Why the Small Private Retail Business Model is Irrational, Costly and Inefficient

In this post, I explain why the small private retail business model is socially irrational, and discuss two alternatives–big box monopolies and social enterprises.

Doug Henwood’s “Small is Not Beautiful.”

However, keep in mind throughout this discussion:
A study of American communities with and without big box stores finds that communities with big box stores are unhealthier. This coincides with studies that find that communities are healthier and more affordable where commercial goods are within walking distance. Furthermore, Food & Water Watch points out that the way that big boxes operate ipso facto drives unsustainable economic and human-nature relationships. (See also Varoufakis’ “Handmaidens” discussion in The Global Minotaur.)

Make no mistake: The point I am making here is NOT an argument in favor of Walmartization, both engine and beneficiary of today’s austerity crisis. Rather I am making a Power Resources argument– Small businesses should not be fetishized or coddled in public policy to the extent that we ignore their impact on labor conditions, because labor conditions have multifold economic, political, environmental and social reverberations

As a counterpoint, John Restakis pointed out in his study of Emilia Romagna, the low-inequality, full employment cooperative economy “allows small and medium firms to compete globally through the use of co-operation as an industrial strategy.” But if small businesses are allowed to proliferate junk jobs, then Walmarts stand at the wings, ready to swoop in and take advantage of primed degraded labor, while offering the lower prices that degraded labor depends on.

A Robust Regional Economic Strategy, 
for Deployment Outside Global Financial Centers and Oil Kingdoms

The better model is a combination of Swedish economic development policy under Social Democratic Party rule and Emilia Romagna and Basque policy that allows cooperatives to flourish together. The upshot is that healthy, efficient, humane economic policy fosters neighborhood-based cooperatives, linked by a regional producers’ and consumers’ cooperative network capable of exerting aggregate buying power and issuing loans.

Social democratic Swedish policy focused on fostering economic efficiency and innovation while maximizing labor, reproductive, and environmental conditions. Whereas with cooperative networks, the Emilia Romagna and Basque regions have focused on solving Peter Evans’ “Embedded Autonomy” problem– securing a bond between state-fostered, economically-powerful organizations and local and regional economic, social, health and environmental welfare.

But as (Restakis’ study implies while) I emphasize in my study of Swedish social democracy, the robustness of the alternative economy depends upon the maintenance of a socialist backbone. Rip out or chip out the socialist nervous and skeletal substructure, and you’ll look up to find that capital has harvested the alternative economic institutions like a juicy, de-spined bag of well-fed organs, and all that’s left is a pool of blood. That’s exploitation, and that’s the name of the capitalist game. So if you want a thriving economy anywhere outside the global urban centers of finance and their good ol’ boy partners in the oil kingdoms, don’t throw your communists into the dungeon. They are the only ones who can remember–past the blandishments, the teaser offers, the marginalist revolutions, and all the shiny, shiny marketing–what is going on in capitalism.

Two of the worst errors are to believe 1) the marketing that a political-economic strategy that works in global urban financial centers and oil kingdoms works elsewhere, or that all regions can competitively pursue the same economic strategy, and 2) that a value-accumulating strategy that creates economic dynamism at one point in history will continue to do so as the relations it exploits deplete and age (as its contradictions play out). We tend to follow common, well-advertised, well-funded patterns. We are thus limited creatures, intellectually; it is important to our flourishing to compensate by not crushing what critical intellectuals we have.

So why aren’t small businesses the automatic answer to our environmental, health and economic problems?

Characteristic social, health and environmental costs of excessive economic dependence on small private retail businesses:

Why the small-business model is socially irrational

  1. It is a ready contributor to unhealthy social inequality. The model, if all works out ideally, is to have the business owner make a middle to upper-middle class income, while the majority of people, employees, struggle by on poverty wages that keep these workers in crippling crises and so tax the community and the state.
  2. The small retail business model creates political pressure to use social policy (including unemployment) as well as culture to keep people undereducated, dispossessed, disenfranchised, desperate, and vulnerable, in order to maintain a full stock of vulnerable, disposable labour at the disposal of small businessmen. 
  3. Inequality creates an alienated, adversarial culture, breaking down community solidarity, reducing social and cultural capital, leading to declining capacity to innovate and deal with problems.
  4. Social inequality causes chronic stress in humans, promoting chronic-stress related diseases, and taxing the health care system.
  5. With increased pressure to demonstrate one’s place among the elect, social inequality causes asset price inflation, and encourages speculation.
  6. The model undermines necessary social goods and services funding and provision. With inequality, the affluent have both competitive and class warfare incentive and the power to hoard and to withdraw from contributing to the important, public goods and services that less-affluent people cannot afford individually, such as education, health care, holidays, clean air and water, pensions and transportation, inter alia. This hoarding further makes resources illiquid, and reduces productive investment and either economic development or environmental melioration, in favor of private money-generating unproductive financial speculation that demands state capture and eventually results in maldistributed wealth destruction.
  7. The model mars and clutters the landscape, eats up arable land, poisons potable water and plugs up wetlands with acres of sprawling, ugly, cheap, utilitarian yet garish stripmalls, parking tarmac and miles of tar roads. Small businesses are politically coordinated by the Chamber of Commerce to feed the bankers’ and developers’ Growth Machine, constantly chasing and consuming cheaper land, forcing consumers and workers to drive and live ever further apart so that their incomes are increasingly consumed in transportation and other new infrastructure costs. The Growth Machine mass-murders species by consuming their habitat as well as obliterating ecological services.
  8. The Growth Machine chokes political offices with graft, patronage and corrupt, Little King good ol’ boys to enforce and reap the sprawl order. Dependent upon bosses, citizens forget how to work together democratically.
  9. The roads and infrastructure required to serve sprawl are expensive to build and maintain.
  10. This sprawl forces environmentally-poisonous, politically-corrupting community dependence on oil industry, the automotive industry, road construction, and the military industry required to secure oil.
  11. Sprawl confines people to body-destroying cars and creates car culture path dependency, for example proliferating  fast food drive-in consumption, facilitating reduced leisure time standards and assaulting human health, which taxes the health care system.
  12. The small private business model discourages entrepreneurial innovation. Because it is difficult to eke out a living as a small businessman, owners cleave to the tried and true: promulgating chain franchises that do not innovate in response to local needs so much as seduce and force local consumers to adapt to the procrustean bed of standardization.
  13. The model saddles consumers with expensive, poor quality goods, or at best very expensive, medium-quality goods. Small private retail businesses have comparably poor supply chains, especially in regions which do not have a large enough domestic market to bring sufficient market power to trade negotiations.
  14. For this reason, the small private business model funnels local income to corporate cities abroad. This is also true in the case of real estate bubble collusion by local banker-real estate agent collaborations. The beneficiaries of real estate bubbles are primarily global cities’ FIRE firms.
  15. Where owning confers a monopoly on entitlements, working becomes stigmatized. This fosters an alienated “lotto mentality” culture, in which people at odds with each other wait to win freedom and hope that a supernatural force shows them to be exceptional. 
  16. As working becomes stigmatized and owning apotheosized, the small private business model creates path dependency–preventing the improvement of working conditions, instigating the degradation of work, building an ideology of  entitlement to exploiting other people and nature, and weighting society with the burden of an overbuilt law-and-order machine enforcing excessive economic and political inequality order.
  17. In this way, the small business model creates the vulnerable, exploitable conditions for large monopoly firms to move in and take over the retail landscape, as per the Walmart model.

 There are small businesses which provide exceptions to the social costs of the private small-business model, businesses which are credits to the community. Craft skills can be rationally incorporated in competitive small private businesses to social benefit. Also, even socially-irrational small private  businesses may make some contributions to the community, though these contributions may not outweigh the social costs of the business. I do not argue that there should be no small businesses.

But neither do I argue, as some do, that small private businesses’ defects imply that they should be entitled to increased social support. Instead I argue that it is socially irrational, for the many reasons cited above, to pursue economic growth through an indiscriminate emphasis on promoting small private business with policy incentives. We must have a nuanced understanding of which kinds of small businesses are aggregately beneficial in particular environments (which change over time). And we need to keep in view–What are the more socially-rational economic and human development alternatives? Can we craft and deploy incentives to build an economic base that can unambiguously build up the social good, ensuring developmental working conditions, rather than entitling exploitation?

Small businesses have to be evaluated by a metric designed to weed out the above adumbrated problems.  Permits, loans, certification and credentialing, awards, support and taxation for and on small businesses need to determine whether the small business is rational to the extent that they proliferate craft skills and design ideas networks, minimize junk jobs and environmental harm, and maximize neighborhood livability and walkability. Could these goals be better served with another form of goods or services delivery (social economy co-operative, big box, state, and/or charity)? Small businesses should be housed on neighborhood corners, from residences, or in neighborhood streetside shops below a couple of layers of residential space, phasing out stripmall sprawl.

Socially-rational and Useful Businesses for Small Entrepreneurs to Develop:

  • Local craftwork, art and design (eg. woodwork, ceramics, fibre arts, printing, electrician, plumbing, gardening and animal care, etc.) services, shops and guilds.
  • Neighborhood pubs and cafes. These should be supported by municipal laws encouraging quality of life–local food and music production and distribution, and permitting rooftop, garden, and streetside eating and drinking, as well as dogs and people of all ages.
  • Recycled household goods shops, boot camps, laundromats, nail and hair salons, car washes, book stores, pet and child care, and residential and commercial local gardening and food production services
  • Neighborhood groceries, hardware stores, bicycle and ski shops, and copy centres. To keep costs down, job quality higher, and keep these kinds of businesses viable, these are best as co-operatives in a co-operative network, but in any case such small businesses provide a real service to neighborhoods. They should be supported by charities and government, and municipal law.

Alternatives to the many problems of the small retail business economy model

Part I: The big-box monopolies

We’ll start with big box private monopolies. Consider IKEA and Target. Together, IKEA and Target could, between the two megastores, as they currently run, provide a nearly-comprehensive host of much better quality goods to an urban consumer market at a fraction of the cost currently charged by the plethora of small retail businesses selling mountains of low-quality, overpriced goods. IKEA and Target just have more powerful demand and more control over their supply chains. Further, IKEA, a transnational corporation with its roots in Sweden, has been obliquely impacted by Swedish organized labour, and so it offers better working conditions and compensation than small private retail businesses. Last, the big boxes are more compact. Without a landscape of stripmalls, big boxes could have less impact on land and resources use.

However, first, as I have argued above, private monopolies are not really alternatives to small businesses, but rather they accompany wanton and irrational private small business over-development. Therefore, as we can observe, IKEAs, and especially Targets and Walmarts do not tend to reduce sprawl. They tend to continue to reinforce car-dependency and sprawl. 

Second, and more fundamentally, without competition among private firms, over time, the quality of the goods private monopolies offer will decrease and the price will increase in order to bolster profits, the sine qua non of capitalist private property (or at least in order to bolster surplus accumulation, the sine qua non of power). The quality of jobs the private monopolies offer, which especially in the case of Target is poor, will suffer further. The private monopolies will decline to pay taxes, and they’ll have the credible threat (eg. “too big to fail”) and economic and political power to enforce their socially-irrational, socially-inefficient demands. 

The community can have no control over private monopolies, which may fail to provide needed goods and services if the private monopolies decide that they can get higher profit margins by changing their business model (eg. Enron et al switching to financial speculation, thereby screwing consumers, workers, the state, and taxpayers. Or consider that their business model may not survive transportation cost increases). And the reliable local economic development spin-off potential from international big box monopolies is slim to none. At best, whatever remote chance of economic spinoff exists, it must involve very low wage labour and other very low price inputs, which requires unsustainable public subsidy.

Without submitting to the unfurling hazards of private monopoly, how can we get control over supply chains, and production, goods and services quality? Would it be possible to get those supply chains to be responsive? How can we provide goods and services, while avoiding the social costs generated by the small private business model?

Part II: Networked social enterprises

In order to address the above questions, I will specifically focus on the social enterprise form of the producer cooperative, following the EMES definition of social enterprise.

Until I finish this post, I recommend these sources for insight into social enterprises and community economic development:

Loxley, John, ed. 2007. Transforming or Reforming Capitalism: Toward a Theory of Community Economic Development. Winnipeg: Fernwood.

Loxley, John, Kathleen Sexsmith and Jim Silver, eds. 2007. Doing Community Economic Development. Winnipeg: Fernwood Press.

Restakis, John. 2010. Humanizing the Economy: Co-operatives in the Age of Capital. New Society Publishers.


The New Economics Foundation

Transition Network

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