Last week economist William Baumol passed away with the day of 95. His death was universally mourned by folks the economics community, many of whom shared the view that they had passed before buying a much-deserved Nobel Prize. One of us (Robert) had the fantastic privilege of working with him, befriending him, and being able to regularly witness his economic wisdom, even just in his later years.
Of Baumol’s many contributions to economics, the most common is cost disease, so in retrospect high-productivity industries raise costs and therefore prices in low-productivity industries. The insight is specially 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 weighed down 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 raises the possibility that U.S. productivity is low because would-be entrepreneurs are centered on a bad form of work.
In the 1990 paper, “Entrepreneurship: Productive, Unproductive, and Destructive,” Baumol argued the degree of entrepreneurial ambition within a country it’s essentially fixed over time, understanding that what determines a nation’s entrepreneurial output could be the incentive structure that governs and directs entrepreneurial efforts between “productive” and “unproductive” endeavors.
Many people think of Cheap Entrepreneurship Books as the “productive” kind, as Baumol known it, where the companies that founders launch commercialize something new or better, benefiting society and themselves in the operation. A considerable body of research establishes the “Schumpeterian” entrepreneurs, the ones that are “creatively destroying” the existing in favor of the brand new, are critical for breakthrough innovations and rapid advances in productivity and standards of just living.
Baumol was worried, however, by the different form of entrepreneur: the “unproductive” ones, who exploit special relationships with the government to construct regulatory moats, secure public spending because of their own benefit, or bend specific rules with their will, in the operation stifling competition to produce advantage because of their firms. Economists call this rent-seeking behavior. As Baumol wrote:
…entrepreneurs are always along with us try to play some substantial role. But there are a selection of roles among that the entrepreneur’s efforts may be reallocated, and several of the roles do not continue with the constructive and innovative script that is conventionally caused by the face. Indeed, from time to time the entrepreneur might lead a parasitical existence that is actually damaging to the economy. How a entrepreneur acts at a with time and set depends heavily on the rules from the game-the reward structure within the economy-that happen to prevail.
In Baumol’s theoretical framework, depressed rates of entrepreneurship aren’t the culprit for periods of slow economic growth; rather, a general change in the amalgamation of entrepreneurial effort between the two sorts of entrepreneurship is to blame – specifically, a decline in productive entrepreneurship as well as a coincident boost in unproductive entrepreneurship. But is this what’s actually happening within the U.S.?
Well, for starters, we and others have documented a pervasive decline in the speed of new firm formation over the past 3 decades as well as an acceleration because decline since 2000. The truth is, we found that by 2009 the speed of economic closures exceeded the speed of economic births the very first time within the three-decades-plus good reputation for our data. This decline in startup formation has occurred in each state and the majority of locations, plus each broad industrial sector, including modern day. We are seeing a slowdown in activity of high-growth firms, the relatively very few businesses that be the cause of the lion’s share of net job gains. This suggests a slowdown within the expansion of productive entrepreneurship.
What about another form of entrepreneurship? Do we also go to a boost in unproductive entrepreneurship, as Baumol theorized?
We don’t possess a smoking gun to substantiate this hypothesis, but there is smoke, and yes it also comes in two forms: rising profits, specially those earned with the largest businesses throughout the market, and suggestive proof of a boost in efforts to shape the policies from the game. This pattern is in conjuction with the rise of economic rents and rent-seeking behavior.
For instance, Jason Furman and Peter Orszag, both former economic advisers to President barack obama, wrote an important 2016 paper that argued that economic rents are rising, particularly since 2000, and were a main take into account increasing wage inequality observed during this time period. Similarly, a group of economists from MIT, Harvard, and Zurich found that industries where top firms’ business had most increased had experienced the largest declines within the share of revenue gonna 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 profits are included together a single broad, residual “returns to shareholders” category.) He found that the share of revenue earned by workers may be falling, as others have pointed out, but also the share earned by capital has, too. Indeed, both have been declining whilst the share of revenue gonna “markups,” or rents, may be increasing.
In reality, the presence of economic rents on it’s own doesn’t establish that there’s been a boost in unproductive entrepreneurship. To the really was, there has to be be proof of a boost in rent-seeking – that is, concerted efforts to stifle competition by influencing the reward structure or rules from the game within a market.
James Bessen of Boston University has provided suggestive evidence that rent-seeking behavior may be increasing. In the 2016 paper Bessen demonstrates that, since 2000, “political factors” be the cause of a considerable area of the boost 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 are finding that companies that have executives with partners to key policy makers have abnormally high stock returns.
In a nutshell, Baumol was in advance of his amount of time in warning that economies can suffer not just coming from a cost disease but also looking at the entrepreneurial counterpart – a general change in the policies that shifts the distribution of entrepreneurial effort from activity which enables the economy toward activity that hurts it. Unfortunately, there exists strong suggestive evidence that Baumol’s warnings have started to pass. If your U.S. will almost certainly tackle its many problems, we will need to find approaches to encourage would-be entrepreneurs to start out innovative, productive businesses, instead of dedicating their efforts to co-opting government so that you can secure economic advantage.
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