Last month economist William Baumol passed away in the day of 95. His death was universally mourned by folks the economics community, lots of whom shared the view which he had passed before getting a much-deserved Nobel Prize. Among us (Robert) had the great privilege of dealing with him, befriending him, or being able to regularly witness his economic wisdom, during his later years.
Of Baumol’s many contributions to economics, the best is cost disease, so in retrospect high-productivity industries raise costs and thus prices in low-productivity industries. The insight is particularly relevant now, as business activities has shifted into low-productivity services like health care 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 idea of Baumol’s that is certainly equally relevant today understanding that could help explain America’s productivity slump. Baumol’s writing enhances the possibility that U.S. productivity is low because would-be entrepreneurs are devoted to the incorrect kind of work.
In a 1990 paper, “Entrepreneurship: Productive, Unproductive, and Destructive,” Baumol argued the degree of entrepreneurial ambition in the country is essentially fixed after a while, understanding that what determines a nation’s entrepreneurial output is the incentive structure that governs and directs entrepreneurial efforts between “productive” and “unproductive” endeavors.
Most of the people consider Buy Entrepreneurship Books beeing the “productive” kind, as Baumol described it, the place that the companies that founders launch commercialize new things or better, benefiting society and themselves along the way. A sizable body of research establishes the “Schumpeterian” entrepreneurs, those that are “creatively destroying” that old in support of the newest, are critical for breakthrough innovations and rapid advances in productivity and standards of life.
Baumol was worried, however, by the very different form of entrepreneur: the “unproductive” ones, who exploit special relationships with the government to make regulatory moats, secure public spending because of their own benefit, or bend specific rules with their will, along the way stifling competition to create advantage because of their firms. Economists label this rent-seeking behavior. As Baumol wrote:
…entrepreneurs are always here and constantly play some substantial role. But there are a variety of roles among which the entrepreneur’s efforts may be reallocated, plus some of people roles don’t follow the constructive and innovative script that is certainly conventionally related to that individual. Indeed, occasionally the entrepreneur might even lead a parasitical existence that is certainly actually damaging on the economy. How the entrepreneur acts in a with time and place depends heavily on the rules with the game-the reward structure from the economy-that get lucky and prevail.
In Baumol’s theoretical framework, depressed rates of entrepreneurship aren’t the culprit for periods of slow economic growth; rather, a modification of the mix of entrepreneurial effort backward and forward kinds of entrepreneurship is always to blame – specifically, a loss of productive entrepreneurship and a coincident boost in unproductive entrepreneurship. But are these claims what’s actually happening from the U.S.?
Well, first off, we among others have documented a pervasive loss of the rate of the latest firm formation over the past three decades as well as an acceleration for the reason that decline since 2000. Actually, we learned that by 2009 the rate of economic closures exceeded the rate of economic births initially from the three-decades-plus reputation our data. This loss of startup formation has occurred in each state and the majority of metropolitan areas, along with each broad industrial sector, including hi-tech. We are seeing a slowdown in activity of high-growth firms, the relatively few businesses that account for the lion’s share of net job gains. All this points to a slowdown from the development of productive entrepreneurship.
How about the opposite kind of entrepreneurship? Do we also view a boost in unproductive entrepreneurship, as Baumol theorized?
We don’t possess a smoking gun to substantiate this hypothesis, but there is smoke, also it will come in two forms: rising profits, in particular those earned from the largest businesses throughout the market, and suggestive evidence of an increase in efforts to shape the guidelines with the game. This pattern is similar to the rise of monetary rents and rent-seeking behavior.
For example, Jason Furman and Peter Orszag, both former economic advisers to Barack obama, wrote an important 2016 paper that argued that economic rents are on the rise, particularly since 2000, and were a central factor in increasing wage inequality observed during this time. Similarly, a group of economists from MIT, Harvard, and Zurich learned that industries where top firms’ business had most increased had experienced the largest declines from the share of greenbacks going to workers.
Perhaps most convincing, University of Chicago economist Simcha Barkai carefully tabulated the proportion of industry income offered to labor, capital, and “profits.” (Normally, capital and profits are included together a single broad, residual “returns to shareholders” category.) He learned that the proportion of greenbacks earned by workers may be falling, as others have talked about, but also the share earned by capital has, too. Indeed, both have been declining whilst the share of greenbacks going to “markups,” or rents, may be increasing.
To be clear, the presence of economic rents on it’s own doesn’t establish that there’s been an increase in unproductive entrepreneurship. To the to be true, there has to be be evidence of an increase in rent-seeking – that is certainly, concerted efforts to stifle competition by influencing the reward structure or rules with the game in the market.
James Bessen of Boston University has provided suggestive evidence that rent-seeking behavior may be increasing. In a 2016 paper Bessen shows that, since 2000, “political factors” account for an amazing part of the rise in corporate profits. Such a thing happens through expanded regulation that favors incumbent firms. Similarly, economists Jeffrey Brown and Jiekun Huang with the University of Illinois have discovered that companies that have executives with relationships to key policy makers have abnormally high stock returns.
Simply speaking, Baumol could have been ahead of his time in warning that economies can suffer not simply from the cost disease but also from the entrepreneurial counterpart – a modification of the guidelines that shifts the distribution of entrepreneurial effort from activity that assists the economy toward activity that hurts it. Unfortunately, there is certainly strong suggestive evidence that Baumol’s warnings have come to pass. When the U.S. will almost certainly tackle its many problems, we intend to need to find approaches to encourage would-be entrepreneurs to start out innovative, productive businesses, rather than dedicating their efforts to co-opting government in order to secure economic advantage.
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