Thursday, April 28, 2011
Small business is a sacred cow in America. In 1958, Congress created the Small Business Investment Company ("SBIC"), a unique public-private program that provides long-term capital to small entrepreneurs. From its inception, however, the SBIC has been plagued by inefficiency and failure. Yet, Congress continues to pour millions of dollars into the SBIC program, with no end in sight. What explains this failed policy course?
This article argues that the SBIC program exemplifies the pitfalls of legal and political institutional path dependency and should be replaced by private institutional lending systems. Pursuant to this account, past decisions can influence future legal developments even in the face of material social change.
Political institutions can entrench ineffective paths by sustaining dynamics of "increasing returns" through processes of "positive feedbacks" and "self-reinforcement." Increasing returns occur when the benefits of a choice augment simply because over time more people opt for that choice.
Our romantic ideal of small business as an economic and social catalyst has sprouted positive cultural feedbacks. Thereafter, the establishment of the House and Senate Small Business Committees and the Small Business Administration sustained this culture, self-reinforcing the SBIC program inefficient path where we remain invested to this day.