Last week economist William Baumol perished with the day of 95. His death was universally mourned by people in the economics community, lots of whom shared the vista that they had passed before receiving a much-deserved Nobel Prize. One among us (Robert) had the truly amazing privilege of working with him, befriending him, and being able to regularly witness his economic wisdom, even 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 particularly 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 concept of Baumol’s that is certainly equally relevant today knowning that might help explain America’s productivity slump. Baumol’s writing improves the possibility that U.S. productivity is low because would-be entrepreneurs are devoted to an unacceptable form of work.
In the 1990 paper, “Entrepreneurship: Productive, Unproductive, and Destructive,” Baumol argued the a higher level entrepreneurial ambition in a country is basically fixed with time, knowning that what determines a nation’s entrepreneurial output is the incentive structure that governs and directs entrepreneurial efforts between “productive” and “unproductive” endeavors.
Most of the people think of Kogan Page Entrepreneurship Books beeing the “productive” kind, as Baumol known it, in which the businesses that founders launch commercialize a new challenge or better, benefiting society and themselves along the way. A big body of research establishes that these “Schumpeterian” entrepreneurs, those who are “creatively destroying” the existing and only the brand new, are crucial for breakthrough innovations and rapid advances in productivity and standards of living.
Baumol was worried, however, with a different sort of entrepreneur: the “unproductive” ones, who exploit special relationships using the government to create regulatory moats, secure public spending for their own benefit, or bend specific rules on their will, along the way stifling competition to create advantage for their firms. Economists know this as rent-seeking behavior. As Baumol wrote:
…entrepreneurs will almost always be along with us and always play some substantial role. But there are a variety of roles among that your entrepreneur’s efforts might be reallocated, and a few of people roles tend not to keep to the constructive and innovative script that is certainly conventionally caused by see your face. Indeed, at times the entrepreneur may even lead a parasitical existence that is certainly actually damaging to the economy. How the entrepreneur acts at a with time and set depends heavily around the rules from the game-the reward structure in the economy-that get lucky and prevail.
In Baumol’s theoretical framework, depressed rates of entrepreneurship aren’t at fault for periods of slow economic growth; rather, changing your the mix of entrepreneurial effort forwards and backwards kinds of entrepreneurship would be to blame – specifically, a loss of productive entrepreneurship along with a coincident boost in unproductive entrepreneurship. But is what’s actually happening in the U.S.?
Well, first of all, we among others have documented a pervasive loss of the interest rate of latest firm formation over the past 3 decades as well as an acceleration in that decline since 2000. In reality, we found out that by 2009 the interest rate of commercial closures exceeded the interest rate of commercial births for the first time in the three-decades-plus good reputation for our data. This loss of startup formation has took place each state and virtually all locations, and in each broad industrial sector, including high tech. There has 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 this items to a slowdown in the increase of productive entrepreneurship.
What about one other form of entrepreneurship? Should we also visit a boost in unproductive entrepreneurship, as Baumol theorized?
We don’t use a smoking gun to confirm this hypothesis, but there is surely smoke, plus it also comes in two forms: rising profits, specially those earned through the largest businesses throughout the economy, and suggestive proof more efforts to shape the principles from the game. This pattern is in conjuction with the rise of economic rents and rent-seeking behavior.
As an example, Jason Furman and Peter Orszag, both former economic advisers to The president, wrote an influential 2016 paper that argued that economic rents are on the rise, particularly since 2000, and were a central take into account increasing wage inequality observed during this time period. Similarly, a group of economists from MIT, Harvard, and Zurich found out that industries where top firms’ share of the market had most increased had experienced the most important declines in the share of greenbacks gonna 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 profits are included together in one broad, residual “returns to shareholders” category.) He found out that the proportion of greenbacks 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 even though the share of greenbacks gonna “markups,” or rents, may be increasing.
To be clear, a good economic rents alone doesn’t establish that there’s been more unproductive entrepreneurship. To the to be real, there needs to be be proof more rent-seeking – that is certainly, concerted efforts to stifle competition by influencing the reward structure or rules from the game in a market.
James Bessen of Boston University provides suggestive evidence that rent-seeking behavior may be increasing. In the 2016 paper Bessen shows that, since 2000, “political factors” are the cause of an important area of the increase in corporate profits. Such a thing happens through expanded regulation that favors incumbent firms. Similarly, economists Jeffrey Brown and Jiekun Huang from the University of Illinois are finding that businesses that have executives with close ties to key policy makers have abnormally high stock returns.
To put it briefly, Baumol could have been before his period in warning that economies can suffer not simply from your cost disease but 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’s strong suggestive evidence that Baumol’s warnings began to pass. If your U.S. is going to tackle its many problems, we’re going to must find methods to encourage would-be entrepreneurs to get started on innovative, productive businesses, as opposed to dedicating their efforts to co-opting government to be able to secure economic advantage.
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