Populist industrial policy.

• Author: Postrel, Virginia I.
• Position: Editorials - Editorial

The myth that small business creates most jobs serves both liberals and conservatives.

JUST ABOUT EVERYBODY LIKES small business--liberals and conservatives, Democrats and Republicans, even aging Chinese Communists. Bill Clinton frequently says good things about small business to prove he's a "different kind of Democrat."

He even appealed to small companies in his big health-care speech: "These rising |health-care~ costs are a special nightmare for our small businesses--the engine of our entrepreneurship and our job creation in America today."

Clinton's opponents, of course, argue that the president's policies are the nightmare. Responding to the State of the Union address, House Minority Leader Bob Michel said, "We agree with the president that we have to put more people to work, but remember this: 80 to 85 percent of the new jobs in this country are created by small business. So the climate for starting and expanding businesses must be enhanced with tax incentives and deregulation, rather than imposing higher taxes and more governmental mandates."

Small business is, apparently, the opposite of the weather: Everybody praises it, and everybody does something about it. But all this posturing is based on bad economics and worse politics. Contrary to endlessly repeated conventional wisdom, small companies do not account for the vast majority of new jobs.

That notion stems from the work of David Birch, a former MIT researcher who now runs a consulting firm called Cognetics. In the 1980s, Birch claimed to show that most new jobs came from small companies. His findings were trumpeted by small-business advocates, notably the Small Business Administration and my former employer, Inc. magazine. It seemed impolite to subject Birch's research to normal scientific checking.

But Birch has now recanted. He says, "The relative role of smaller firms in generating jobs varies enormously from time to time and place to place....Most small-firm job creation occurs within a relatively few firms--the Gazelles." These "Gazelles" are, quite simply, high-growth companies. That growing companies hire more people than non-growing companies is hardly surprising. The "Gazelles," says Birch, represent every sector of the economy and are extremely unstable.

As a celebration of a dynamic, entrepreneurial economy, Birch's vision is appealing. It holds up on anecdotal grounds. Birch cites such Gazelle successes as AST Research and Federal Express. But his research has...