizen with a concern.)
• They don’t claim the First Amendment right to free speech in spending hundreds of millions on national advertising designed to affect the political processes.
• They don’t sue the government, declaring a person’s Fourth Amendment right to privacy as a means to prevent OSHA or EPA inspectors from looking into toxic wastes or labor practices in chemical factories or steel mills.
• They don’t demand Fourteenth Amendment rights of equal protection to knock down local community laws designed to keep out large corporations that have been convicted of corporate crimes or have the ability to unfairly compete.
• They don’t sit on the councils of NAFTA and the WTO and make decisions that wipe out domestic highpaying jobs and create offshore kingdoms in tax havens or low-wage nations.
In fact, small and medium sized businesses make little to no use whatsoever of corporate personhood. Eliminating corporate personhood would help them inasmuch as it could help restore democratic processes, empower local communities in which small businesses are rooted, and enable politicians to begin anew to enforce anti monopoly legislation.
Denying the personhood of the handful of very large corporations that exploit it will allow the passage of laws getting them out of undue influence in politics, which in turn will hinder efforts to influence government to maintain trust and monopoly status. Federal, state, and local governments will be able to enforce laws, if the citizens want, that require corporations to operate to the benefit of the states and the communities in which they are incorporated and do business.
This will open millions of doors of opportunity for the entrepreneurial energies and imagination of people all over the world and could easily create a boom every bit as dramatic as the agricultural revolution, industrial revolution or the technological revolution.