Last month economist William Baumol passed on at the chronilogical age of 95. His death was universally mourned by people in the economics community, many of whom shared the vista which he had passed before receiving a much-deserved Nobel Prize. Certainly one of us (Robert) had the fantastic privilege of dealing with him, befriending him, and being able to regularly witness his economic wisdom, during his old age.
Of Baumol’s many contributions to economics, the favourite is cost disease, which explains why high-productivity industries raise costs and for that reason 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 notion of Baumol’s that is certainly equally relevant today and 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 centered on the wrong sort of work.
In the 1990 paper, “Entrepreneurship: Productive, Unproductive, and Destructive,” Baumol argued that the a higher level entrepreneurial ambition within a country is basically fixed with time, and 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 think of Buy Entrepreneurship Books as the “productive” kind, as Baumol referred to it, the location where the companies which founders launch commercialize something new or better, benefiting society and themselves in the process. A sizable body of research establishes that these “Schumpeterian” entrepreneurs, those who are “creatively destroying” the previous in favor of the brand new, are critical for breakthrough innovations and rapid advances in productivity and standards of living.
Baumol was worried, however, with a different kind of entrepreneur: the “unproductive” ones, who exploit special relationships with the government to develop regulatory moats, secure public spending for their own benefit, or bend specific rules to their will, in the process stifling competition to create advantage for their firms. Economists know this as rent-seeking behavior. As Baumol wrote:
…entrepreneurs are always around and always play some substantial role. But there are a selection of roles among that this entrepreneur’s efforts can be reallocated, and some of the roles do not stick to the constructive and innovative script that is certainly conventionally attributed to the face. Indeed, at times the entrepreneur might lead a parasitical existence that is certainly actually damaging to the economy. How the entrepreneur acts in a given time and place depends heavily around the rules with the game-the reward structure within the economy-that get lucky and prevail.
In Baumol’s theoretical framework, depressed rates of entrepreneurship aren’t to blame for periods of slow economic growth; rather, a modification of the mix of entrepreneurial effort forwards and backwards forms of entrepreneurship would be to blame – specifically, a loss of productive entrepreneurship plus a coincident increase in unproductive entrepreneurship. But is this what’s actually happening within the U.S.?
Well, to begin with, we yet others have documented a pervasive loss of the pace of the latest firm formation over the last 30 years and an acceleration for the reason that decline since 2000. Actually, we found that by 2009 the pace of business closures exceeded the pace of business births for the first time within the three-decades-plus good reputation for our data. This loss of startup formation has occurred in each state and virtually all urban centers, and in each broad industrial sector, including high tech. There has also been a slowdown in activity of high-growth firms, the relatively very few companies that account for the lion’s share of net job gains. Doing this exactly what to a slowdown within the development of productive entrepreneurship.
Why don’t you consider the opposite sort of entrepreneurship? Do we also visit a increase in unproductive entrepreneurship, as Baumol theorized?
We don’t possess a smoking gun to verify this hypothesis, but there is smoke, plus it will come in two forms: rising profits, in particular those earned from the largest businesses throughout the market, and suggestive evidence of more efforts to shape the policies with the game. This pattern is consistent with the rise of economic rents and rent-seeking behavior.
For instance, Jason Furman and Peter Orszag, both former economic advisers to President Obama, wrote an important 2016 paper that argued that economic rents are rising, particularly since 2000, and were a central factor in increasing wage inequality observed during this time period. Similarly, several economists from MIT, Harvard, and Zurich found that industries where top firms’ share of the market had most increased had experienced the greatest declines within the share of greenbacks likely to 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 earnings are included together a single broad, residual “returns to shareholders” category.) He found that the share of greenbacks earned by workers may be falling, as others have described, but in addition that the share earned by capital has, too. Indeed, have been declining whilst the share of greenbacks likely to “markups,” or rents, may be increasing.
In reality, the use of economic rents alone doesn’t establish that there’s been more unproductive entrepreneurship. For your really was, there has to be be evidence of more 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 presents suggestive evidence that rent-seeking behavior may be increasing. In the 2016 paper Bessen implies that, since 2000, “political factors” account for an amazing part of the increase 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 are finding that companies which have executives with relationships to key policy makers have abnormally high stock returns.
To put it briefly, Baumol was before his amount of time in warning that economies can suffer not merely coming from a cost disease but in addition by reviewing the entrepreneurial counterpart – a modification of the policies 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 have come to pass. When the U.S. is going to tackle its many problems, we’re going to have to find approaches to encourage would-be entrepreneurs to start out innovative, productive businesses, instead of dedicating their efforts to co-opting government to be able to secure economic advantage.
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