Is America Encouraging the incorrect Sort of Entrepreneurship?

Recently economist William Baumol passed on with the chronilogical age of 95. His death was universally mourned by folks the economics community, a lot of whom shared the view which he had passed before getting a much-deserved Nobel Prize. One of us (Robert) had the great privilege of utilizing him, befriending him, or being able to regularly witness his economic wisdom, even during his retirement years.

Of Baumol’s many contributions to economics, the best is cost disease, so in retrospect high-productivity industries raise costs and so prices in low-productivity industries. The insight is very relevant now, as business activities has shifted into low-productivity services like healthcare and education, where price increases are devouring public and household budgets, and whose continued low productivity has weighed down U.S. productivity growth overall.

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

Inside a 1990 paper, “Entrepreneurship: Productive, Unproductive, and Destructive,” Baumol argued that this a higher level entrepreneurial ambition in a country it’s essentially fixed as time passes, and 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 consider Kogan Page Entrepreneurship Books as the “productive” kind, as Baumol known as it, the location where the businesses that founders launch commercialize new things or better, benefiting society and themselves along the way. A substantial body of research establishes these “Schumpeterian” entrepreneurs, people who are “creatively destroying” that old for the newest, are critical for breakthrough innovations and rapid advances in productivity and standards of life.

Baumol was worried, however, with a completely different form of entrepreneur: the “unproductive” ones, who exploit special relationships together with the government to construct regulatory moats, secure public spending because of their own benefit, or bend specific rules on their will, along the way stifling competition to make advantage because of their firms. Economists know this as rent-seeking behavior. As Baumol wrote:

…entrepreneurs are invariably with us and always play some substantial role. But there are a selection of roles among that your entrepreneur’s efforts might be reallocated, and a few of these roles usually do not keep to the constructive and innovative script that’s conventionally caused by that person. Indeed, sometimes the entrepreneur may even lead a parasitical existence that’s actually damaging on the economy. The way the entrepreneur acts at a moment and put depends heavily for the rules of the game-the reward structure within 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, a general change in a combination of entrepreneurial effort between the two types of entrepreneurship is always to blame – specifically, a decline in productive entrepreneurship along with a coincident rise in unproductive entrepreneurship. But is what’s actually happening within the U.S.?

Well, for starters, we among others have documented a pervasive decline in the speed of latest firm formation over the last thirty years plus an acceleration for the reason that decline since 2000. The truth is, we discovered that by 2009 the speed of business closures exceeded the speed of business births initially within the three-decades-plus reputation our data. This decline in startup formation has happened each state and almost all metropolitan areas, 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 firms that be the cause of the lion’s share of net job gains. This items to a slowdown within the expansion of productive entrepreneurship.

How about the opposite type of entrepreneurship? Can we also go to a rise in unproductive entrepreneurship, as Baumol theorized?

We don’t have a very smoking gun to verify this hypothesis, but there surely is smoke, also it is available in two forms: rising profits, particularly those earned through the largest businesses throughout the economy, and suggestive evidence a rise in efforts to shape the principles of the game. This pattern is like rise of monetary rents and rent-seeking behavior.

For example, Jason Furman and Peter Orszag, both former economic advisers to Barack obama, wrote an influential 2016 paper that argued that economic rents are rising, particularly since 2000, and were a main aspect in increasing wage inequality observed during this time. Similarly, several economists from MIT, Harvard, and Zurich discovered that industries where top firms’ share of the market had most increased had experienced the largest declines within the share of income planning to workers.

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

To be clear, the presence of economic rents on its own doesn’t establish that there’s been a rise in unproductive entrepreneurship. For your to be true, there has to be be evidence a rise in rent-seeking – that’s, concerted efforts to stifle competition by influencing the reward structure or rules of the game in a market.

James Bessen of Boston University presents suggestive evidence that rent-seeking behavior has been increasing. Inside a 2016 paper Bessen implies that, since 2000, “political factors” be the cause of an important section of the boost in corporate profits. Such a thing happens through expanded regulation that favors incumbent firms. Similarly, economists Jeffrey Brown and Jiekun Huang of the University of Illinois have found that businesses that have executives with relationships to key policy makers have abnormally high stock returns.

Simply speaking, Baumol could have been ahead of his in time warning that economies can suffer not only coming from a cost disease but also looking at the entrepreneurial counterpart – a general change in the principles that shifts the distribution of entrepreneurial effort from activity that can help the economy toward activity that hurts it. Unfortunately, there is strong suggestive evidence that Baumol’s warnings have come to pass. If your U.S. will tackle its many problems, we are going to have to find solutions to encourage would-be entrepreneurs to start out innovative, productive businesses, rather than dedicating their efforts to co-opting government so that you can secure economic advantage.
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