A few weeks ago economist William Baumol died with the chronilogical age of 95. His death was universally mourned by folks the economics community, most of whom shared the scene he had passed before getting a much-deserved Nobel Prize. One of us (Robert) had the great privilege of dealing with him, befriending him, and being able to regularly witness his economic wisdom, even during his old age.

Of Baumol’s many contributions to economics, the most common is cost disease, which explains why high-productivity industries raise costs and for that reason prices in low-productivity industries. The insight is especially relevant now, as economic activity 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 overwhelmed U.S. productivity growth overall.

But there’s a lesser-known idea of Baumol’s that is certainly equally relevant today and that can help explain America’s productivity slump. Baumol’s writing improves the possibility that U.S. productivity is low because would-be entrepreneurs are centered on the incorrect sort of work.

Inside a 1990 paper, “Entrepreneurship: Productive, Unproductive, and Destructive,” Baumol argued the degree of entrepreneurial ambition within a country is actually fixed with time, 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 imagine Kogan Page Entrepreneurship Books being the “productive” kind, as Baumol referred to it, in which the companies that founders launch commercialize a new challenge or better, benefiting society and themselves in the act. A big body of research establishes why these “Schumpeterian” entrepreneurs, those that are “creatively destroying” the existing in support of the modern, are crucial for breakthrough innovations and rapid advances in productivity and standards of living.

Baumol was worried, however, by way of a different kind of entrepreneur: the “unproductive” ones, who exploit special relationships together with the government to create regulatory moats, secure public spending for his or her own benefit, or bend specific rules on their will, in the act stifling competition to create advantage for his or her firms. Economists label 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 your entrepreneur’s efforts might be reallocated, and some of the roles don’t stick to the constructive and innovative script that is certainly conventionally attributed to see your face. Indeed, occasionally the entrepreneur might lead a parasitical existence that is certainly actually damaging on the economy. The way the entrepreneur acts at the given time and set depends heavily on the rules in 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 forwards and backwards kinds of entrepreneurship is always to blame – specifically, a loss of productive entrepreneurship as well as a coincident boost in unproductive entrepreneurship. But is what’s actually happening from the U.S.?

Well, first of all, we among others have documented a pervasive loss of the rate of new firm formation over the last 3 decades with an acceleration in that decline since 2000. The truth is, we found that by 2009 the rate of economic closures exceeded the rate of economic births the first time from the three-decades-plus reputation our data. This loss of startup formation has happened each state and the majority of towns, as well as in each broad industrial sector, including advanced. There has also been a slowdown in activity of high-growth firms, the relatively small number of firms that are the cause of the lion’s share of net job gains. All of this points to a slowdown from the growth of productive entrepreneurship.

Think about one other sort of entrepreneurship? Do we also see a boost in unproductive entrepreneurship, as Baumol theorized?

We don’t have a smoking gun to substantiate this hypothesis, but there is surely smoke, and it also comes in two forms: rising profits, especially those earned by the largest businesses throughout the market, and suggestive evidence of an increase in efforts to shape the principles in the game. This pattern is like rise of economic 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 element in increasing wage inequality observed during this time. Similarly, several economists from MIT, Harvard, and Zurich found that industries where top firms’ share of the market had most increased had experienced the largest declines from the share of greenbacks planning 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 earnings are included together in one broad, residual “returns to shareholders” category.) He found that the proportion of greenbacks earned by workers has been falling, as others have pointed out, and also the share earned by capital has, too. Indeed, have been declining while the share of greenbacks planning to “markups,” or rents, has been increasing.

In reality, the existence of economic rents by itself doesn’t establish that there’s been an increase in unproductive entrepreneurship. To the actually was, there should be be evidence of an increase in rent-seeking – that is certainly, concerted efforts to stifle competition by influencing the reward structure or rules in the game within a market.

James Bessen of Boston University offers suggestive evidence that rent-seeking behavior has been increasing. Inside a 2016 paper Bessen demonstrates that, since 2000, “political factors” are the cause of a considerable area of the boost in corporate profits. This happens through expanded regulation that favors incumbent firms. Similarly, economists Jeffrey Brown and Jiekun Huang in the University of Illinois have realized that companies that have executives with partners to key policy makers have abnormally high stock returns.

In a nutshell, Baumol may have been in front of his in time warning that economies can suffer not just from the cost disease and also looking at the entrepreneurial counterpart – a modification of the principles that shifts the distribution of entrepreneurial effort from activity that helps the economy toward activity that hurts it. Unfortunately, there is certainly strong suggestive evidence that Baumol’s warnings began to pass. When the U.S. is going to tackle its many problems, we will must find approaches to encourage would-be entrepreneurs to start innovative, productive businesses, as an alternative to dedicating their efforts to co-opting government so that you can secure economic advantage.
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