What is driving the decline in entrepreneurship?

by on November 26, 2017 at 1:03 am in Economics, Law, Web/Tech | Permalink

Nicholas Kozeniauskas, a job candidate from NYU, has a job market paper on that topic:

Recent research shows that entrepreneurial activity has been declining in the US in recent decades. Given the role of entrepreneurship in theories of growth, job creation and economic mobility this has generated considerable concern. This paper investigates why entrepreneurship has declined. It documents that (1) the decline in entrepreneurship has been more pronounced for higher education levels, implying that at least part of the force driving the changes is not skill-neutral, and (2) the size distribution of entrepreneur businesses has been quite stable. Together with a decline in the entrepreneurship rate the second fact implies a shift of economic activity towards non-entrepreneur firms. Guided by this evidence I evaluate explanations for the decline in entrepreneurship based on skill-biased technical change, changes in regulations increasing the fixed costs of businesses and changes in technology that have benefited large non-entrepreneur firms. I do this using a general equilibrium model of occupational choice calibrated with a rich set of moments on occupations, income distributions and firm size distributions. I find that an increase in fixed costs explains most of the decline in the aggregate entrepreneurship rate and that skill-biased technical change can fully account for the larger decrease in entrepreneurship for more educated people when combined with the other forces.

This is one of the more important papers of this job market season.

1 Chip November 26, 2017 at 1:46 am

I’m not sure. His paper focuses only on businesses with at least 10 employees. This ignores the huge shift to self-employment in the gig economy. Intuit has predicted that 40% of workers will be independent contractors by 2020.

I’m self employed with a business that sells to 20 countries and operations that run from product ideation to manufacturing and marketing. The only employees are myself and two partners. All of our work is outsourced to independent contractors.

Business owners don’t want to manage staff. It’s a headache, especially with the growing regulatory burden. So I’m skeptical that this shift away from having employees is linked to a decline in entrepreneurialism.

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2 Ricardo November 26, 2017 at 4:01 am

The sort of entrepreneurship we should care about is the type that results in higher productivity. The gig economy is partly about mobilizing unemployed or partially employed people for low-productivity work and is also about large companies finding ways to classify some people who work for them as “consultants” or “independent contractors” to get around labor laws.

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3 clockwork_prior November 26, 2017 at 5:32 am

‘to get around labor laws’

That is just a stop gap – the real point of the tireless efforts of people such as Prof. Cowen and Prof. Tabarrok is to pretty much get rid of labor laws entirely so we all take small steps to that much better world.

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4 Mulp November 26, 2017 at 1:02 pm

Unfortunately, the 13th amendment blocks efforts to Make America Great Again by eliminating all labor laws requiring workers be paid and not maimed or killed.

Paying workers costs too much!

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5 Chip November 26, 2017 at 10:44 am

As you say, partly. The trend to individual self-employment is more than just an Uber driver who had lost his previous job.

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6 Mulp November 26, 2017 at 1:12 pm

An Uber driver can not exist because Uber never hires workers, only small businesses with a minimum capital investment.

For Uber, if any driver is required, the driver should work for free. Ideally Uber hires a robot built by robots who build themselves. Then Uber can earn $1 in fees for every $1 charged customers.

Today, Uber provides an opportunity for the worker, fired to boost profits as required by share price inflation, to work for free while earning the payment for his smartphone and payment for his car mortgage so he has a place to live.

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7 Boonton November 26, 2017 at 9:10 am

I disagree, most ‘gig workers’ are really just part-time employees rather than entrepreneurs. IMO entrepreneurship implies at least partially owning capital as well as supplying labor. A guy who saves up and buys his own taxicab is an entrepreneur. Someone who uses their personal vehicle part-time driving for Lyft or Uber is at best only a partial-entrepreneur. Someone who has a vehicle 100% dedicated to Uber might be closer but at the same time that’s not quite the same as the guy who owns his own taxi. I could see such a guy owning multiple taxis years from now employing multiple drivers to man them. That’s not likely in the ‘gig environment’.

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8 Mike W November 26, 2017 at 10:24 am

What’s the definition of “entrepreneur”? It would seem that “a guy who saves up and buys his own taxicab” is no different from the Uber “partial-entrepreneur” or the 100% dedicated Uber driver. They are all just self-employed individuals…i.e., their productivity is limited to their own labor. The guy who can attract capital and own multiple taxis employing multiple drivers would seem to better define an entrepreneur.

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9 Boonton November 26, 2017 at 10:48 am

They may all be ‘self-employed’ but the guy who owns a taxi also in a sense owns the business. He can hire someone to drive the taxi and focus on the ‘office’ side of dispatching and sales if the business gets serious enough. I can easily imagine a story of a guy who saved up and brought his first taxi and 40 years later owns a massive fleet of taxis and limos with a hundred employees. Driving full time for uber, though, means that uber still owns the ‘business’ aspect even if you own a car dedicated fully to uber. Same thing I think with Amazon and ebay as platforms. You may get limited entrepreneurship but in another sense the larger business has capped the entrepreneur on the ‘upside’ of potential growth. Not unlike how a sharecropper might have been an entrepreneur in a limited sense that he is allowed to grow crops on a small plot to sell on his own but such an enterprise will forever be limited.

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10 Mulp November 26, 2017 at 1:37 pm

In other words, the food industry has seen a massive loss in entrepreneurship as McDs spurred the franchise eliminating 95% of the risk taking of starting any kinds of food service, and food distributors took control off most food logistics and then owned or franchised the stores, and ag corporations dictated to farmers what to produce, how to produce, and sold them the required inputs and bought all their output.

Economists seem to argue for eliminating entrepreneurs.

For example, which economists argue for local food movements, based on knowing all the entrepreneurs within your community that produce all the ingredients, process them, and then cook them or sell them to you to cook?

Food production entrepreneurship as the priority would mean farms are tuned to local conditions, using, for example,, seeds saved based on best productivity for the local soil and climate, grown in combinations that improved the soil, with the consumption shaped by the farmer promoting a local seasonal diet instead of the fashion set by big city elites seeking profit. Ie, in some places, plantains and beans would be the foundation, not wheat and corn, of the diet, or rice and beans. The US big city elites drive what consumers all around the world eat based on maximizing US industrial corn, wheat, soybean based food production corporate profits.

11 Chip November 26, 2017 at 10:42 am

A part-time entrepreneur is still an entrepreneur.

And an independent contractor is more than just an Uber driver. I know several dozens of these individually self-employed people. This list from Upwork is fairly representative of my experience:

“ designers and creatives, web, mobile and software developers, administrative support specialists, writers and translators, accounting/finance/consulting professionals, IT and networking professionals, sales/marketing/customer service professionals, lawyers/paralegals, engineers and architects, and data science/analytics specialists.”

Finally, according to BLS the biggest drop in self-employed over the decades has been in agriculture as farmers leave and big agribusinesses take over. This drag on the self-employment numbers is due to industry-specific economics not an overall waning of entrepreneurship.

I’ll stick with my intuition that entrepreneurialism is growing, not just due to personal experience but because powerful technological trends are reducing the need for people to cluster in large inflexible organizations.

I’d like to think politics should become less important for the same reason but the ability of authoritarian ideologies to centralize power seems as strong as ever.

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12 Boonton November 26, 2017 at 4:20 pm

OK let’s take it to an extreme, could you imagine a huge corporate headquarters (say 500 employees or more) suddenly switching to 90% contractor/gig for their core business (I’m not talking stuff that’s tangential like the cafeteria staff, cleaning). I don’t see it. Yes I can see contractors being used more and more but at some point you would have a tipping point, Instead of having 450 independent one-off contracts wouldn’t 5 or 10 or 20 of those people clump together into a company? In that case the headquarters would downsize by 20 people but a new company supplying services to the main company would be born.

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13 Guy Makiavelli November 26, 2017 at 1:51 am

So basically educated people know that it’s extremely difficult to compete with the cyberbehemoths. And thus it’s only the hardcore managerial class acolytes with Harvard mbas who can do the blah blah necessary to raise funds and make nice with the sharks.

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14 Ray Lopez November 26, 2017 at 11:15 am

Right. And it’s a TC “Great Stagnation” (GS) theme as well. For this reason I propose breaking through the GS barrier by better patent laws, including abolishing ‘first to invent’ thresholds (i.e., allowing independent invention, even if not first past the gate), government reward of all worthy parties (even second to invent), AlexT rewards for achieving invention milestones, and, crucially, as is done with copyright, inalienable “droits moraux” for truly worthy inventors such as is already done by patent caselaw for pioneer inventors in Japan and even Germany under certain conditions. And going to a laid-open patent application that is not examined until litigation (also akin to copyright today).

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15 Mulp November 26, 2017 at 2:01 pm

Shorten patent and copyright terms. When communication and lack of quick access to capital, ie, traveling for months to sell ideas to those able to capitalize an idea, the terms were 15 to 25 years. Now when everything is faster, terms should be 5 to 10 years.

Many patents cover ideas that are obsolete in 5 years, but new derived obvious modifications are either added to the existing claim, or covered in new patents which infringe on the previous patent limiting who can benefit to the earlier inventor, effectively blocking all new innovators.

It is ironic that Apple and Qualcomm are in conflict given both spend a lot of time generating patents just to effectively extend long past ideas granted patent or copyright that should be freely available to all, including hundreds of obvious modifications. Both have inflated asset prices based on extracting high rents on what are really commodities. International standards have limited Qualcomm rents, and they remain only due to license deals that bundle lots more than patent rights. Apple is trying to get out of that license deal. Paying $10 in rent is too much out of Apple’s $200 rent extraction.

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16 Benjamin Cole November 26, 2017 at 1:55 am

“For the empirical analysis I study the entrepreneurial decisions of people in the US using data from the Current Population Survey for 1988 to 2016. The idea for who an entrepreneur in this paper is a person who owns and actively manages a business which has employees and, due the information available in the data, for the empirical analysis a person must have 10 employees to be an entrepreneur. I focus on businesses with employees to avoid the risk of results being driven by very small businesses with little economic impact. The starting point for the empirical analysis is that the entrepreneurship rate (the share of the labor force who are entrepreneurs) has declined by 16% from 1988 to 2016.”—-from the paper

All well and good, but we are looking at 16% drop in measured entrepreneurs, but the definition of an entrepreneur is someone who employs 10 people or more?

I think web start-up are famous for small staffs and outsourcing.

Then we have this: “Wholesale and retail exhibit the largest declines in entrepreneurship….”

So, that could mean less boutiques and coffee shops. Not desirable, but not what most people think of when discussing entrepreneurs….

Only a passing mention of property zoning….as retail and residential rents and the cost of living in some cities soar, I would expect less business start-ups….and we are seeing exploding rents in those very cities known for entrepreneurism, such as Bay Area, Boston, NYC, LA.

I keep hoping a Milwaukee will become a tech-hipster capital….

But hey, the paper has sme strong points too

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17 Rafael R November 26, 2017 at 2:05 am

Yeah. Main problem with modern econ is that most papers are data papers but their data is often inconclusive or faulty. Like this paper: he claims entrepreneurship in the US declined but there isn’t any way of measuring aggregate entrepreneurial activity clearly: share of labor force which owns business that employs more than 10 people? Not convincing. Though I was looking at other similar papers that show declining fraction of the labor force employed in new business since 1980 (which is perhaps a stronger measure of entrepreneurial activity).

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18 Ray Lopez November 26, 2017 at 11:17 am

As you say, “though”. It’s the weight of evidence that is telling, not one particular paper. Clearly we have a Great Stagnation, I think we can all agree on that.

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19 Rafael R November 26, 2017 at 7:39 pm

I don’t think so. In the US growth has slowed down in the past decade yes, but in other countries it hasn’t. Also, US slowdown might be just be the product of the Great Recession, in the decade before it labor productivity per hour worked was growing faster than in the decades before and faster than in Europe. Maybe the great recession and it’s associated policies might have made it harder for firms to invest and grow, as the US’s investment to GDP rate has gone substantially down since 2007. By the way, during the Great Depression productivity per hour worked increased a lot so this recession might be considered more severe than the Great Depression from that perspective.

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20 Benny Lava November 26, 2017 at 12:15 pm

Why Milwaukee?

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21 Benjamin Cole November 27, 2017 at 3:49 am

Why not?

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22 Ryan November 26, 2017 at 2:02 am

Student loans?

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23 clockwork_prior November 26, 2017 at 4:16 am

Well, that bubbling font of money certainly led to a good number of educated people being able to find institutional employment, many with guaranteed lifetime employment.

It is a rare person indeed who gives up tenure to pursue private activities. Sadly, this web site seems to have a real problem with allowing anyone to mention an actual example from GMU.

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24 JonFraz November 27, 2017 at 3:05 pm

Lifetime employment is pretty much a thing of the past.

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25 clockwork_prior November 26, 2017 at 4:14 am

Too many educated people founding public policy institutes instead of actually doing something productive?

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26 Guy Makiavelli November 26, 2017 at 4:54 am

The educated people in think tanks know that “productive” work is increasingly a commodity, and have no interest in pursuing a career path in which the ultimate goal of the organization is to drive their wages down to the legal minimum.

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27 clockwork_prior November 26, 2017 at 5:30 am

So cynical, when according to some people in the public policy institute world, they are just helping all of us take small steps to a much better world-

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28 A clockwork orange November 26, 2017 at 8:43 am

Not even the optimism to realize this could be the worst possible comment out of any potential situation.

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29 A Truth Seeker November 26, 2017 at 5:14 am

Americans know a few families control the economy. The American worker have been displaced and dispossed by malefactors of great wealth in cahoots with the red fascists.

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30 Ray Lopez November 26, 2017 at 11:24 am

TR I think you are projecting Brazil onto the USA here. BTW, on YouTube there is a anti-crime channel called the “ASP” network that shows CCTV of violent robberies and almost always (I would say well over 50% of the time) the videos are from Brazil, so much so that the narrator often says “here is another video from –you guessed it–Brazil…”

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31 A Truth Seeker November 26, 2017 at 12:38 pm

That happens because Brazilian stores are well-equiped with the best in CCTV and there is no censorship. Brazil is not like Laos or Red China or Burma.

Crime is, on average, declining. Our authorities have the situation well under their control. Also, Brazil is big, bigger than the Roman Empire at its height, and with a bigger population than all the rest of the former Portuguese Empire put together. Absolute numbers about Brazil will always be big, but the averages and trends are conforting and reassuring. It is time to stay the course and keep the eyes on the ball.

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32 Steve Sailer November 26, 2017 at 5:57 am

What have been the historical trends? I can recall reading in Theodore White’s “The Making of the President 1972” that self-employment was in decline in the 1960s.

Then at the end of the 1970s (perhaps after the capital gains tax cuts of 1978) there seemed to be a sudden surge in fashion toward entrepreneurship, with Apple’s 1980 IPO being a landmark.

This trend led to a brief IPO bubble in early 1983: the company I worked at doubled in price the day of the IPO. A year later the bubble was over and the stock price was back down around the original offering price, which was actually pretty good for that vintage: many of the high-fliers of March 1983 were already bankrupt.

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33 David Chandler Thomas November 26, 2017 at 7:29 am

Schumpeter reached a similar conclusion in the 1920s. His error was in missing the explosion of venture capital beginning in the late 1960s. As a serial Silicon Valley entrepreneur, my experience suggests that the elimination of liberal stock options through regulation and the passing of Sarbanes Oxley, increased the cost of taking on the role of entrepreneur and therefore the potential for entrepreneurial profits. In my case, these changes were instrumental in convincing me to walk away.

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34 Ray Lopez November 26, 2017 at 11:22 am

Interesting, though it seems you left the table a bit early, missing discovering a unicorn. It’s OK, I did the same thing when I worked in Silicon Valley. The memories are priceless, but don’t look back.

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35 Ali Choudhury November 27, 2017 at 4:04 am

The regulations have been loosened a bit. The JOBS Act of 2012 exempted newly listed public companies with sales of less than a billion USD from complying with Sarbox for 5 years. There has been a lot of opting for that based on what I have seen.

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36 Ted Craig November 26, 2017 at 8:04 am

One challenge for classic small business formation is many entrepreneurs used to mortgage their homes and forego health insurance to get started. That has been more challenging for the past decade.

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37 Bill November 26, 2017 at 8:47 am

I think the best points have already been made about the subject: the definitional problem of the word “entrepreneurial”, the ascendency of the gig economy and independent for hire workers (uber drivers, consultants, etc.).

I think the paper would have been better had it used census data, and the change in economies of scale for various businesses and occupations.

Using census data, you would look at establishment numbers, number of employees per establishment, entry and exit rates over time (to see if there is a minimum economy of scale, or if scale economies had changed), etc. Today, for example, a small business may be able to sell on the internet, obviating the need for an employed sales force, or may be able to contract for services that previously had to be contained within the business. It could go the other way too: the minimum efficient scale for a business could be rising because of the fixed costs of having employed specialists, more expensive equipment, higher costs of development related to the complexity of the product, etc. Those variables would be industry specific and not captured with a broad brush based on establishments of 10 or more employees.

Second, the rise and falll of “entrepreneurial activity” may actually signal the downturn, and not the upturn, in an economy, as people who have lost their jobs have to find something to do, and become “entrepreneurs”, stay at home computer programmers who subcontract for work. Maybe what you should be looking for is changes in patents, business formation by specific sectors (excluding restaurants or coffee shops (which have high turnover), etc.

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38 RustySynapses November 26, 2017 at 9:04 am

Put whatever anecdotal and parochial qualifiers you want on this, but as someone who has worked with startup companies in Silicon Valley since 1990, this really seems so wrong it’s beyond laughable. It obviously depends on your definition of “entrepreneurship”, and maybe there are by the numbers fewer people running small businesses of less than 10 employees (that may be both because startups are leaner now (as others have noted) and also because more of them that show any promise at all quickly get beyond that number). It may also be that there are (by the numbers using that definition) fewer small local retail boutiques and restaurants (and those numbers dominate the data). But the number of people and startups that are trying to grow and disrupt all or even a small part of an industry or business model (or just make a new/better product) is so dizzying, and the resources ($, support and people) available to those entrepreneurs are so extensive, compared to 1990, it seems clear (again, anecdotal) that there are orders of magnitude greater activity. It seems like everyone wants to “go big or go home” now (or at least dream big) – even in retail and restaurants (where I see it more as a consumer), the successful ones seem to branch out and grow much more intentionally early on than they used to. And in 1990, at least as far as VC backed companies, there were a few identifiable buckets – PCs, networking/telcom, medical devices and biotech (with maybe a few restaurant companies thrown in). Now, VC (and angel, of which there’s a lot more than in 1990) money will (and do) back entrepreneurs in any industry. And obviously, this isn’t completely concentrated in a few geographies anymore (Silicon Valley, Route 128, etc.). I guess it depends on why you care about “entrepreneurship” (and that should drive the definition) – but as far as an economy that starts dynamic companies that create jobs (and make sure existing companies don’t get complacent), 2017 looks a lot better than 1990. (I’m not arguing that there aren’t things like de-coupling health care and jobs couldn’t make it even better)

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39 Bob November 26, 2017 at 2:04 pm

Sure, there is plenty of entrepreneurship in Silicon Valley, but this is not a paper on the bay area, but the US. Go look at what happens is 99% of markets: The lack of access to VC markets means that entrepreneurship there is mostly dead. You don’t have to go further than 10 markets down to see that there are few startups, and said startup ecosystems have no exits.

Take a Trip to Kansas City, St Louis, Topeka… and then try to see if any of the things you say are even remotely true there.

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40 RustySynapses November 27, 2017 at 10:55 am

Can I pick LA, New York, Boston, Pittsburgh, Austin, Denver, Salt Lake City or even Detroit? All of those are way up from 1990.

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41 Greg G November 26, 2017 at 9:26 am

This is anecdotal evidence but I have one adult child who has already started a successful business and another who plans to try in less than two years. Both tell me that the biggest thing that caused them to hesitate making the leap was health insurance.

Anyone with enough talent to start a successful business can easily find employment with a large employer providing good health insurance. Trying to find decent quality affordable health insurance for an individual or small group can be a very big challenge.

Incorporating can limit your losses from bad business results. It’s a lot harder to limit your losses from bad health results when you leave the shelter of a large employer.

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42 Boonton November 26, 2017 at 9:37 am

The social safety net is probably a net positive for entrepreneurship. If someone can fall back upon health coverage, food stamps, rental and income assistance, taking the leap is less daunting. Ironically the US was an early adopter of a type of safety net: bankruptcy and easy incorporation law. Rather than debtors prisons and lifetime debt burden, bankruptcy allowed an entrepreneur who lost to wipe the slate clean and start over again. Incorporation meant someone could protect his wealth if he started a business that crashed and burned in flames.

One way to look at this is people need a certain amount of security and regularity in their life. If gov’t provides more regularity, people can take on more irregularity in the business sector. If the govt pulls back that regularity, people will turn to the business sector for regularity. The price the business sector demands for that is the big corporation model of employment.

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43 RustySynapses November 26, 2017 at 9:41 am

+1
I have worked with several companies where a founder or executive they were trying to hire had a child or spouse with major health care issues, and this was #1 on their list of concerns. Note even if it is a funded company, COBRA doesn’t protect you if the company goes under (so there’s no longer a plan).

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44 Bill November 26, 2017 at 9:55 am

Following up on this, the current system in fact helps the owner pay for health insurance that he might not otherwise be able to get outside of a group policy.

One of my relatives has a small business. He has severe type II diabetes, and was not be able to get health insurance in the individual market. But, because he has a large number of healthy young workers, he was able to get a group plan.

The young folks were in effect paying for his insurance and enabled him to have it.

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45 Lhlynn November 26, 2017 at 10:38 am

Something isn’t right in your anecdote – you cannot be refused insurance or charged more for pre-existing conditions, including diabetes.

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46 Bill November 26, 2017 at 10:45 am

Not so. This was before Obamacare. He has continued group coverage, his employees pay their share of coverage.

This is what’s funny: prior to Obamacare, an owner of a business who had difficulty getting individual coverage HAD an incentive to get a group policy, particularly if he had young employees with fewer medical claims.

This is exactly what happened in my brother-in-laws case. He owns a theatre and an office building, and when his wife’s COBRA ran out, and he needed coverage, he got group coverage for his business, with his employees, in effect, guaranteeing his coverage and paying part of his healthcare costs or risks.

47 Greg G November 26, 2017 at 10:56 am

Lhlynn,

There is a high risk that any new business will fail. If that happens the insurance available to the failed entrepreneurs will likely be much worse than what they had as employees of a large employer and that will be happening at the time they are least likely to be able to afford increased medical costs.

And, of course, there is the risk that we hear about all the time that the Republicans will finally succeed in killing Obamacare.

48 RustySynapses November 26, 2017 at 12:05 pm

I’ve often thought of this in another context – the exclusion of employer provided insurance from taxable wages – really, it benefits the old, senior executives a lot more than the young, because if they didn’t get insurance through work, they would pay a lot more.

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49 Boonton November 26, 2017 at 1:55 pm

It’s not so much the exclusion from taxable income but the requirement that in order to be excluded the coverage has to be the same for all employees regardless of age or pre-existing conditions. But it also benefits the young & few companies are made up of just executives and no younger, jr. employees.

Pre-existing conditions and age are two sides you can’t dodge in this equation. If the gov’t went with the model of allowing premiums to vary for either pre-existing conditions or age the young and healthy would benefit greatly *but* then also lose in terms of taxes because such a policy would have to come with some way of subsidizing those who would be priced out of insurance.

50 JonFraz November 27, 2017 at 3:08 pm

Under the ACA he certainly could get insurance in the individual market. This should not be news in 2017.

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51 The Anti-Gnostic November 26, 2017 at 10:34 am

De-coupling medical insurance from employment seems like it would boost self-employment. I suppose that could be an argument for socialized medicine: more risk-taking, more flexibility in labor markets. What does data from places like Germany or Canada show?

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52 We Live in Interesting Times November 26, 2017 at 11:02 am

How could you forget Nancy Pelosi’s comment as to why we needed Obamacare? That was the expectation or part of the hard sell. More artists, etc.

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53 The Anti-Gnostic November 26, 2017 at 1:20 pm

I honestly don’t know. My impression is Canadian and European labor markets are not terribly flexible and their economies not too entrepreneurial but I’m happy to be proved wrong.

At a minimum, there must be some tweaks we can make to de-couple medical insurance from employment.

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54 ʕ•ᴥ•ʔ November 26, 2017 at 12:14 pm

I am really confident that single payer (ideally multiple provider) health care would encourage all sorts of risk taking. Including but not limited to entrepreneurship.

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55 Harun November 26, 2017 at 8:55 pm

You’re really confident even though europen has less entrepreneurship and the ACA removes these risks and yet did not spur entrepreneurship.

To me this says you are irrationally confident.

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56 ʕ•ᴥ•ʔ November 26, 2017 at 9:28 pm

Multivariate problems are hard, and sometimes even block people from considering rationally them at all.

https://www.startupgrind.com/blog/the-3-key-differences-between-european-vs-us-startups/

57 ʕ•ᴥ•ʔ November 26, 2017 at 9:32 pm

By the way, you might have missed the joke. Expect more bicycle crashes and unprotected sex, as well as entrepreneurship, with the public health.

58 JonFraz November 27, 2017 at 3:11 pm

Europe does not have less entrepreneurship. Business ownership and self-employment are higher in many European countries than in the US. “Entrepreneurship” does not mean one is the next Bill Gates. It can mean owning a coffee shop or bistro that employers a few family members and provides a lower middle class income.

59 Boonton November 26, 2017 at 2:00 pm

Unfortunately I don’t think it would be easy to do a comparison. Germany has a heavy manufacturing element to its economy so it’s not clear that any difference you see in vague ‘risk taking’ is due to the safety net of medical coverage OR other factors like being a different economy and culture.

Here’s a study you could do in the US, though. What happens when spouses get a job with good health coverage? Does the quite rate dramatically increase for the other spouse? We could gleam some sense from that of how many are holding down corporate jobs just for the health benefits and the moment they are freed of that worry they immediately jump ship.

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60 Boonton November 26, 2017 at 9:30 am

So Geoffrey West’s Sacle: The Universal Laws of Growth, Innovation, Sustainability, and the Pace of Life in Organisms, Cities, Economies, and Companies had what I thought was a telling observation. Rather than looking at businesses as a whole, he looked at ‘establishment’. Long story short an establishment would view a single McDonald’s or Starbucks as an establishment rather than looking at all McDonald’s or Starbucks as massive companies. Geographically it appears that there’s a pretty constant pattern over the entire US. In any given area there is about one establishment per 22 people and that establishment employs about 8 people.

If that is a constant then what does that mean for measuring entrepreneurship? Well for one thing there will have to be some level of new entrepreneurship at all times since retiring establishments have to get replaced by new ones or else the ratio of 1 to 22 people won’t hold. Likewise establishments growing beyond 8 employees have to be countered by new young establishments with less than 8 employees, otherwise the ratio of 8 workers to each establishment won’t hold.

Entrepreneurship might be hidden if you aren’t looking at establishments. If a corporate headquarters of 1000 people decides to split into 4 regional headquarters of 250 people, that might be a type of internal entrepreneurship where individual managers are taking on more responsibility.

Another interesting implication…if entrepreneurship is decreasing then that means establishment lifespan must be increasing if the 1 to 22 ratio and 8 to 1 ratios are indeed constants. But doesn’t innovation imply longer lifespan? If Google is really innovative as a search engine, then why would it vanish as an establishment? If Walmart has retailing logistics down to a science, then the thousands of WalMart establishments are pretty much going to remain where they are as long as population is stable (and as Cowen noted, migration is getting lower in the US so that implies local populations will be more stable). In other words if the market has figured out a block with 1,000 residents needs, say, 10 fast food establishments why would there be a lot of turnover if that’s a pretty optimal solution?

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61 RustySynapses November 26, 2017 at 9:38 am

Am I missing something? I believe most founders and co-founders of companies that I have worked with would answer this as “employed by a private company” (because technically they usually are employees) [from the survey]:

“First they must identify as self-employed in response to the question, ‘Last
week, were you employed by government, by a private company, a nonprofit organization, or were
you self-employed?”

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62 Harun November 26, 2017 at 8:56 pm

Yep.

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63 ʕ•ᴥ•ʔ November 26, 2017 at 10:00 am

It’s complicated.

1. Whatever the constraints on the category, a decline in it is probably not great.

2. Whatever the constraints on the category, it probably does represent a band that start-ups should grow through on the way from a garage to an IPO.

3. But all else isn’t really equal, and a retail store not founded because chains now dominate is different than a garage startup.

4. In the past, more start-ups replicated (pizza joints) than innovated.

5. Satoshi Nakamoto did not, as far as we know, start a 10+ person company to change the world.

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64 ʕ•ᴥ•ʔ November 26, 2017 at 10:53 am

Github growth could also illustrate growth/innovation elsewhere.

“GitHub Growth Appears Scale Free”

https://www.r-bloggers.com/github-growth-appears-scale-free/amp/

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65 ʕ•ᴥ•ʔ November 26, 2017 at 10:55 am

Scale free growth being a benefit of a free and unconstrained global computing network, of course. #nn

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66 celestus November 26, 2017 at 10:12 am

Starting a business is dumb. It’s very likely not going to “work” to the point of the entrepreneur making more money than as an employee, and there’s a good chance (over 50%?) they’ll lose everything. Two things have happened to reduce the number of people making such an irrational decision:
1) We have the Internet and other rich sources of information informing people that they are making an irrational decision.
2) Anecdotally, many successful entrepreneurs have strong religious faith and believe God has a plan. I would speculate that such a strong religious faith pushes more people over the hump of irrationality, producing a lot of religious successful entrepreneurs and religious failed entrepreneurs. Declining religiosity (especially among young people) thus results in declining entrepreneurship.

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67 Bill November 26, 2017 at 10:20 am

Re: Religiousity as a spur to entrepreneurial activity:

The same could be said of a person who hears voices.

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68 Clay November 26, 2017 at 3:58 pm

Well, aside from the faith itself, church attendance often comes with a network of people in the general area who are likely to trust the individual and wish them success, which helps build that all important customer base.

Many churches have the “insurance guy” or the “real estate lady” who everyone in the congregation knows and looks to when those services are needed.

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69 Greg G November 26, 2017 at 10:33 am

If religiosity was really the key to entrepreneurship then entrepreneurship should have peaked in ancient times when non-believers were an insignificant percentage of the population.

Instead, the rise of capitalism has been correlated with a decline in religiosity that is most evident where capitalism has existed the longest.

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70 JonFraz November 27, 2017 at 3:14 pm

Too many traditionally religious people, especially women not wanting to work outside the home, get sucked into MLM pyramid schemes.

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71 Bill November 26, 2017 at 10:28 am

What is interesting is what is not mentioned in the post so far, or in the summary of the paper:

The role of university research and university research spinoffs. https://timreview.ca/article/857

Of course, government funding–such as NSF grants– as a source of innovation are not popular to the more libertarian minded who focus on the “gov’ment “rgulation” as the impediment.

But, if we continue to cut back on government funded research and develop, and then later get surprised that innovation and entrepreneurial activity using this work declines, well, we get what we didn’t pay for and what we deserve.

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72 ʕ•ᴥ•ʔ November 26, 2017 at 10:40 am
73 The Anti-Gnostic November 26, 2017 at 11:19 am

Public funding is like the quantum observer: its very existence distorts the market. Would cancer research end if the public funds dried up? I suppose quantum physics would take a hit, but is it socially just to tax people so a few geniuses can pursue such arcane areas? Silicon Valley and Wall Street have enormous amounts of wealth piled up by brilliant people. Let the quantum physicists make their pitch to them.

On the other hand, there’s an odd pedestrian trend among modern merchant class-elites (who are THE elites at this point) that undercuts my thesis. Formerly, aristocrats derived prestige from subsidizing intellectuals and high culture. The current elites don’t seem to think along those lines. Facebook, for example, is devoting lots of money to getting Africans more access to Facebook, which would increase the company’s eyeball-count and its founders’ already enormous personal wealth, but doesn’t address more basic (and life-changing) needs, like potable water and functioning sewers.

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74 Boonton November 26, 2017 at 2:04 pm

If Facebook got lots of new users who had no potable water or functioning sewers, you would figure that would be pretty bad for advertising so how would Facebook’s wealth go up? Clearly Facebook’s efforts to ad more users in Africa is also adding millions of users who have spending money and advertisers are willing to pay to get access to those eyeballs. Maybe they don’t have as much spending money per person as the typical American, but there’s a lot of them and it adds up.

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75 The Anti-Gnostic November 26, 2017 at 2:24 pm

Facebook users aren’t consumers; they’re the product.

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76 Boonton November 26, 2017 at 3:11 pm

Product for who? Advertisers need consumers, no advertiser will pay to run an add to a billion people who can’t buy your product.

77 The Anti-Gnostic November 26, 2017 at 6:03 pm

Facebook sells eyeballs. That the eyeballs have high microbial loads and live around ponds of open sewage is irrelevant to Facebook and its actual consumers.

78 Boonton November 27, 2017 at 7:38 pm

You’re not getting it. You think Africa is a bunch of people sitting in hot sand starving to death around an open sewer. Reality Africa has a huge population, huge cities and a lot of economic activity that happens informally because many people do not have access to the banking and market services that the developed world enjoys. If Facebook and other platforms can capture even a little bit of that it’s a huge amount of potential profit and locks in a generation plus of growth as Africa’s economy and population will be expanding for decades to come.

79 Allyn November 27, 2017 at 11:12 am

“Public funding is like the quantum observer: its very existence distorts the market.”

Public funding may actually set the tone for the privateers to engage in research and development, thus expanding the market into directions that would not have been explored.

“Would cancer research end if the public funds dried up?”

It would not end, but what would be the incentive to continue if there were not additional monies available and/or encouragement by the public to go into certain areas?

“Silicon Valley and Wall Street have enormous amounts of wealth piled up by brilliant people. Let the quantum physicists make their pitch to them.”

It’s all about the bottom line for them. In this manner, with public funding, at least there is an avenue to pursue rather than having a street closed.

“Facebook, for example, is devoting lots of money to getting Africans more access to Facebook, which would increase the company’s eyeball-count and its founders’ already enormous personal wealth, but doesn’t address more basic (and life-changing) needs, like potable water and functioning sewers.”

You seem to forget that the Gates and Buffets of the world are donating their entire fortune for worthy causes, and/or have funded initiatives befitting of their ideology.

“Facebook users aren’t consumers; they’re the product.”

They are the consumers for what is found on the clickbait advertisements, and they are the product as new features become available.

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80 rayward November 26, 2017 at 1:35 pm

Decline in entrepreneurship? Is this fellow daft? Who says irony is dead: it’s alive and well at this blog. I’m amazed at the level of entrepreneurship in America. The author is measuring entrepreneurship as if this were the America of Henry Ford. Or the America of Deng Xiaoping. That Americans have been able to adjust as well as they have to a post-industrialist economy is nothing short of amazing. What the author may not understand, what Cowen may not understand, is that the American economy has an entirely different structure than in the past. My son works in construction, and just this morning he was describing how the shape of construction has changed. For example, most construction work is subcontracted. No, I don’t mean that the general contractor engages subs (electricians, plumbers, roofers, etc.), rather the subs engage subs. For example, the roofer for a job doesn’t actually do the roofing; instead, the roofer subs the work to a small sub; indeed, roofers may not even build roofs! Of course, under this model the actual work is performed by very small businesses, the kind of small business entrepreneurship that does not even exist under the author’s business model. These new entrepreneuers have replaced the entrepreneuers of the past, such as the tool and die makers who thrived as entrepreneuers with work subbed by the auto makers. And this does even consider the entepreneurers in the new economy, such as the software engineer, the Uber driver, the radiologist with a career as a locum tenens, etc.

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81 Bill November 26, 2017 at 2:57 pm

The decline in entrepreneurship,

As measured by the post,

Is due to

The decline of the number of

Available Illegal aliens to work in the restaurant kitchen or on the rooftop replacing shingles.

The Decline of the Lawncare Service Industry.

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82 Dallas Weaver Ph.D. November 26, 2017 at 3:22 pm

As someone who lived the entrepreneurship lifestyle, my viewpoint agrees with his research showing that regulatory fix costs are the major issue.

Being an overeducated scientist who found out in the early 70’s that I was a very good scientist, but LBJ’s “guns and butter” with a corollary decision of major federal cuts to the physical science, shut down the academic or research lab areas forcing me into industrial environmental scientist type positions. Of course, I found that the Pipefitters who worked for me in the field had a larger 1-week paycheck that my bi-monthly check and it was a myth that you could be promoted up a “technical ladder” instead of the “management ladder” to a level required for my growing family. I looked for an economic niche market that required developing some missing technology combined with a small enough market size to keep out big companies and I found it in recycled aquaculture for high-value ornamental (tropical fish) and research aquatic animals.

When I started, I just did my research and built the business in my backyard with no permissions and just a business name registration and a business license with insurance and workman’s comp for the employees. It didn’t take a lot of bandwidth to handle the paperwork as I was fully computerized by the 80’s including automatic control systems for my hatchery.

However, by the 90’s the city of Huntington Beach had evolved to have a “code enforcement” branch advertising on TV for a neighbor to turn in neighbor for “violations” of their expanding “codes”. This forced me to move and introduced my business to costs and time delays along with diversion of the bandwidth of my time devoted to bureaucratic BS. Having the academic credentials and PE license made it possible to actually build a fish hatchery in an industrial building, but I had to read all the code books looking for the loopholes to get around the bureaucrats insane demands like using copper pipes in a fish hatchery that would kill all the fish or anchoring my tank for earthquakes (a PE licence was required to do calculation proving the one tone tanks won’t move).

After the 90’s the bureaucratic demands just kept increasing and the manpower devoted to nonsense in every area from shipping live product to cities wanting a business license and a tax for delivering $25/wk worth of fish to a store to preparing reports for hazardous materials bought from Home Depot or doing water consumption analysis.

To see the effect of this evolving regulatory environment, we just have to look at the status of aquaculture (producing aquatic animals) in the US where there has been a steady decrease over the last 3 decades while at the same time aquaculture worldwide has been increasing at double-digit rates for 4 decades and now provides half the worlds seafood supply in a 100+ billion dollar per year industry.

The US and California have gone from a position of technological leadership in aquaculture of all types to an exporter of skilled manpower and technology with no real significance the last 4 decades. The regulators have become the new kings and princes and demand we spend decades and millions on trying to open a new fish farm.

As a semi-retired consultant, my recommendation for someone trying to start an aquaculture business in the US, especially California, is don’t. Goes south or north outside the US.

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83 The Anti-Gnostic November 26, 2017 at 6:18 pm

Thanks for the report from the trenches.

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84 Dallas November 26, 2017 at 7:27 pm

Being semi-retired I can just watch the groups spend millions trying to get permissions in a society where every idiot is a “stakeholder” and has a veto, even when they have no skin in the game.

For fun, I can actually read mathematical models the regulators are using to calculate impacts and have found known, provable, false assumptions buried in the math that used to justify demanding a billion dollar solution to a thousand dollar class problem. Regulatory Science, unlike real science, is often agenda driven not truth-seeking.

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85 Putin Vlad November 26, 2017 at 11:19 pm

How much does being a Commie Bastard elite in the US contribute to or eliminate economic opportunity for the majority of citizens in America?!

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86 Ali Choudhury November 27, 2017 at 4:07 am

I’d say the more successful entrepreneurs I have seen are senior managers from larger companies who spot a profitable niche their own C-suite ignores because the potential market size does not make it worth their while. It isn’t too hard to get backing if you have a credible background.

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87 Cranky Professor November 27, 2017 at 3:38 pm

Is the rise of major/minor programs in Entrepreneurship causal or symptomatic? Certainly they’re all the rage at liberal arts colleges right now.

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88 Zhenyu Xiang November 28, 2017 at 12:34 am

In my opinion, the economic decline is not entirely a bad thing. The slowdown in the creation of new companies means the more stable operation of existing enterprises and less impact from bankruptcies, which can improve social welfare. However, according to Schumpeter’s theory of “creative destruction”, the decline of the establishment speed of the company means that the new company can’t eliminate the old companies with lower efficiency in a timely manner, which is not conducive to the rapid and effective allocation of resources, which is not conducive to the improvement of production efficiency. Therefore, as a whole, The impact of declining economic viability is negative.

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