Last month economist William Baumol passed away with the age of 95. His death was universally mourned by members of the economics community, many of whom shared the view that he had passed before finding a much-deserved Nobel Prize. Certainly one of us (Robert) had the truly amazing privilege of utilizing him, befriending him, or being able to regularly witness his economic wisdom, even during his retirement years.
Of Baumol’s many contributions to economics, the most common is cost disease, which is why high-productivity industries raise costs and so prices in low-productivity industries. The insight is especially relevant now, as economic activity has shifted into low-productivity services like medical 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 which is equally relevant today and that could help explain America’s productivity slump. Baumol’s writing enhances the possibility that U.S. productivity is low because would-be entrepreneurs are devoted to an unacceptable sort of work.
In the 1990 paper, “Entrepreneurship: Productive, Unproductive, and Destructive,” Baumol argued how the level of entrepreneurial ambition inside a country is essentially 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 beeing the “productive” kind, as Baumol referred to it, where the companies which founders launch commercialize something totally new or better, benefiting society and themselves along the way. A considerable body of research establishes the “Schumpeterian” entrepreneurs, the ones that are “creatively destroying” that old in favor of the new, are crucial for breakthrough innovations and rapid advances in productivity and standards of just living.
Baumol was worried, however, by the very different kind of entrepreneur: the “unproductive” ones, who exploit special relationships with the government to construct regulatory moats, secure public spending for own benefit, or bend specific rules for their will, along the way stifling competition to generate advantage for firms. Economists know this as rent-seeking behavior. As Baumol wrote:
…entrepreneurs will almost always be with us and constantly play some substantial role. But there are a selection of roles among that your entrepreneur’s efforts can be reallocated, plus some of people roles usually do not keep to the constructive and innovative script which is conventionally attributed to the face. Indeed, from time to time the entrepreneur might even lead a parasitical existence which is actually damaging for the economy. What sort of entrepreneur acts with a moment make depends heavily around the rules from the game-the reward structure inside the economy-that eventually 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 forms of entrepreneurship would be to blame – specifically, a loss of productive entrepreneurship and a coincident rise in unproductive entrepreneurship. But are these claims what’s actually happening inside the U.S.?
Well, to begin with, we yet others have documented a pervasive loss of the pace of latest firm formation throughout the last three decades with an acceleration in this decline since 2000. Actually, we discovered that by 2009 the pace of economic closures exceeded the pace of economic births initially inside the three-decades-plus good our data. This loss of startup formation has happened each state and virtually all towns, as well as in each broad industrial sector, including hi-tech. There has also been a slowdown in activity of high-growth firms, the relatively few companies that take into account the lion’s share of net job gains. All of this exactly what to a slowdown inside the development of productive entrepreneurship.
Think about the other sort of entrepreneurship? Do we also see a rise in unproductive entrepreneurship, as Baumol theorized?
We don’t possess a smoking gun to substantiate this hypothesis, but there is surely smoke, and yes it also comes in two forms: rising profits, specially those earned by the largest businesses in the economy, and suggestive evidence of more efforts to shape the guidelines from the game. This pattern is consistent with the rise of economic rents and rent-seeking behavior.
By way of 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 on the rise, particularly since 2000, and were a central aspect in increasing wage inequality observed during this time period. Similarly, a gaggle of economists from MIT, Harvard, and Zurich discovered that industries where top firms’ share of the market had most increased had experienced the greatest declines inside the share of capital 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 in one broad, residual “returns to shareholders” category.) He discovered that the share of capital earned by workers continues to be falling, as others have pointed out, but also how the share earned by capital has, too. Indeed, have been declining whilst the share of capital likely to “markups,” or rents, continues to be increasing.
In reality, a good economic rents on its own doesn’t establish that there’s been more unproductive entrepreneurship. With the to be true, there has to be be evidence of more rent-seeking – which is, concerted efforts to stifle competition by influencing the reward structure or rules from the game inside a market.
James Bessen of Boston University offers suggestive evidence that rent-seeking behavior continues to be increasing. In the 2016 paper Bessen implies that, since 2000, “political factors” take into account a considerable area of the surge in corporate profits. This takes place through expanded regulation that favors incumbent firms. Similarly, economists Jeffrey Brown and Jiekun Huang from the University of Illinois have found that companies which have executives with partners to key policy makers have abnormally high stock returns.
Simply speaking, Baumol might have been ahead of his amount of time in warning that economies can suffer not merely coming from a cost disease but also from its entrepreneurial counterpart – changing your 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 tackle its many problems, we will must find solutions to encourage would-be entrepreneurs to start out innovative, productive businesses, as an alternative to dedicating their efforts to co-opting government in order to secure economic advantage.
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