Want More Jobs? Unleash Small Businesses, Venture Capital and Technology

Job creation continues to be the seminal issue of our time. The scale of the requirement is daunting. We need an economy that can not only keep employed the 155 million working today, but can find jobs for another 15 million over the next decade. How both can happen is obvious if we just look at where jobs came from in the past.

I’ve visited hundreds of companies, seen many more business plans, and can honestly say I’ve never met a CEO or entrepreneur who said the purpose of their company, or idea, was to create jobs. Businesses of course need people; those that are successful naturally need more as they grow from inception. But success is never counted in the boardroom or in investor circles by a company’s head count. For a business, any business, it is and must always be first about revenue and profits. It should go without saying that without both, it’s not a business but either a charity or a government program.

Society, all of us, would count as a success a company that started in a garage or its equivalent, with a few guys and gals with an idea and some investment capital, and ended up over a decade or two employing a couple of hundred people as a consequence of that company providing a valuable GDP-enhancing product or service. Such a company provides wealth for everyone along the way; employees, investors, and tax collectors. And even more successful are those that grow from garage to gargantuan employers of thousands. That’s of course the storied trajectory of firms like Microsoft [NASDAQ: MSFT], Intel [NASDAQ: INTC] and Apple [ NASDAQ: AAPL]in fairly recent history, and in earlier history firms like Standard Oil, U.S. Steel [NYSE: X], and Ford [NYSE: F], and more recently for example, Google [NASDAQ: GOOG] and Facebook.

From these stories we know four things about jobs.

First, the government didn’t create those companies — or any others. Governments don’t create jobs. Oh sure, state, local and federal governments employ firefighters, police, soldiers, regulators and so forth. All are essential to the maintenance, stability and safety of the underlying societal infrastructure. But those kinds of jobs comprise only about 10 percent of the workforce. Importantly, such jobs are not engaged in wealth creation, but in wealth absorption. In order to have per capita wealth grow, we need most people employed in enterprises that create, not absorb, wealth.

Second, wealth creation is anchored in technology progress. You need a stable society, rule of law, and access to capital as underlying features. But no one would argue that cars, farms or computers are artifacts of anything but technology in one form or another. It’s not just "new" technology in the form of a new invention, like the internal combustion engine, light bulb, or transistor, but also new technology in every derivative and incremental form. There is no shortage of new technologies. If anything, the pace of technology change is accelerating. A collateral truism about technology: forecasters and derivatively, policy makers, reliably fail in their ability to guess what technologies will unleash new frontiers. In this regard we’re only good at hindsight. No one but no one, not even science fiction writers, anticipated in 1980 for example the emergent economic power of the Internet.

Third, our salvation will come from small businesses. The overwhelming majority of all national net job growth — over three-fourths by some estimates — comes from small businesses. And the majority of current employment is in small businesses; about one-third of workers are employed by mega-enterprises. This is a widely documented, oft reported and generally ignored reality. Nonetheless, invariably we find big corporate CEOs with big payrolls at the table when it comes to talking about job creation. To be sure the founding CEOs of some big companies have direct experience with job creation, but that’s the exception; most have taken on the CEO job long, often very long, after their company’s start-up through growth phase.

And when it comes to big companies, we should keep in mind an underlying irony. Increasing labor productivity, not the labor workforce, is a key big-corporate metric indicative of underlying profitability and thus enterprise sustainability — i.e., to increase sales and market share without a pro rata growth in labor costs, indeed even by shedding jobs. Such productivity has been largely responsible for the recent run-up in the big corporate centered Dow Jones average – and has frustrated those who expected profits would have led to more hiring. In reality, if you want to find a million new jobs, 100 big corporations are quite unlikely to each add 10,000 to their payrolls — but 10,000 new businesses will almost certainly each employ 100 people. If we want more jobs we need to create an environment that unshackles daring souls who build new companies.

And the fourth reality we know: new businesses can’t get started without risk capital. What could be more risky than trying to build a business? You don’t see all the failures, but they are manifold. We focus on and know about the successful ones — a tautology if ever there was one. There’s often lower risk sitting at the tables of a Vegas casino than negotiating across the table to fund a start-up or a small business. Investors do it because there are opportunities for outsized profits. You want more small businesses funded? Unleash venture capital. You want fewer? Have the government try to pick the winners. The historical record provides no support for the idea of the government successfully picking winners, but, on average, the private sector does – even if only through the law of averages.

Apropos the President’s State of the Union Address, could it be that pundits inside and out of government are right, that green tech is the opportunity for America’s "Sputnik moment"? New energy technologies are indeed emerging; many quite exciting and some critically valuable. But we do know that 95 percent of people work in businesses that consume energy; just five percent work in energy-production industries. Increasing the latter would not be particularly impactful in terms of jobs, nor arguably a good thing. Only in less advanced societies is a large share of the workforce occupied by providing energy (and, similarly, food).

Still, could the mere act of trying to radically change the technology of energy production serve in the same apocryphal fashion as Sputnik? Would it spur a new generation of engineers like those who were inspired by President Kennedy’s dream of conquering space, and went on to engineer the 20th century’s technology-productivity boom and the modern computer era? I’ve visited this subject before, in the context of this Administration’s 2010 revised space policy to abandon a return to the moon and punt on going to Mars. If we want a seemingly impossible, inspirational engineering goal that could challenge a generation, it would be something like a mission to Mars, not building a wind farm, or a battery factory. (And, re the latter, I plead ’guilty’ as both chairman and investor in one.) A much more likely Sputnik moment will arrive the day we learn that China has a spaceship on its way to Mars.

Meanwhile, back on Earth, near-term job creation will come roaring back when we unleash the tigers of innovation — small businesses.

This piece originally appeared in Forbes

This piece originally appeared in Forbes