A few weeks ago economist William Baumol perished on the ages of 95. His death was universally mourned by individuals the economics community, most of whom shared the view he had passed before finding a much-deserved Nobel Prize. One among us (Robert) had the truly great privilege of working together with him, befriending him, or being able to regularly witness his economic wisdom, even just in his old age.
Of Baumol’s many contributions to economics, the most common is cost disease, so in retrospect high-productivity industries raise costs and so prices in low-productivity industries. The insight is particularly 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 notion of Baumol’s that is certainly equally relevant today which could 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 a bad kind of work.
Within a 1990 paper, “Entrepreneurship: Productive, Unproductive, and Destructive,” Baumol argued how the degree of entrepreneurial ambition within a country is basically fixed with time, which what determines a nation’s entrepreneurial output could be the incentive structure that governs and directs entrepreneurial efforts between “productive” and “unproductive” endeavors.
Most of the people imagine Entrepreneurship Books being the “productive” kind, as Baumol known it, the place that the companies that founders launch commercialize something new or better, benefiting society and themselves in the act. A big body of research establishes the “Schumpeterian” entrepreneurs, those that are “creatively destroying” that 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 very different type of entrepreneur: the “unproductive” ones, who exploit special relationships using the government to make regulatory moats, secure public spending because of their own benefit, or bend specific rules to their will, in the act stifling competition to generate advantage because of their firms. Economists know this as rent-seeking behavior. As Baumol wrote:
…entrepreneurs are invariably here and try to play some substantial role. But there are a selection of roles among that this entrepreneur’s efforts could be reallocated, and several of those roles tend not to stick to the constructive and innovative script that is certainly conventionally related to the face. Indeed, at times the entrepreneur might lead a parasitical existence that is certainly actually damaging on the economy. How the entrepreneur acts in a unpredictable moment and put depends heavily about the rules with the game-the reward structure from the economy-that eventually 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 mix of entrepreneurial effort between the two kinds of entrepreneurship would be to blame – specifically, a loss of productive entrepreneurship plus a coincident boost in unproductive entrepreneurship. But is what’s actually happening from the U.S.?
Well, first of all, we while others have documented a pervasive loss of the rate of the latest firm formation throughout the last 30 years plus an acceleration for the reason that decline since 2000. Actually, we discovered that by 2009 the rate of economic closures exceeded the rate of economic births the first time from the three-decades-plus good reputation for our data. This loss of startup formation has occurred in each state and almost all locations, as well as in each broad industrial sector, including advanced. There has also been a slowdown in activity of high-growth firms, the relatively very few businesses that account for the lion’s share of net job gains. All of this suggests a slowdown from the growth of productive entrepreneurship.
What about the opposite kind of entrepreneurship? Do we also view a boost in unproductive entrepreneurship, as Baumol theorized?
We don’t have a very smoking gun to substantiate this hypothesis, but there is smoke, plus it comes in two forms: rising profits, specially those earned with the largest businesses for the overall design, and suggestive proof of a rise in efforts to shape the principles with the game. This pattern is like rise of economic rents and rent-seeking behavior.
For instance, Jason Furman and Peter Orszag, both former economic advisers to The president, 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 period. Similarly, several economists from MIT, Harvard, and Zurich discovered that industries where top firms’ business had most increased had experienced the biggest declines from the share of greenbacks going to workers.
Perhaps most convincing, University of Chicago economist Simcha Barkai carefully tabulated the share of industry income given to labor, capital, and “profits.” (Normally, capital and income is included together in a broad, residual “returns to shareholders” category.) He discovered that the share of greenbacks earned by workers has become falling, as others have talked about, but in addition how the share earned by capital has, too. Indeed, both have been declining even though the share of greenbacks going to “markups,” or rents, has become increasing.
To be clear, the existence of economic rents on its own doesn’t establish that there’s been a rise in unproductive entrepreneurship. For that to be real, there should be be proof of a rise in rent-seeking – that is certainly, concerted efforts to stifle competition by influencing the reward structure or rules with the game within a market.
James Bessen of Boston University provides suggestive evidence that rent-seeking behavior has become increasing. Within a 2016 paper Bessen signifies that, since 2000, “political factors” account for a substantial 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 found that companies that have executives with relationships to key policy makers have abnormally high stock returns.
In a nutshell, Baumol may have been ahead of his period in warning that economies can suffer not simply coming from a cost disease but in addition from the entrepreneurial counterpart – a modification of the principles that shifts the distribution of entrepreneurial effort from activity which enables 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 probably tackle its many problems, we are going to must find ways to encourage would-be entrepreneurs to start out innovative, productive businesses, as opposed to dedicating their efforts to co-opting government as a way to secure economic advantage.
To read more about Entrepreneurship Books view this useful site: look at here
