A few weeks ago economist William Baumol died with the chronilogical age of 95. His death was universally mourned by folks the economics community, many of whom shared the vista which he had passed before buying a much-deserved Nobel Prize. One among us (Robert) had the fantastic privilege of working together with him, befriending him, or being able to regularly witness his economic wisdom, during his final years.
Of Baumol’s many contributions to economics, the most common is cost disease, so in retrospect high-productivity industries raise costs and thus prices in low-productivity industries. The insight is specially relevant now, as economic activity 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 overwhelmed U.S. productivity growth overall.
But there’s a lesser-known thought of Baumol’s that’s equally relevant today understanding that can help explain America’s productivity slump. Baumol’s writing enhances the possibility that U.S. productivity is low because would-be entrepreneurs are focused on an unacceptable form of work.
In the 1990 paper, “Entrepreneurship: Productive, Unproductive, and Destructive,” Baumol argued how the degree of entrepreneurial ambition within a country is basically fixed after a while, understanding that what determines a nation’s entrepreneurial output will be the incentive structure that governs and directs entrepreneurial efforts between “productive” and “unproductive” endeavors.
Most of the people imagine Entrepreneurship Books beeing the “productive” kind, as Baumol described it, where the companies which founders launch commercialize new things or better, benefiting society and themselves in the operation. A sizable body of research establishes these “Schumpeterian” entrepreneurs, those that are “creatively destroying” the existing and only the newest, are crucial for breakthrough innovations and rapid advances in productivity and standards of living.
Baumol was worried, however, with a unique sort of entrepreneur: the “unproductive” ones, who exploit special relationships using the government to create regulatory moats, secure public spending for their own benefit, or bend specific rules with their will, in the operation stifling competition to generate advantage for their firms. Economists know this as rent-seeking behavior. As Baumol wrote:
…entrepreneurs are invariably with us and constantly play some substantial role. But there are many of roles among that the entrepreneur’s efforts might be reallocated, and several of those roles tend not to continue with the constructive and innovative script that’s conventionally attributed to that individual. Indeed, at times the entrepreneur might lead a parasitical existence that’s actually damaging towards the economy. What sort of entrepreneur acts at the given time make depends heavily about the rules from the game-the reward structure in the economy-that get lucky and prevail.
In Baumol’s theoretical framework, depressed rates of entrepreneurship aren’t at fault for periods of slow economic growth; rather, a modification of the amalgamation of entrepreneurial effort forwards and backwards forms of entrepreneurship would be to blame – specifically, a loss of productive entrepreneurship plus a coincident surge in unproductive entrepreneurship. But are these claims what’s actually happening in the U.S.?
Well, first of all, we and others have documented a pervasive loss of the interest rate of the latest firm formation throughout the last 3 decades as well as an acceleration in that decline since 2000. In reality, we found out that by 2009 the interest rate of commercial closures exceeded the interest rate of commercial births initially in the three-decades-plus good our data. This loss of startup formation has took place each state and nearly all locations, as well as in each broad industrial sector, including hi-tech. There has been a slowdown in activity of high-growth firms, the relatively very few businesses that are the cause of the lion’s share of net job gains. Doing this points to a slowdown in the growth of productive entrepreneurship.
How about one other form of entrepreneurship? Do we also visit a surge in unproductive entrepreneurship, as Baumol theorized?
We don’t use a smoking gun to verify this hypothesis, but there is surely smoke, also it will come in two forms: rising profits, specially those earned with the largest businesses throughout the market, and suggestive evidence of more efforts to shape the guidelines from the game. This pattern is in conjuction with the rise of economic rents and rent-seeking behavior.
As an example, Jason Furman and Peter Orszag, both former economic advisers to President 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, 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 largest declines in the share of greenbacks gonna 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 found out that the proportion of greenbacks earned by workers may be falling, as others have described, but also how the share earned by capital has, too. Indeed, both have been declining even though the share of greenbacks gonna “markups,” or rents, may be increasing.
To be clear, the existence of economic rents alone doesn’t establish that there’s been more unproductive entrepreneurship. For your to be real, there should be be evidence of more rent-seeking – that’s, concerted efforts to stifle competition by influencing the reward structure or rules from the game within a market.
James Bessen of Boston University has provided suggestive evidence that rent-seeking behavior may be increasing. In the 2016 paper Bessen demonstrates that, since 2000, “political factors” are the cause of a considerable section of the boost in corporate profits. This happens through expanded regulation that favors incumbent firms. Similarly, economists Jeffrey Brown and Jiekun Huang from the University of Illinois have realized that companies which have executives with relationships to key policy makers have abnormally high stock returns.
In a nutshell, Baumol was before his in time warning that economies can suffer not simply from a cost disease but also looking at the entrepreneurial counterpart – a modification of the guidelines that shifts the distribution of entrepreneurial effort from activity that can help the economy toward activity that hurts it. Unfortunately, there’s strong suggestive evidence that Baumol’s warnings began to pass. When the U.S. will almost certainly tackle its many problems, we’re going to need to find ways to encourage would-be entrepreneurs to begin innovative, productive businesses, instead of dedicating their efforts to co-opting government in order to secure economic advantage.
To learn more about Entrepreneurship Books go to see our new web site: web link