Last of the small businesses?

What if the farmers protests are justified, but not for the reasons assumed?

The results are in, and the commentariat of both right and left have declared that globalisation is to blame. Possibly hyper-globalisation. Whether it is the absence of manufacturing jobs, the depressing state of high streets, inequality, or many other ills, we are to blame a cabal of 1990s and 2000s politicians who were quite happy to open up the doors to China taking over the world.

Standing against such a consensus is a thankless task, not least as we can note how quickly this apparently edgy contrarian view became the mainstream. Look at the Conservatives and Labour, Republicans and Democrats, Macron and Le Pen, you will find criticism of globalisation. Look too at the farmers protests across Europe, inconveniently for some and helpfully for others homing in on the extra costs of the net-zero transition. But also about the ills of globalisation, global trade, and elites, however designed.

Yet there are different ways to think about farmers and modern economies. Most obviously, of old-fashioned protectionists demanding their subsidies. Or of politically inspired, perhaps Moscow-funded, to upset Europe. All plausible, but still rather lazy, lacking in any serious questioning of the modern political economy, and where farmers fit into that.

One of the complaints of the farmers is of the amount of bureaucracy required for their livelihoods. All those forms to be filled in, or various things to be tracked online, of requirements to protect their land and trace their animals, all necessary to receive their income. Requirements that will be rather easier for a large agri-business employing dedicated staff than for small family-run farms.

Sound familiar? Certainly for those following Brexit, where the main trade victims have been the small exporters suddenly required to go through numerous processes in order to export, many of whom have ceased to do so. Could that also be extended to the small retailers no longer appearing on high streets, or small manufacturers struggling to maintain competitive prices given regulatory requirements?

Regulation has gone along with globalisation, and indeed technology as the key political economy developments of the last 30 years. As states withdrew from direct control of markets, they regulated them instead. Consumers, politicians and indeed businesses then demanded ever more rules, for very good reasons such as safety and preventing economic damage. That had effects which are typically overlooked. China certainly mastered the art of production at scale to meet regulatory requirements, but then so did large companies around the world. At the cost typically of smaller operations for whom the cost was just too high.

Many countries have tried initiatives to respond to a perceived over-regulation by removing particular instances. But most have failed in assuming individual rules would not be popular, whereas actually there is a great demand for them, that is why they came to pass. Indeed the very same politicians crying about overall regulatory burden will often be asking for specific rules in their chosen areas. The same may also apply to the media, the first to demand a government response to particular problems even when also decrying the regulatory state as a whole.

Technology exacerbates regulatory effects. High street shops face higher unit costs while online providers can deliver tomorrow, perhaps even later the same day. Meanwhile businesses demand from their suppliers a level of precision and cost hard to meet without scaling up. We are long past the days of individual food growers being able to easily sell their surplus into shops, supermarkets demand predictability.

Perhaps then what we are really seeing with the farmers protests is against the scale effects of regulation, that we have previously seen in other fields. That in a modern economy, in too many sectors the only answer is to be a large business. Or perhaps a single small sub-contractor to one. That the public wants small business, but also wants the things that have made their continuation so difficult in particular the regulation and their affordable goods whenever and wherever. On this basis, farmers protests make eminent sense as they are being squeezed out by larger providers. This though is the effect of political choices that have been made.

Then returning to the debate on globalisation, if the prevailing critique is actually a mis-diagnosis of what has happened, then how is a better path to be found? For the assumption in so many accounts is that politicians’ actions were able to create the modern economy we have, whereas it is well known that it is companies that trade, that have created their supply chains, that have often sided with consumers on regulations. Business used technology and regulations as much as they did free trade to create the political economy of the time.

What we may want to ask instead is that if regulatory volume has this effect on small business, but widespread deregulation is not politically possible, how can this be managed? At the moment there is a good argument that small business is disadvantaged, and further that this has a knock-on effect onto overall economic competitiveness, if larger companies have less need to be concerned about potential rivals growing.

Perhaps a heavily regulated economy favouring large business, particularly in terms of goods production and sale, is the best balance. Then the innovation can take place in other services, though there are anti-competitive signs there as well. Although if that is the case, we should at least be discussing this. Or perhaps we shouldn’t have so much regulation even when it is popular, because it has a slowing effect on the whole economy. Or maybe we should just straightforwardly pay the smaller business to keep going.

Back to that consensus view that globalisation is to blame. Simple answers and scapegoats are very convenient, but rarely the whole story. In this case, almost certainly very little of the story of a major political economy transformation that was going for 30 years before most politicians and commentators seemed to notice. Low growth since 2008, covid, Russia’s invasion of Ukraine, and now the cost of the net-zero transformation have brought focus, but to also bring solutions the resulting analysis has to be the right one.