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April 09, 2010

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Paul,

While i completely agree with your conclusions (being an entrepreneur in a small firm myself), there is an assumption missing that (it seems to me) changes the basic dynamics.

Small firms are not statistically independent of large firms.

Therefore, if (as a society) we spend all of our resources focusing on small firms, we are changing the large firm dynamic in at least a couple of ways:
1. Some of the best agents of a large firm are not working for a small firm.
2. The small firm could grow but take so much market share from the large firm that the large firm loses more jobs than the small firm adds.
3. Small firms are by definition less capital rich than large firms and thus they generally need greater efficiency which can speed the process of using foreign labor or technology to replace local human resources.

That said, large firms are by your argument rightfully less likely to create change and growth and therefore small firms clearly need to be encouraged, but i thought it was an interesting point to add to this discussion.

Thanks for the post, i really enjoyed it.

-E

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So... by your logic, should all firms be dissolved after a certain period of time, so that it is mathematically impossible for jobs to be "lost?" That seems to be the logical conclusion of this post.

If job creation is what is important (instead of actual production), then it follows that we should prioritize job creation. If young firms are better at job creation, then we should get rid of the inefficient old firms and replace them with young firms.

But this, of course, is something you are likely to disagree with and rightfully so. Job creation cannot be what is important; it MUST be production. Therefore, focusing on job creation is actually bad for an economy. Further, jobs are actually an economic bad and it is the entrepreneur's duty to destroy them whenever possible, not to create them. For more on this, see Schumpeter's book, "Capitalism, Socialism, and Democracy."

The same goes for fast-growing emerging economies, I guess.

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