Startups - maybe not the economic panacea - Business Works
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Startups - maybe not the economic panacea

Peter Kolarz, Francis Hutcheson Institute Record numbers of businesses are being started in the UK. Surely, good news! After years of economic gloom and one disheartening news report after another, there is finally a positive feature to observe in our economic landscape. Or is there?

Politicians and many from the business-world itself have been eager to point out and celebrate this. Many also advocate measures aimed at fostering more startups, to make startups easier, and to focus all our efforts in economic policy, banking reform and tax codes on making the UK more startup friendly. However, recently-released figures for Germany, a country widely praised for remaining in remarkably good economic shape, show that in 2012 the number of new startups there were especially low; the lowest in fact since the year 2000, shortly before the German economy last experienced a severe downturn.

This brief cross-national comparison highlights a mis-match between high levels of startups and predictions of economic recovery. Furthermore, when the assumed link between the two begins to influence policy, businesses that already ‘started up’ a long time ago and are, as it were, well on their way, may end up with a raw deal in various government plans for growth.

students simply do not believe that there are any jobs out there

The key problem with the recent startup-mania lies in the fact that new businesses are started for a large number of possible different reasons, ranging of course from the brilliant inventor and innovator seeking to bring the fruit of their labour from the catacombs of their creativity to the daylight of the market, all the way to rather more mundane, sad, tragic and downright concerning reasons. A wealth of social research shows that many individuals choose to start their own business because they lost their job in a larger company, or because working conditions at said company led them into depression and nervous breakdowns. Moreover, many startups are variants of the phoenix-company: the last startup failed, but with a new name, one more bankloan, a smaller office and a cosmetic re-jig of staff, it might just work yet. At an anecdotal level, I have heard from staff at the careers centres of three separate high- to medium-ranking universities that more and more students come to see them not to ask about which jobs to apply for, but about how to start their own business, very often with the same rationale: they simply do not believe that there are any jobs out there that they stand any hope of actually getting. Anybody who has even briefly compared unemployment figures and vacancy figures in this country knows: they have a point.

Business startups, more often than not, are signs of desperation, of economies void of opportunity, of unemployment, of a business climate so stress-inducing that the enormous challenge of starting a business from scratch becomes appealing.

the increase in people who decide to start their own business largely reflects a dire economic landscape

For sure, we rightly celebrate those who start new businesses. We should cheer them on and celebrate that small, but significant percentage of new businesses that survive their first three years. And we should certainly not punish with draconian welfare cuts those who legitimately try, fail, and fall back into unemployment. But we must acknowledge that the increase in people who decide to start their own business largely reflects a dire economic landscape, not a prosperous one. Why is this important to remember?

A certain level of new startups is always a good thing; it might heighten somewhat when there is a new large product market that needs to be seized – see for instance the IT boom of the 1990s. But a successful, stable and growing economy is not characterised by dizzying amounts of startups, but by survival and growth of companies that already exist! Low rates of bankruptcy, commercial and private, opportunities on the job market, expansions, acquisitions and long-term stable and profitable factories and offices; these are signs that things are going well.

policy makers should make education affordable and ensure skills gaps are filled

As such, policy makers would do well to stop obsessing about the ‘green shoots’ emerging from the charred remains of economic hey-days. Instead, they should help ensure the health of those trees that are still standing: incentivise recruitment more than startups, ensure that our very real and numerous skills gaps are filled by the education system and that said education system is affordable to all; ensure that banks lend money for ventures that hold a reasonable promise for job-creation and accept: when more and more people in the society you govern are willing to risk their capital, their home, their credit rating, relinquish their stable income, their leisure time, their peace of mind, in order to embark on a venture more likely than not to fail within the first couple of years, there is a serious flaw in your economic policy.

Dr Peter Kolarz is a sociologist with particular interests in globalization, political sociology, political economy and variations of capitalism and is Director of Research of the Francis Hutcheson Institute. He can be contacted by e-mail.

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