Is America Encouraging a bad Kind of Entrepreneurship?

A few weeks ago economist William Baumol passed away in the day of 95. His death was universally mourned by individuals the economics community, many of whom shared the vista he had passed before finding a much-deserved Nobel Prize. Among us (Robert) had the truly great privilege of dealing with him, befriending him, and being able to regularly witness his economic wisdom, even just in his later years.

Of Baumol’s many contributions to economics, the best is cost disease, which is why high-productivity industries raise costs and thus prices in low-productivity industries. The insight is very relevant now, as economic activity has shifted into low-productivity services like medical care and education, where price increases are devouring public and household budgets, and whose continued low productivity has overwhelmed U.S. productivity growth overall.

But there’s a lesser-known concept of Baumol’s which is equally relevant today understanding that might help explain America’s productivity slump. Baumol’s writing enhances the possibility that U.S. productivity is low because would-be entrepreneurs are dedicated to a bad type of work.

Within a 1990 paper, “Entrepreneurship: Productive, Unproductive, and Destructive,” Baumol argued the a higher level entrepreneurial ambition in a country is essentially fixed as time passes, understanding that what determines a nation’s entrepreneurial output may be the incentive structure that governs and directs entrepreneurial efforts between “productive” and “unproductive” endeavors.

Many people think of Cheap Entrepreneurship Books as the “productive” kind, as Baumol referred to it, where the companies that founders launch commercialize a new challenge or better, benefiting society and themselves in the operation. A considerable body of research establishes that these “Schumpeterian” entrepreneurs, those who are “creatively destroying” the old in favor of the modern, are critical for breakthrough innovations and rapid advances in productivity and standards of living.

Baumol was worried, however, with a unique kind of entrepreneur: the “unproductive” ones, who exploit special relationships together with the government to make regulatory moats, secure public spending for their own benefit, or bend specific rules on their will, in the operation stifling competition to create advantage for their firms. Economists call this rent-seeking behavior. As Baumol wrote:

…entrepreneurs are invariably here and constantly play some substantial role. But there are a variety of roles among that this entrepreneur’s efforts could be reallocated, plus some of those roles don’t continue with the constructive and innovative script which is conventionally attributed to that individual. Indeed, occasionally the entrepreneur might even lead a parasitical existence which is actually damaging towards the economy. How a entrepreneur acts with a with time and put depends heavily for the rules from the game-the reward structure from the economy-that occur to prevail.

In Baumol’s theoretical framework, depressed rates of entrepreneurship aren’t at fault for periods of slow economic growth; rather, changing your a combination of entrepreneurial effort backward and forward sorts of entrepreneurship is always to blame – specifically, a decline in productive entrepreneurship as well as a coincident increase in unproductive entrepreneurship. But is this what’s actually happening from the U.S.?

Well, first off, we yet others have documented a pervasive decline in the rate of recent firm formation over the last three decades with an acceleration in that decline since 2000. The truth is, we found out that by 2009 the rate of business closures exceeded the rate of business births the very first time from the three-decades-plus good our data. This decline in startup formation has happened each state and virtually all locations, as well as in each broad industrial sector, including high tech. We are seeing a slowdown in activity of high-growth firms, the relatively few businesses that be the cause of the lion’s share of net job gains. Doing this exactly what to a slowdown from the growth of productive entrepreneurship.

What about the other type of entrepreneurship? Should we also view a increase in unproductive entrepreneurship, as Baumol theorized?

We don’t use a smoking gun to confirm this hypothesis, but there is smoke, plus it comes in two forms: rising profits, in particular those earned by the largest businesses in the economy, and suggestive proof of an increase in efforts to shape the guidelines from the game. This pattern is similar to the rise of monetary rents and rent-seeking behavior.

For instance, Jason Furman and Peter Orszag, both former economic advisers to President Obama, wrote an influential 2016 paper that argued that economic rents are rising, particularly since 2000, and were a central take into account increasing wage inequality observed during this time. Similarly, a gaggle of economists from MIT, Harvard, and Zurich found out that industries where top firms’ share of the market had most increased had experienced the biggest declines from the share of revenue gonna workers.

Perhaps most convincing, University of Chicago economist Simcha Barkai carefully tabulated the share of industry income offered to labor, capital, and “profits.” (Normally, capital and earnings are included together in a broad, residual “returns to shareholders” category.) He found out that the share of revenue earned by workers has been falling, as others have stated, and also the share earned by capital has, too. Indeed, both have been declining as the share of revenue gonna “markups,” or rents, has been increasing.

To be clear, a good economic rents alone doesn’t establish that there’s been an increase in unproductive entrepreneurship. With the actually was, there needs to be be proof of an increase in rent-seeking – which is, concerted efforts to stifle competition by influencing the reward structure or rules from the game in a market.

James Bessen of Boston University offers suggestive evidence that rent-seeking behavior has been increasing. Within a 2016 paper Bessen implies that, since 2000, “political factors” be the cause of an amazing the main rise in corporate profits. Such a thing happens through expanded regulation that favors incumbent firms. Similarly, economists Jeffrey Brown and Jiekun Huang from the University of Illinois have discovered that companies that have executives with partners to key policy makers have abnormally high stock returns.

Simply speaking, Baumol might have been in front of his time in warning that economies can suffer not just coming from a cost disease and also looking at the entrepreneurial counterpart – changing your the guidelines that shifts the distribution of entrepreneurial effort from activity that can help the economy toward activity that hurts it. Unfortunately, there is certainly strong suggestive evidence that Baumol’s warnings have learned to pass. If your U.S. is going to tackle its many problems, we are going to need to find approaches to encourage would-be entrepreneurs to start innovative, productive businesses, as an alternative to dedicating their efforts to co-opting government to be able to secure economic advantage.
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