Australia’s mining resource boom is at the end of the cycle and the much-vaunted two-speed economy is about to come to an end according to some commentators. The market had a demand particularly from China for our mineral resources and towns where mining is underway benefited greatly from this boom. While there is a lot of discussion about the localized benefits where there are fly-in fly-out (FIFO) work forces, our economy as a whole was largely insulated from the global financial crisis because of this boom.
The story that Government saved us from the GFC through it’s stimulus package is another story however, it may well indeed have been the best of intention but a Government spending borrowings simply doesn’t make sense to me. In less than 6 months after releasing the funds into the economy, it was all back out of the economy and locked up in investment, particularly by big business as they wrote down debt. i.e. the money was no longer operating in the economy and any stimulus benefit was incredibly ephemeral.
Keynesian economics are adopted on both sides of the political spectrum, the only point of difference is that one mob doesn’t believe we should have gone as far into debt as we did. The Conservatives preach small government and lower taxes but in truth they are marginally different from the ALP in any meaningful achievements on that front. And just for clarity, if the conservatives were not Keynesian economists, they would not provide any support to big businesses or keep in place many of the tax expenditure & other policies they maintain.
The problem with Keynesian economic theory is that Government is picking winners, and unfortunately it is invariably picking enterprises that created the pressure on the economy in the first place. To over simplify what usually happens; incredibly large enterprises get into difficulty, in this case the banks, and Government says they are too large to fail so they prop them up.
Park for a moment the conversation whether it’s true that we can’t afford to let them fail, it doesn’t make sense that Government chooses which businesses are allowed to survive and lets others fail, especially when they are the businesses which created the problem…..
So what should we be doing differetly
Economy of scale is the realm of big business; the valuable economy is within small business, where the most important part of the economy always exists. These businesses live and die at the margins, they either meet the demands of the market to provide value or they perish.
Big business I have to point out is not a bad thing; it is where we obtain goods and services when we have price pressures to take into consideration and even more importantly they create many of the distribution networks critical for a lot of small businesses to get their products to market.
The thing with big business though is that through necessity they invariably become focused on productivity gains and efficiency to remain competitive in the marketplace, they invariably have small margins of error in their pricing and are cumbersome bureaucracies, slow to react to change.
So what is the two paced economy….
If we look at the numbers here in Australia we can see that big business accounts for 49% of the economy with 35% of the workforce, this compares to small business contributing 47% of the economy, a smaller contribution to GDP but with a much larger workforce at 39% of employees. The difference in numbers is the public sector that includes Government Owned Enterprises generating 4% of GDP.
What these figures seem to say is that big business makes more money with less workers needed, i.e. more for less and commonsense would suggest that perhaps big business is the way to go and lets have fewer small enterprises as they are too much bloody hard work for the return!
Well, that’s the whole point of this article and why there will always be a two-paced economy.
The problem with efficiency focus is that ultimately price becomes the only point of differentiation and value to the customer, for example service, is no longer a component of the transaction.
Small Business cannot compete on price and as a consequence the only option for these business operators is to create a competitive advantage is to deliver on the value they can create for their customers. Without value being delivered a small business will disappear and this is exactly what we want as consumers.
If the market had monopolies or duopolies delivering lowest prices at the top of the food chain and a as consequence every small business disappeared, there is a common held belief that the big boys would then gouge their prices due to having no competition….
That may or may not be true, let’s hope that we never find out because I for one always want to see value exist in the market and secondly, if all that exists is big business and we have economic downturn, our economy will fail spectacularly as big business cannot respond to change the way that a small business must and does every day.
Yours in Successful Small Businesses…