Last month economist William Baumol perished at the day of 95. His death was universally mourned by people in the economics community, many of whom shared the scene he had passed before receiving a much-deserved Nobel Prize. Among us (Robert) had the great privilege of working with him, befriending him, or being able to regularly witness his economic wisdom, during his old age.
Of Baumol’s many contributions to economics, the most famous is cost disease, which explains why high-productivity industries raise costs and therefore prices in low-productivity industries. The insight is especially 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 idea of Baumol’s that is equally relevant today understanding that may help explain America’s productivity slump. Baumol’s writing improves the possibility that U.S. productivity is low because would-be entrepreneurs are focused on the incorrect sort 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 with time, understanding that what determines a nation’s entrepreneurial output is the incentive structure that governs and directs entrepreneurial efforts between “productive” and “unproductive” endeavors.
A lot of people consider Cheap Entrepreneurship Books as the “productive” kind, as Baumol known it, the location where the firms that founders launch commercialize new things or better, benefiting society and themselves in the act. A substantial body of research establishes why these “Schumpeterian” entrepreneurs, people who are “creatively destroying” the existing and only the newest, are critical for breakthrough innovations and rapid advances in productivity and standards of life.
Baumol was worried, however, by a very different form of entrepreneur: the “unproductive” ones, who exploit special relationships with all the government to construct regulatory moats, secure public spending for his or her own benefit, or bend specific rules for their will, in the act stifling competition to make advantage for his or her firms. Economists call this rent-seeking behavior. As Baumol wrote:
…entrepreneurs will always be around and try to play some substantial role. But there are many of roles among that this entrepreneur’s efforts can be reallocated, and several of the roles tend not to follow the constructive and innovative script that is conventionally due to the face. Indeed, occasionally the entrepreneur might even lead a parasitical existence that is actually damaging for the economy. How the entrepreneur acts in a given time and put depends heavily about the rules of the game-the reward structure in 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, changing your this mixture of entrepreneurial effort between the two types of entrepreneurship is usually to blame – specifically, a decline in productive entrepreneurship and a coincident boost in unproductive entrepreneurship. But are these claims what’s actually happening in the U.S.?
Well, for starters, we yet others have documented a pervasive decline in the rate of new firm formation throughout the last 3 decades plus an acceleration in this decline since 2000. The truth is, we learned that by 2009 the rate of economic closures exceeded the rate of economic births the very first time in the three-decades-plus history of our data. This decline in startup formation has happened in each state and the majority of urban centers, plus 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 account for the lion’s share of net job gains. All this suggests a slowdown in the growth of productive entrepreneurship.
What about one other sort of entrepreneurship? Should we also visit a boost in unproductive entrepreneurship, as Baumol theorized?
We don’t have a very smoking gun to ensure this hypothesis, but there surely is smoke, and yes it also comes in two forms: rising profits, particularly those earned with the largest businesses throughout the economy, and suggestive evidence a boost in efforts to shape the principles of 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 President barack obama, wrote an important 2016 paper that argued that economic rents are on the rise, particularly since 2000, and were a main take into account increasing wage inequality observed during this period. Similarly, a group of economists from MIT, Harvard, and Zurich learned that industries where top firms’ share of the market had most increased had experienced the greatest declines in the share of capital gonna workers.
Perhaps most convincing, University of Chicago economist Simcha Barkai carefully tabulated the share 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 learned that the share of capital earned by workers has been falling, as others have described, and also how the share earned by capital has, too. Indeed, have been declining even though the share of capital gonna “markups,” or rents, has been increasing.
To be clear, the presence of economic rents alone doesn’t establish that there’s been a boost in unproductive entrepreneurship. For your to be true, there must be be evidence a boost in rent-seeking – that is, concerted efforts to stifle competition by influencing the reward structure or rules of the game within a market.
James Bessen of Boston University presents suggestive evidence that rent-seeking behavior has been increasing. In the 2016 paper Bessen signifies that, since 2000, “political factors” account for an important the main boost in corporate profits. This happens through expanded regulation that favors incumbent firms. Similarly, economists Jeffrey Brown and Jiekun Huang of the University of Illinois have found that firms that have executives with relationships to key policy makers have abnormally high stock returns.
In short, Baumol may have been ahead of his time in warning that economies can suffer not simply coming from a cost disease and also from the entrepreneurial counterpart – changing your the principles that shifts the distribution of entrepreneurial effort from activity that can help the economy toward activity that hurts it. Unfortunately, there exists strong suggestive evidence that Baumol’s warnings have come to pass. If your U.S. will almost certainly tackle its many problems, we are going to must find solutions to encourage would-be entrepreneurs to get started on 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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