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History of Small Business

Small businesses provide the fuel for the engine of modern economies.

Today, some of the world’s largest corporations started out as small businesses. McDonald’s, for example, started out as a single hamburger stand in San Bernardino, California. Walmart was originally a store called Walton’s 5 & 10 in the town of Bentonville, Arkansas (population 2,900 at the time).

Today, approximately 50% of U.S. GDP is generated by small businesses across the country.

The next multibillion dollar corporation could be that small business just down the street in your small town.

But where did small businesses come from? What’s the history of small business? And what does the future hold for entrepreneurs? Let’s find out.

Small Businesses in Roman Times, the Middle Ages, and the Medieval Period

If you go back over 500 years, then you’ll realize that virtually everybody was running a “small business” of some form or another.

Farmers, for example, were running a small business selling grain to merchants in the cities. Merchants were running a small business buying grains from farmers and flipping it for a profit at markets. Market owners were running a business by renting out stalls to merchants. The list goes on.

Put simply, the vast majority of people in Roman times, the Middle Ages, and the Medieval Period were in business for themselves.

Types of Small Businesses in Medieval Times

Some of the most common small businesses in medieval times included:

  • Armorer: During this period, armor would be customized to fit each wearer, which made armorers some of the most important craftspeople of the period.
  • Apothecary: An apothecary dispensed herbal remedies collected from nearby areas or purchased from abroad. They were early pharmacies and were often the only place where sick, poor people could turn for medical advice.
  • Baker: Bread was a daily staple of medieval life.
  • Blacksmith: Blacksmiths forged weapons, sharpened weapons, and repaired armor, making them one of the most important jobs in the town. Nevertheless, blacksmiths were still considered to be a lowly profession.
  • Bottler: Bottlers stored and dispensed wines and other bottled goods.
  • Candlemaker: Before electricity, oil lanterns, and other lights, candles were the only way to work or live at night. Understandably, the people who made candles were considered important people in towns around the world.
  • Carpenter: Carpenters played a diverse range of roles throughout medieval cities. They built household goods like furniture and roofing as well as military goods like siege engines. A good carpenter was considered an elite craftsman.
  • Fletcher: Fletchers crafted and manufactured bows and sold flights of arrows.
  • Moneylenders: Moneylenders were the cornerstone of the medieval banking system. These small businessmen lent money and would form the foundation for the modern banking systems of the future.
  • Artists and Painters: Castles would often enlist the help of artists and painters, many of whom worked on a freelance basis. Medieval castles were often highly colorful and painters could spend years – even decades – decorating a single church or castle.
  • Physician: Physicians, just like today, were a highly-regarded profession. In medieval times, they functioned more like small businessmen than as employees of a public or private healthcare system. Physicians often charged steep prices for their services (which is why many poorer peasants went to the apothecary for treatment instead).
  • Potters: Potters produced the clay, porcelain, and ceramic-like pots needed for cooking and storage.
  • Shoemakers or Cobblers: Also known as cordwainers, these skilled craftsmen were the sole source of shoes in a medieval town (get it?).

Typically, these small businesses would be run by a single individual. That individual might enlist family members to help with various parts of the business, or take on an apprentice.

Who Wasn’t Running a Small Business in Ancient and Medieval Times?

The main groups of people who weren’t in business for themselves were serfs (peasants who worked their lord’s land), clergy, and government employees (i.e. castle workers and those who worked for local lords).

Serfs worked the lord’s land and paid the lord certain dues in return for their use of the land. They ran a semi-independent business (kind of like a small business retail store renting space at a mall), but it’s hard to define serfs as self-employed small businesspeople.

Clergy worked for the church and were often supported by local governments and people, and “government employees” could be defined as anyone who worked on behalf of the lords of the land (like the king or queen).

Some of the most popular jobs for “government employees” at the time included jobs around the castle, like butlers, janitors, gardeners, jesters, messengers, reeves, scribes, and keepers of the wardrobe.

This small business structure remained largely the same for thousands of years.

Guilds Change Medieval Business Structure Forever

One key small business development took place in the medieval ages. Guilds began to play a critical role in each town’s business structure.

Guilds were one of the hallmarks of medieval business. Over time, skilled craftsmen living together in the same town realized they could help one another by forming guilds together.

In “A History of Business in Medieval Europe, 1200-1550”, the authors write that:

“…Guilds arose out of the need for tradesmen to band together to meet the pressure of increasing local and import competition. The guilds were associations of masters, and although they tended toward monopoly, they sought to regulate competition rather than to abolish it.”

These guilds would regulate certain craftsmanship standards in each town, for example. They also acted as early unions. They would schedule “no-work feast days”, for example, and ensure certain craftsmen were meeting a certain standard of quality.

Small business structure in medieval times went from a loose organization of different craftsmen to a strict conglomerate of skilled professionals dedicated to maintaining the strong reputation of various towns for different crafts.

Small Business and the Industrial Revolution

Just prior to the industrial revolution, Europe was dominated by small workshops and small businesses. This pre-industrial society powered most of its machinery using falling water, wind, animals, or human labor.

While small business provided local jobs and powered the local economy, they also constricted the nation’s economy overall. Countries weren’t using their resources efficiently.

Water-powered manufacturing, for example, was only available in areas with falling water. Wind-powered manufacturing was subject to weather-related interruptions.

As Enclyopedia.com explains, the lack of power meant there was little motivation to launch larger factories:

“…with limited supplies of power, there was little reason to concentrate manufacturing processes in large workshops.”

The Rise of Big Business at the Expense of Small Business

Several major technologies would change the fate of the world (and of small businesses) forever. Those technologies included means of wide scale energy production like steam power, gasoline, and electric motors.

Between 1850 and 1914, small workshops gradually moved out of fashion while large factories became the norm. By the eve of World War I, the European economy was dominated by large factories:

“By 1850, however, these descriptions no longer applied to large areas of Western Europe, and by 1914 the European economy as a whole was dominated by large factories, many of them employing thousands of workers. Both manufacturing and transportation now relied on steam power, and gasoline and electric motors were becoming common.”

At the same time, population growth was exploding around the world, providing cheap sources of labor for developing economies.

The combination of efficient energy production with cheap sources of human labor created ripe conditions for big businesses. Big businesses were thriving at the expense of small businesses.

1850 to 1914: Small Businesses Struggle to Adapt to Changing Economic Realities

This was a challenging period for small businesses. Smaller workshops couldn’t compete with larger factories. Economies of scale made competition difficult while also concentrating wealth among the wealthiest industrialists and capitalists.

It was during this time that philosophers like Karl Marx recognized that this new industrial age would eventually lead to widespread capitalism around the world. For better or worse, he was right, and small businesses have never been the same as they were before the Industrial Revolution.

Here’s a good way to think of the Industrial Revolution’s effect on small business: before the Industrial Revolution, small businesses were virtually the only type of business that could be built. Society didn’t have the infrastructure or means of energy production needed to create large-scale businesses. Thus, you had small local producers serving local communities.

After the Industrial Revolution, small businesses were seen as inefficient in many industries. It was no longer efficient to have one single blacksmith working at a small forge in a tiny English village. Instead, it was more efficient to build factories that produced resources like pig iron en masse before sending that pig iron to other factories to be turned into finished goods.

Small Business History in the United States

At this point, it’s helpful to look at small business history in the United States. The small business traditions that started in the United States would make their way around the world, spreading trends and demonstrating to the world how a successful capitalist economy could work.

Calvin Coolidge, president of the United States during the Roaring 20s, famously said that “the business of America is business.”

Christopher Conte writing for eJournal USA in 2006 amended that famous Coolidge quote by stating that:

“For the first century of the country’s existence – until the 1880s – it would have been equally accurate to say that the business of America was small business since virtually all businesses in the nation were small in those years.”

Conte goes on to write that:

“Businesses had no choice but to be small in America’s early days. Transportation was slow and inefficient, keeping markets too fragmented to support large-scale enterprise. Financial institutions also were too small to support big business. And productive capacity was limited because wind, water, and animal power were the only sources of energy. Whatever the reason businesses were small, Americans liked it that way. Small business, they believed, cultivates character and strengthens democracy.”

Nevertheless, America experienced numerous inventions that challenged the idea of small business. Key technologies included railroads, the telegraph, and the development of the steam engine. Meanwhile, huge population growth – and huge immigration – created the perfect conditions for capital-intensive big businesses to thrive.

So how did small businesses survive and thrive to this day? Keep reading to find out.

How Small Businesses Survived the Industrial Revolution

As big businesses exploded with growth, small businesses had to adapt to changing economic realities:

“…economists believe small business has survived over the years more as a result of economic realities – and its own ingenuity than as a result of legislation.”

Let’s talk about those ingenuities.

They Moved to Sectors With Too Little Demand for Big Businesses to Care

Some of those “ingenuities” included moving to sectors were there was too little demand to require large-scale production.

One company named Buckeye Steel Castings Company of Columbus, for example, was formed in 1881 and “thrived for many years by producing automatic railroad car couplers.”

Other companies survived by producing clothing for the “constantly fluctuating seasonal-clothing market.”

These trends have remained prevalent to this day. Smaller IT companies and online businesses sell products aimed at narrow market segments and are nevertheless able to make a successful profit.

Small Businesses Are the Most Adaptable Type of Business

Throughout the 1980s and 1990s, the economy became increasingly globalized. Economists realized that companies that could innovate, customize products, and adapt quickly to a changing global economy would have an edge over the competition.

One of the reasons why small businesses have survived to this day is because they are the most adaptable type of business structure. Small businesses often lack the hierarchical management structures of big businesses, for example. They also tend to have non-unionized workforces.

Moreover, employees at small businesses tend to play multiple roles. In companies with fewer than 20 employees, good employees need to be good at different aspects of the business.

All of these traits make small businesses adept at working with the global economy.

American Business Structures Spread Around the World

American small business practices would eventually spread around the world, often supplemented by the unique business practices of their home countries.

France, for example, had a long history of running family-owned business that were small in scale and managed conservatively. By combining this history with global means of production, France has been able to earn the world’s sixth largest GDP.

Some business historians also point to Latin America as an emulation of American small business practices.

It’s Not All Good News for Small Businesses

Given the information above, it’s easy to think that small businesses will continue dominating the economy in the future. But there are some underlying stats that tell a slightly darker story for small businesses.

One important statistic was released by David Birch in 1987. Birch was an economist who claimed that small businesses “create most of the new jobs in the economy” in America. Thus, small businesses were the powerhouse of America’s economy.

Birch’s research was disputed. In a 1993 study, the National Bureau of Economic Research found that small businesses employing less than 500 people did create more jobs between 1972 and 1988. However, those small businesses also went out of business more often. Thus, their net impact on job creation was about the same as larger firms.

Another sobering statistic for the small business world is its share of US GDP. In 1958, that share stood at 57%. Since 1980, that number has hovered around 50%.

Optimists will look at that statistic and claim that hovering around 50% is pretty good – especially given how large American businesses like Apple, Nike, Microsoft, and Google have dominated the world economy in recent years. Pessimists will see that statistics and argue that it’s just delaying the inevitable.

Conclusion: What Does the Future Hold for Small Businesses?

Today, it’s easy to think that we’re in a world dominated by multinational corporations with billions of dollars available to smash small businesses into obscurity.

In reality, however, small businesses are alive and thriving. Today, 90% of American employers have fewer than 20 workers. The vast majority of business in America (and virtually every other developed country in the world) is still done on a small scale.

In 2002, for example, there were 16,845 companies in America employing more than 500 people, compared to 5,680,914 companies employing fewer people.

Furthermore, 50% of America’s GDP comes from small businesses.

Small business advocates are encouraged by recent expansions in the global economy: small businesses remain the most adaptable type of business in the world today. Small businesses also got a boost with declining transportation costs and the emergence of the internet. Suddenly, larger firms didn’t have as much of an advantage in certain industries.

The adaptability of small businesses means they can easily pivot to capitalize on new technologies and trends.

Ultimately, some economists believe that small businesses and large businesses “have reached some kind of equipoise”. The two types of businesses share approximately equal amounts of GDP (50% each) and have virtually the same net effect on American employment.

We’ll have to wait and see if that number continues to remain steady – or grow – in the coming years.

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