[This article is adapted from a talk delivered February 21, 2026 at the Mises Institute’s Mises Circle in Oklahoma City: Entrepreneurship Beyond Politics]
As 2025 came to an end, Bloomberg reported that “the prosperity gap between big and small businesses” was getting bigger: “Economists note a divergence between the fortunes of small and large companies, with small businesses struggling and large companies seeing relentless profit and stock gains.”
In many ways, this recent trend in which the small businesses falls behind big businesses is simply a reversion to what we might call “normal.” It’s not that small enterprise is shrinking in absolute terms in the US. Many parts of the small business economy continue to grow, even as growth has moderated and bankruptcies rose last year across many sectors. Rather, the dynamic is more typically one in which both small businesses and larger businesses are growing, but large businesses are growing faster. That is, the picture is one of relative decline for small business in recent months.
I say this is a return to normal because this trend is a well established historical trend that has been going on since at least the middle of the twentieth century. For more than sixty years, small businesses have had a smaller and smaller role in the US economy in terms of its overall share in driving employment and production in the US economy.
In the nineteenth century, the overwhelming majority of Americans worked for themselves either as farmers or in the retail and service sectors. But throughout the twentieth century this changed significantly, and fewer and fewer Americans, proportionally speaking, relied on small enterprises to earn a living.
This leaves us with the question of whether or not this is a true market-based phenomenon, or if it is the result of government intervention in the economy.
The answer is “both.”
From the point of view of consumers and markets, the value of a firm of any size is found in how well it serves the consumers while profiting the owners. In some sectors, small enterprise can do this better, but not in others sectors. So, in a free market environment, large firms can indeed certainly develop, and from the point of view of sound economics, a small enterprise is not necessarily any better or worse than a large enterprise.
What concerns us here is developing a framework for identifying the difference between the growth and dominance of large enterprise in a free marketplace, and the same thing when it is a result of government intervention.
A History of the (Relative) Decline of Small Business
Throughout the eighteenth and nineteenth centuries in the United States, up until the 1880s, the overwhelming majority of Americans either owned a small business or worked for a small business. Contrary to some caricatures of American farms during this period, few American farmers were subsistence farmers. Perhaps 75 percent of farmers produced for the marketplace, meaning that most farms were small businesses. Mansel Blackford, author of A History of Small Business in America, writes:
In the years before 1880, small business assumed myriad forms in America’s merchandising, farming, manufacturing, and service industries. Small business were the norm in most fields of endeabvor, with single-unity, non-bureaucratic firms dotting the American landscape. Only in the 1880s and later was the dominace of small business challenged by the rise of big business in some fields.
Blackford emphasizes that farmers who produced for the marketplace also often took a longer term entrepreneurial view of their enterprises. They took steps to increase the value of their lands and capital, and were not focused merely on the immediately concerns of the current crop.
This small-enterprise economy extended beyond agriculture and those who did not own farms were often found among the artisans (that is, skilled workers), many of whom owned their own tools and shops, and were therefore small business owners. Merchants were a key group as well, accompanied by a growing sector of small manufacturers. This economy of small enterprise propelled an impressive economic engine during the nineteenth century. From 1839 to 1859, the US per capita output rose by an impressive one third. It continued to grow into the late nineteenth century as the nation industrialized on its foundation of small enterprise.
With the rise of larger industrial enterprises, however, the centrality of small businesses to the economy began to decline. After the 1880s, both small business and big businesses continued to expand, but small business began to decline in terms of relative importance. By 1904, corporations, a legal structure used almost exclusively by large firms at that time, accounted for three quarter of America’s industrial production. During the early twentieth century, the United States increasingly was a home for large, vertically integrated firms that operated more than one plant—a metric that has long distinguished small firms from large firms. By 1923, at least one third of the nation’s workforce found employment in one of these multi-plant companies.
Small manufacturing firms certainly did not disappear, but continued to decline in terms of receipts and output, relative to larger firms. Similar trends existed in agriculture as well. The number of farms peaked in the United States in 1935, and since then the size of farms has grown as the total number of farms has fallen. Most of this change occurred from the 1930s to the 1970s as mechanization increased in farming and as urbanization offered farm workers and farm owners many new options outside of agriculture. Blackford notes:
between 1945 and 1974, 4.2 million more Americans quit farming than began it. In the 1960s alone, some 600,000 independent family farms disappeared. … In 1920, about 27 percent of all working Americans were engaged in agriculture, but by 1945 only 14 percent were, by 1973, it was down to just 4.5 percent.” … In 1948, the largest 10 percent of America’s farms produced 24 percent of the nation’s farm output, but by 1968 they accounted for 48 percent. … The postwar decline of small scale farming had its greatest impact on farms of fewer than 260 acres. From 1950 to 1983, average farm size more than doubled, from 200 acres to 450 acres.
The trend continues today, albeit at a slower pace. In 2024, the average farm size was 466 acres. In 2024, the number of farms in the US was 1.9 million, down 72 percent from the 1935 peak of 6.8 million.
Small business, in general, followed a similar trend throughout the twentieth century.
During the 1920s, America’s transformation into a consumer-based economy accelerated. This created opportunities for manufacturers of consumer goods to expand -as in automobiles, electric stoves, radios, and other household amenities. But this also created new opportunities for smaller businesses in terms of distribution.
Nonetheless, large enterprises continues to grow relative to small business. “Establishments with more than 250 workers employed 46 percent of all wage earners in American industry in 1914, and that proportion rose to 56 percent in 1937. .”
The trend accelerated during the Second World War, and has only continued since then.
“The total number of self-employed nonfarm business people in America declined steadily from 1950 to 1972…While the total share of employment held by small firms…declined only slightly, from 41 percent in 1958 to 40 percent in 1997, the share of business receipts received by those small companies plummeted from 52 percent to a scant 29 percent of the total for all American firms during those same years.”
In a 2024 repoot for the Small Business Adminstration, the authors note that “small firms’ receipts have been on a general decline since 1963.” In 1963, small firms collected 56.8 percent of all receipts in the US economy. By 1977, that fell to 53.6 poercent, before recovering slightly during the 1980s. Then, after 1987, small firm receipts plummeted to 35.6 percent by 2017.
Moreover, the small business share of GDP declining: “The small business share of GDP fell from 48.0% in 1998 to 43.5% in 2014. Since then, the trend has flattened, and the SBA now reports that during 2024, the small business share of GDP remains at 43.5.
In the immediate wake of the Covid Panic, in mid 2020 and into 2021, some began to claim that small business might again grow in relation to big business. For example, the Harvard Business Review claimed that the pandemic had “rebooted” small business, as measured by new startups. It has never been clear that this phenomenon extends beyond the period’s 40 percent increase in the money supply, and a temporary reconfiguration of the accompany to accompany lockdowns and a surge in remote work. Moreover, this was all soon followed by a surge in price inflation rising to a 40-year highs. Rising cots put new pressure on small businesses with a 2025 JP Morgan report noting that with small businesses, ”revenues in most cities have struggled to compensate for increased inflation in recent years.“ This brings us back again to the December 2025 Bloomberg report finding that we may be returning to the historical trend of the past century, with “The relentless profit and stock gains on Wall Street are bypassing Main Street, where an increasing number of small businesses are struggling.”
While it is true that small business create a large number of new jobs in the United States in most years, it is also true that small businesses also shed a large a large number of jobs, and small businesses are relatively fragile during recessionary periods, thanks to diminished access to capital and other factors.
However we measure it, it is true the small business economy has consistently grown over the past century, even when faced with immense competition from very large firms that arrived with the advent of industrialization. It is also true, however, that the small business economy has gone from near total dominance in the US economy to being the minority party. While small firms make up over 99 percent of all firms in existence, they employ only 46 percent of all private-sector employees in the US. Moreover, small businesses pay out only 39 percent of total private payrolls, and collect only 39 percent of private sector receipts.
The Advantages of Bigness
The next question is why small businesses generate less than half the country’s output today. There are many reasons why small business has been in relative decline since the nineteenth century. Many of these reasons come out of the natural evolution of market economies in the presence of industrialization and growing infrastructure.
For example, when the United States lacked robust transportation infrastructure, it was difficult for any single firm to forge a large customer base across a large geographical area. Outside of goods suitable for export, most goods were limited to regional markets, which meant businesses were often limited to functioning regionally as well. Moreover, the provision of services tends to be limited by communications technology in addition to transportation amenities. Improvement in these areas will open new markets to competition, and the most successful firms will tend to dominate larger areas, paving the way for larger firms. The formal corporate structure of large firms also tends to give larger firms a longer life if for no other reason than smaller firms often cease to exist when the original founders retire or die. This happens less frequently with larger firms.
Those firms that are able to grow into larger markets are then able to take advantage of economies of scale which reduce costs and give large firms an advantage over smaller firms, all else being equal. This is true in agriculture and industry, as well as in retail where vertical integration and the ability to warehouse and move large numbers of goods is a clear advantage. Moreover, large firms, especially large public companies usually can access more resources with more ease through corporate bonds, and stock sales, thanks in part to their ability to tap into a larger base of consumers. Loans, at relatively low interest rates, are also more readily available to large firms, thanks in part to the large firms’ longer life span and more sophisticated record keeping.
Size does not bring advantages in all sectors, however. The service sector, especially, has been a stronghold for small businesses since the early days of industrialization. Food service remains dominated by locally owned small enterprises. Historically, law firms, medical offices, accountants, and other services in the “professions” have tended to be provided at the local level by smaller firms. Sales and brokering in real estate and insurance is usually provided by small businesses. Even in manufacturing and retail, experience has shown that small firms have been able to hold their own against larger enterprises through specialization in niche markets, and by focusing on providing superior service rather than on providing the largest possible numbers of goods. Consider, for example, TruValue and ACE Hardware franchisees who manage to turn a profit even when located near a Home Depot or Lowe’s in many markets.
This all helps us to understand why the small business economy will never disappear so long as market forces are allowed to function. The dynamism of the marketplace, combined with a total lack of uniformity across many local markets, will always provide smaller firms with opportunity to innovate and find new customers.
The Ways Government Can Favor Big Business
So, there are very real advantages for large enterprises in many cases in a truly free market environment. But, it is also true that government policy can put further pressure on small businesses and crowd out small businesses through this process.
In other words, just as economic inequality is often a product of free exchange in the market place, it can also be a artificially produced through market interventions, such as monetary inflation. The same is true of market and political trends which, combined, confirm to the dominance of large enterprises.
The tools used today are not fundamentally difference from what they were in the nineteenth century: inflation, regulation, protection, and government spending. The modern notion of too-big-to-fail is an additional factor, and central banking is now, and has always been, another vehicle for favoring large enterprises over small.
So, how do these mechanisms work? Any policy that raises costs for enterprises while reducing competition is going to tend to favor larger enterprises. Larger enterprises are better able to endure rising prices through easier access to credit, and are able to draw resources through a variety of means. That is,. larger enterprises have more cushion against policies that raise costs. This fact is routinely acknowledged when legislators exempt small enterprises from costly regulatory policy, such as the American with Disabilities act. It is known that regulations are costly, and small enterprises are less able to endure them. So, smaller firms below a certain threshhold of employees are often exempted, but this does not solve the problem. Rather, small firms are disincentivized from making the jump from the small, exempt firm to the larger, non-exempt firm which must take on the higher level of regulation. This also tends to reduce the number of firms that are able to provide actual competition against the larger incumbent firms.
This has been of particular note in the field of smaller banks since the introduction of new banking regulations under Dodd-Frank. In a 2025 study by the Conference of State Bank Supervisors, the researchers concluded that compliance with Dodd-Frank has a greater impact on smaller banks. Or, as the report puts it: “four of the five expense categories show that smaller community banks shoulder a markedly higher proportion of compliance costs [than large banks]. …The evidence puts forth a clear conclusion: regulatory costs behave more like a fixed overhead cost than a variable one, meaning they do not scale down gracefully. The smaller the bank, the bigger the bite.”
Protective tariffs have long been another policy that favors large enterprise at the expense of small. This is partly because the whole point of protectionism is to raise prices on consumers to the advantage of manufacturers. While small manufacturers certainly do exist, nearly 60 percent of manufacturing employment is in firms with more than 500 employees. This reflecting how most manufacturing output comes from large firms. Moreover, recent data suggests that even among manufacturers, larger firms benefit more from tariffs than smaller firms. A November 2025 survey from the Richmond Fed showed that large firms are far more optimistic than small firms about the impact of tariffs.
Outside the manufacturing sector, small enterprise sees even fewer benefits from tariffs. The most direct effect can be seen in the fact that 97% of importers are small business. Importers are the firms that actually pay the tariff in the act of importing goods and services. Importers hope to be able to “pass on” these costs to American buyers, but that is often a false hope in a competitive economy where there is no guarantee that consumers will pay higher prices. Nor should we think that it is only consumers who buy imported goods. Rather, small businesses rely on countless imported goods to produce goods and services inside the United States. As the US Chamber of Commerce recently noted, “Small manufacturers often face the brunt of tariff impacts” and 40,000 small manufacturers rely on specific imported parts to complete the manufacturing process. This may help explain why small businesses are not exactly cheering new tariffs.
Moreover, small businesses in the service sectors rely on a variety of technologies, vehicles, and foods to deliver services in logistics, food service, and other fields. Protectionism only raises costs for these firms. As with any policy that raises costs, like with government regulation, larger firms are better able to absorb these costs.
Monetary inflation, of course, also raises prices overall, and this has similar effects in that it raises prices on both consumers and small businesses. As with rising process due to protectionism, inflation-induced price increases often have the largest negative effects on the smaller firms because smaller enterprises are often less able to pass on costs to consumers, thanks to more intense competition among smaller firms. Moreover, inflation causes unpredictability in supply chains and increases uncertainty overall, which small enterprise is less able to weather, compared to large industry.
Easy money also tends to reduce competition by encouraging greater numbers of mergers and acquisitions. Empirical studies have shown, for instance, that monetary expansion correlates positively with the buying up of smaller firms, thus eliminating competition. For example, a 2024 study by Johannes Fischer and Carl-Wolfram Horn, “We find that a contractionary monetary policy shock significantly and robustly lowers aggregate M&A activity, both in terms of the total number of deals and their total value” There is nothing wrong with mergers and acquisition in a free marketplace, of course, but when it is a byproduct of monetary expansion, we cannot say it is the result of consumer wants and free market action.
Financial bubbles and financialization tend to disproportionate impact small enterprise as well. Economist Brendan Brown has done work examining how monetary expansion can fuel speculative narratives that push investment toward a small number of firms that are fashionable among yield-starved investors. Recall, how, for many years, easy money chased the so-called FAANGS stocks and how today, investment in the S&P500 is greatly concentrated in a relatively small number of A.I. stocks. The top five companies in the S&P 500, all huge tech firms, now account for over 30 percent of the index’s full value. This phenomenon, which is essentially a form of bubble financialization, has the effect of funneling money and resources toward speculation in larger, financially trendy firms, rather than in productive, smaller firms less connected to the financial sector.
And then there is government spending and subsidies. Although federal grants programs like to play up their attempts to find smaller firms eligible for federal spending and grants, the aggregate effect tends to overwhelmingly favor larger firms. Less than 25 percent of federal contracts are awarded to small businesses. The federal government is the largest purchaser of goods and services in the world, so this alone constitutes an enormous transfer of resources from taxpayers—which includes millions of small business owners—to large enterprise.
The most egregious example of all this are the bailouts and similar policies based on the “too-big-to-fail” policy employed by the Federal government and the central bank. These include the TARP program, which included the AIG bailout, among others. The central bank, beginning in 2008, has purchased more than 2.7 trillion in mortgage backed securities to keep politically-connected banks solvent. Trump has recently ordered Fannie and Freddie to buy an additional $200 billion of these securities, in a new attempt to force up the prices of mortgage-backed securities held by big banks. The administration has not begun buying up portions of private companies outright. Over the past year, the Trump administration has directly bought stakes in ten American corporations, paying in billions in taxpayer money into companies like Intel and US Steel.
War, Industrial Policy, and Small Enterprise
Policies like too-big-to-fail and direct investment in major corporations also bear the hallmarks of a newly revived from of economic intervention called industrial policy. Industrial policy is the use of strategic government interventions, through protective tariffs, subsidies, grants, and taxpayer-funded “investment” into select companies. The idea is to steer the economy to favor certain sectors and firms deemed to be of strategic important to the regime.
Historically, industrial policy has been one of the most explicit means of governments directly favoring large enterprise over small firms. Theoretically, it would be possible for national governments to subsidize and favor smaller firms just as much as larger firms through industrial policy. In practice, it doesn’t turn out that way. It is overwhelmingly large firms that are targeted as beneficiaries of the government grants, subsidies and tax benefits employed to accomplish the strategic goals of regimes using industrial policy.
Rather, as political scientists Andre Blais and Philippe Faucher have shown, Industrial policy tends to concentrate its efforts on “a limited number of sectors, such as aeronautical industry, information technology, telecommunications, and the chemical industry.” In the areas of research grants, for example, it is overwhelmingly large firms that benefit of for no other reason than the fact that small firms rarely engage in the sort of research that national regimes regard as strategic from the state’s perspective.
Moreover, from the state’s perspective, the point of industrial policy is to maximize growth in certain sectors. In recent years, for example, the stated policy has been to increase US production in steel and select technological sectors as part of international rivalries with foreign states like China. In cases like these, the regime is not interested in fostering competition or improving market conditions. It’s not even concerned with raising the standard of living. Rather, the regime seeks growth in its chosen sectors above all else for what the state believes are geopolitical reasons. As Blaise and Faucher put it:
The State seeks to steer the industrial structure in the direction that appears most conducive to growth. For the State, large companies are therefore valuable allies … the State is compelled to support large companies because they are best positioned to ensure economic growth.
In an economy that is mostly guided by actions in the free market, the direction of market development is never predetermined. Industries and sectors that look stable and valuable can suddenly go into decline and disappear based on the whims of consumers. This is all the more true when consumers have a large number of choices in areas where international trade is relatively free.
Governments, however, may decide that markets, beholden as they are to the free choices of consumers, are not sufficiently supportive of the regimes strategic goals. Therefore, the regime intervenes to pick and choose which industries will be supported.
The goal in these cases are to maximize economic growth in certain areas through specific sectors that are deemed to be strategically important. Thus, those sectors and products and services valued in the free marketplace are ignored. Politically, large firms are the easiest to engage through grants, spending, and subsidies, and it is also generally believed that the larger firms offer the fastest path to maximum growth in accordance with regime goals.
Blaise and Faucher continue:
In short, large corporations occupy a central place in government strategy. Their influence on the evolution of the national economy is decisive. The State has every interest in giving them special attention, in helping them in times of difficulty, or in promoting their expansion.
As is so often the case, strategic concerns, from the regime’s point of view, are more important that market priorities, and ultimately more important than any political pressures in favor of market freedom, and so, Blaise and Faucher write: “Because the commitment to the pace of growth and the rate of accumulation generally outweighs political constraints … large companies … are the main beneficiaries of industrial policy…”
Moreover, it is politically convenient if the sectors that benefit from industrial policy “have greater visibility.” This makes it easier for policymakers to claim benefits from their selective and anti-market policies, claiming that the regime’s “investment” has created more jobs or a stronger domestic economy. Thus, Blaise and Faucher conclude that regimes of this nature are “concerned first and foremost with large companies whose impact on the national economy is easily perceptible.”
This political strategy in some ways is similar to what state and local governments do when they offer special regulatory or tax incentives to select large companies as a means of enticing those companies to relocate. These policies favor the selected firms, but smaller firms are unable to take advantage of these benefits. Politically it is more advantageous to policymakers to say “look, Big Company X has moved to our city and create many new jobs.” This is more politically advantageous than simply reducing taxes for all businesses since it would be impossible to keep track of all the job subsequently added by countless small firms, and announcing those job gains to the public.
These phenomena are intensified in times of war. The realities of industrial policy also highlight how large firms are favored in war time as well. It is during major wars—such as World War II—when strategic concerns overwhelm market concerns, and virtually all policy becomes an extension of industrial policy. Thus, during wartime, large weapons manufacturers, and other strategically important firms see immense new inflows of resources while smaller firms see much more modest gains.
Again, this doesn’t mean that very large firms won’t exist or shouldn’t exit in a truly free market. They will, and likely in large numbers. But it is also likely that a truly free marketplace would be much more dynamic than the one we have now, and would feature a larger number of successful smaller firms far more frequently poised to compete against larger firms. Moreover, in a free economy, we’d likely see many larger firms failing in the absence of too-big-to-fail policies. This in itself would be the advantage of many smaller firms since this would make space for more competition from new firms and also provide access to the plants and capital left behind by bankrupted and failed firms. This is what should have happened in the wake of the Great Recession and the Global Financial Crisis. Unfortunately, governments intervened to preserve and sustain large, inefficient firms, bailing them out to the disadvantage of consumers and small enterprise alike.
