Vijay K.
Mathur
Published in Standard-Examiner, July 19,
2013, Ogden, Utah
In a recent
investigative article on risk-taking and entrepreneurship in the June 20 Wall
Street Journal, Ben Casselman finds that Americans have become more
risk-averse. This decline of risk-taking and entrepreneurship is
manifested in the decline of new business formations, start-up rates, new job
creation, and fewer adults changing jobs. It is creating less churn and
dynamism in the economy, important characteristics of a growing economy.
Coincidently,
this decline in risk-taking and entrepreneurship is accompanied by increasing
income and wealth inequality, shrinking of middle class, decrease in employer
businesses, and big business with market and/or asset concentration.
Middle-income class provides the reservoir of entrepreneurship, a resource
whose allocation into different activities determines the well-being of a
capitalistic market economy.
In “A History
of Economic Theory and Method,” Robert Ekelund, Jr. and Robert Herbert, state
that the earliest discussion on the role of an entrepreneur in an economy is
found in Richard Cantillon’s 18th century work. He was an economist, Paris
banker and a London merchant. For Cantillon, entrepreneurs either work with
capital in their enterprises or without capital for uncertain wages, as opposed
to other workers who work for certain wages. He even considered robbers and
beggars as entrepreneurs.
However, 19th
century economist Joseph Schumpeter crystallized the concept and considered
entrepreneurs crucial for economic development in a capitalistic society. For
Schumpeter, an entrepreneur sees and grabs opportunities for new products,
processes, markets, organizations, resources, and any innovation to start and
build an enterprise. He need not be a capitalist, businessman, manager or
inventor. The common assumption that an entrepreneur is an inventor and always
promotes growth and development is faulty.
A nation must
design rules, regulations, laws and an incentive system that produce productive
entrepreneurs who make positive contributions to the national economy.
Political indecisions and corruption create uncertainty in the design and
implementation of laws and regulations that encourage entrepreneurship.
Professor
William Baumol, in his paper in the October 1990 Journal of Political Economy,
further advances Cantillon’s idea. Baumol argues that an entrepreneur is like
any other resource. Rules, regulations, laws and incentive system can influence
the allocation of entrepreneurial resources into productive or unproductive and
even damaging activities (e.g., drug cartels) deleterious to the nation.
He states, “If
entrepreneurs are defined, simply, to be persons who are ingenious and creative
in finding ways that add to their own wealth, power, and prestige, then it is
to be expected that not all of them will be overly concerned with whether an
activity that achieves these goals adds much or little to the social
product.”
For Baumol, a
Schumpeterian list for entrepreneurial activities should also include economic
rent-seeking innovations, the type of innovations we witnessed in the financial
bubble of 2007-08 that eventually led to the Great Recession. In general,
rent-seeking behavior implies keeping and/or acquiring claims on resources to
earn excess profits. Maintaining the ethanol subsidy by corn producers is an
example.
Baumol argues
that in ancient Rome and China, despite many innovations, productive
entrepreneurship in commerce and industry was discouraged by rules,
regulations, reward systems, prestige and general attitude of rulers. Rules of the
game were stacked against wealth accumulation in economically productive
enterprises. Courts encouraged entrepreneurship that engaged in rent-seeking
behavior through political favors.
The Great
Recession of 2007 showed us how non-enforcement and/or non-existence of
government rules and regulations and loopholes in laws led to the emergence of
some entrepreneurs who implemented financial innovations that were not only
unproductive but contributed to the serious recession. The emergence of such
entrepreneurs was encouraged not only by non-enforcement of rules and
regulations, but also by tacit approval of rent-seeking by relevant authorities
to accumulate wealth by many, at the cost of the Great Recession. FBI reports
show that mortgage fraud, as measured by Suspicious Activity Reports, increased
573 percent during 2003-2007. Only 7 percent of SARs filed during FY2007 led to
losses of more than $813 million.
In addition to
a 4 percent decline in GDP and 10.1 percent unemployment rates from December
2007 and June 2009, economist Scott Shane of the Cleveland Fed reports in The
Economic Commentary, March 24, 2011, that entrepreneurship, measured by
employer firms, decreased by 146,000 firms. Perhaps rules, regulations and
incentives facing many relatively small employer firms are so archaic and
cumbersome that it is discouraging many in the dwindling middle class to be
risk-takers in productive activities.
The rewards
for small-employer firms, who face stiff competition from big and concentrated
businesses with outsourced profits, may be skewed towards activities that are
shadier, border on corrupt practices and rent-seeking through political favors.
The Supreme Court decision on Citizens United has further encouraged
rent-seeking behavior.
If the U.S.
wishes to regain its momentum for innovations and entrepreneurship, it must
implement rules, regulations, laws and an incentive system that encourage
productive entrepreneurship that contributes to economic growth and well-being
for all Americans.
Mathur is former chairmen and professor of economics and now
professor emeritus, Department of Economics, Cleveland State University,
Cleveland, Ohio. He also writes blogs for the Standard-Examiner at
http://blogs.standard.net/economics,etc.
