The Exceptionally Entrepreneurial Society

tcsdaily.com ^ | November 27, 2006 | Arnold Kling

[Tolik]

If the United States is exceptional because of our entrepreneurial culture, then our natural allies may not be in Continental Europe, in spite of its democratic governments and high levels of economic development. Instead, we may have more in common with other nations of the Anglosphere, as well as such entrepreneurial outposts as India, Israel, and Singapore.

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"The movement that built the first national democracy was not triggered by an uprising of the masses; nor was it led by intellectual theorists. It was led by entrepreneurial men of means...In fact, starting a business develops precisely the traits that make democracy work. It requires independence, much effort, and self-discipline--but also the ability to work with others and the recognition that you can only succeed by serving the needs of others."
-- Carl J. Schramm, The Entrepreneurial Imperative, p. 161

This is the first of three essays on the theme of the significance of entrepreneurship in America. This essay looks at "American exceptionalism" with respect to entrepreneurship. The next essay will look at entrepreneurship and income inequality. The final essay will look at education and entrepreneurship.

Carl Schramm's thesis is that entrepreneurialism is as important to American culture as it is to our economic vibrancy. By the same token, in order to live in a congenial world, it is as important for the U.S. to export entrepreneurialism as it is to export democracy.

Compared to the United States, other developed countries, particularly in Continental Europe, put up more regulatory impediments to entrepreneurs, particularly the important subset of entrepreneurs that I will define below as change agents. In underdeveloped countries, regulatory impediments are compounded by crime and corruption, creating an environment even less conducive to entrepreneurship.

Defining Terms

The term "entrepreneur" has at least two connotations. The term could describe someone who launches a new enterprise. Alternatively, an entrepreneur could be defined as someone whose income is at risk in a business.

My preference is to require that a person satisfy both connotations in order to be called an entrepreneur. That is, my definition of an entrepreneur is someone who both launches a new enterprise and bears considerable risk and accountability relative to its success. To my way of thinking, an innovator who develops a new product within the safe confines of a university, a government agency, or an existing corporation is an intrepreneur, not an entrepreneur. Someone who has a very high degree of risk and accountability but who did not launch the business is a hired executive, not an entrepreneur.

An important subset of entrepreneurs (and of intrapreneurs) might be termed change agents. A change agent's new enterprise defies conventional wisdom and habits in some important way. Famous entrepreneurs, from Thomas Edison to Steven Jobs, are change agents. Change agents encounter resistance from people who are unwilling or unable to see the benefits of innovation, which explains why personal charisma and salesmanship can be important to their success.

Most entrepreneurs are not change agents. More typically, entrepreneurs own individual franchises, small retail stores, and just about anything else that you would find in a typical strip mall. These businesses require dedication, risk tolerance, and hard work to operate, but they do not depend on or attract change agents to launch them.

Amar Bhide, in his classic treatise, uses the term "promising start-ups" to describe businesses started by change agents and the term "marginal businesses" to describe the more routine entrepreneurial efforts. This terminological exercise may seem tiresome, but otherwise one can slip into using the term "entrepreneur" in multiple ways, depending on context.

Continental Europe

Edmund Phelps is the 2006 winner of the Nobel Prize in economics. Shortly after his award was announced, Phelps published an essay on how capitalism in the United States differs from the system in Continental Europe. Phelps wrote,

There are two economic systems in the West. Several nations -- including the U.S., Canada and the U.K. -- have a private-ownership system marked by great openness to the implementation of new commercial ideas coming from entrepreneurs, and by a pluralism of views among the financiers who select the ideas to nurture by providing the capital and incentives necessary for their development. Although much innovation comes from established companies, as in pharmaceuticals, much comes from start-ups, particularly the most novel innovations...

The other system -- in Western Continental Europe -- though also based on private ownership, has been modified by the introduction of institutions aimed at protecting the interests of "stakeholders" and "social partners." The system's institutions include big employer confederations, big unions and monopolistic banks.

In Continental Europe, large banks control the bulk of investment. The United States has a more vibrant stock market, many more banks, venture capital firms, and other financial channels.

In Continental Europe, large established firms have access to funds from the large banks, but newer enterprises have a much more difficult time raising money. In the United States, the more competitive financial system gives more opportunity for entrepreneurs to raise start-up capital. As Barry Eichengreen put it,

Bank-based financial systems had been singularly effective at mobilizing resources for investment by existing enterprises using known technologies, but they were less conducive to growth in a period of heightened technological uncertainty.

-- (For more on Eichengreen's work, see Tyler Cowen.)

In Continental Europe, labor market regulations serve to keep small businesses small and to ossify the work forces at larger companies. In the United States, it is much easier for new businesses to expand and for old businesses to shed unnecessary workers.

European government policies sacrifice economic dynamism to other goals. For example, Joseph H. Golec and John A. Vernon recently wrote,

EU countries closely regulate pharmaceutical prices whereas the U.S. does not...In 1986, EU pharmaceutical R&D exceeded U.S. R&D by about 24 percent, but by 2004, EU R&D trailed U.S. R&D by about 15 percent. During these 19 years, U.S. R&D spending grew at a real annual compound rate of 8.8 percent, while EU R&D spending grew at a real 5.4 percent rate. Results show that EU consumers enjoyed much lower pharmaceutical price inflation, however, at a cost of 46 fewer new medicines introduced by EU firms and 1680 fewer EU research jobs.

Continental Europe is set up to preserve large public sectors, large banks, and large corporations. For individuals, the promise is stable jobs, a stable business environment, and collective sharing of the costs of unemployment, retirement, and health care. For the economy as a whole, however, the result is stagnation, inefficiency, and a burden on the working population to support the unproductive sector that is becoming increasingly unsustainable.

Over time, Europeans with entrepreneurial inclinations will be increasingly tempted to emigrate to the United States or other countries in the Anglosphere. Among the remaining Europeans, political support for welfare-state policies will solidify, even as the economic viability of those policies slips further.

Crime and Corruption

An entrepreneurial culture can emerge only in a setting where private property enjoys protection. When government fails to prevent crime, or when government corruption and expropriation serve the same functions as crime, the price for entrepreneurs is steep. A recent New York Times story summarized research done by a number of international agencies on the cost of crime in Latin America.

Years of rampant violent crime is not only robbing Latin America of significant private investment, but in some cases is stealing up to 8 percent from national economic growth, economists and World Bank officials say.

..."You have money spent on guarding stuff rather than making stuff," said Michael Hood, Latin America economist for Barclays Capital. "There's a large population standing around in blue blazers rather than engaged in more productive activities."

Much of the cost of government corruption is inflicted on start-up businesses. The World Bank and Canada's Fraser Institute have both documented the difficulties of doing business in many underdeveloped countries.

The Ethics of Growth, Once Again

Four years ago on TCS, I wrote that a nation's prosperity depends on three ethics: a work ethic, a public service ethic, and a learning ethic. The work ethic means that people believe that those who are willing to work deserve more rewards than those who are not. A public service ethic means that government officials are expected to protect private property, not to extort it. And a learning ethic means that people expect to learn, innovate, and adapt, rather than to resist change.

In the underdeveloped world, the work ethic and the public service ethic have not flourished. Instead, crime and corruption sap the economy, and entrepreneurship is particularly frustrated.

Continental Europe does not suffer such severe problems with the work ethic and the public service ethic. However, an important part of the learning ethic is taking advantage of the decentralized, trial-and-error process of entrepreneurial success and failure. The Continental European system attempts to replace the learning of decentralized markets with bureaucratic planning. Individual change agents have little access to capital and less opportunity to earn large individual rewards.

Ultimately, Europe's corporatist, bureaucratic model impedes learning and retards innovation. With its barriers to entrepreneurship, which are particularly discouraging to change agents, European economic growth has lagged behind during the last two decades of rapid technological change.

America's Natural Allies

If the United States is exceptional because of our entrepreneurial culture, then our natural allies may not be in Continental Europe, in spite of its democratic governments and high levels of economic development. China seems more dynamic than Europe, but I would argue that China's government-controlled financial system ultimately is not compatible with American-style entrepreneurship. Instead, we may have more in common with other nations of the Anglosphere, as well as such entrepreneurial outposts as India, Israel, and Singapore.

For the half century following World War II, the United States focused on democracy as the cornerstone of foreign policy. Democratic nations were our allies, and promoting democracy abroad was a top priority. However, it may be that American exceptionalism mostly reflects entrepreneurship. In that case, we have less in common with European social democracy than we thought previously. And, if our goal is to have more countries that look like America, then having them adopt a democratic political system may not be necessary and will certainly not be sufficient. Instead, our primary focus should be on fostering an entrepreneurial economic system. As Nobel Laureate Phelps put it,

I conclude that capitalism is justified -- normally by the expectable benefits to the lowest-paid workers but, failing that, by the injustice of depriving entrepreneurial types (as well as other creative people) of opportunities for their self-expression.

Arnold Kling is an adjunct scholar with the Cato Institute. His most recent book is Crisis of Abundance: Re-thinking How We Pay for Health Care.

[Tolik]

Very Interesting!

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[Tolik]

I rarely do this, but some comments on the tcsdaily discussion forum are too good not to spread. You can read the whole discussion here (http://www.tcsdaily.com/discussionForum.aspx?fldIdContentType=1&fldTheirID=111606G) I re-post just three I liked the most.

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Name:	DonVandervelde
	Subject:	cultural evolution - - - - -
	Date/Time:	26 Nov 2006, 7:55 PM

The medieval class system, with rigid class ranks ranging from serfdom thru the aristocracy yet haunts and stunts european enterprise. Americans rejected this class system, but its ghost haunts us still. Class warriors looove the terms "working class" and the "managerial class" along with privileged bureaucracy, politicians and judges (the snooty "public service" classes). Not to mention the annoying MSM chattering classes. The terms employee and employer smack of peon and patrone. But, the system is evolving. More and more self-employment is being created, at all levels. More and more businesses rely on "contract" help for everything from janitorial services to technical expertise and even management, rather than assume the old employer-employee roles, to get things done. The household survey measure of employment increasingly exceeds the official employment statistics, which measures the officially reported number of hirees of existing businesses. This virtuous trend is leading to a majority of workers being in business for, and responsible for, themselves, a very healthy trend socially as well as economically. Some happy day 'employee' may be an archaic term, like serf.

	Name:	robertbennett
	Subject:	Safety in serfdom
	Date/Time:	27 Nov 2006, 3:03 AM

One intentionally overlooked benefit of serfdom is the sense of safety it provides serfs. Due to legal restrictions on his movement, occupation, and almost every other aspect of his life, a serf knew what his future would most likely hold. And while that future couldn't improve, it wouldn't fall below any other serf's, either, given the obligations his superiors owed him. Of course, societies that prevent the free exploitation of human capital by the people who own it develop painfully slowly because probability consigns their Einsteins, Edisons, Gates and Kamprads (IKEA's founder) to serfdom and very rarely to the nobility - the class with the freedom but not the incentive to exploit genius. Modernly, Europeans have tried to implement this same serf-like sense of safety and social stability for the masses via the welfare state. And while they've succeeded providing security and social stability, they've paid dearly for it by preventing the owners of human capital from exploiting it. This is why Sweden - the vanguard of continental welfare statism - hasn't seen any new Kamprads, Ericssons or Nobels since it went whole hog for welfare statism 50 years ago. For about 20 years now, welfare statist continental Europe has been sagging under the weight of the unfunded obligations providing its safety and social stability, and the ruinous costs arising from this malaise are becoming much clearer to all. Yet I believe the folks here, who have never really lived in a capitalist society and whose attitudes are mostly negative towards entrepreneurs, have a very high tolerance for the costs of security, just as Americans have a very high tolerance for the costs of freedom.

	Name:	robertbennett
	Subject:	The lethal cocktail's key ingredient: Materialism
	Date/Time:	27 Nov 2006, 12:28 PM

When one gets to the point where he realizes that money is neither the solution to all problems or their cause, then one realizes that socialism is even more materialistic than capitalism. But there are things in life more important than money for men whose spiritual and social development empower them to embrace what can't be forced or bought, things like charity, volunteering, community leadership and generally spreading goodwill and fellow-feeling among those he comes into contact with every day. So to me, what's most tragic about socialism isn't that it inhibits the economic exploitation of human capital. Rather, socialism inhibits the development of those things in the human spirit and society that are more valuable than money and that no set of welfare state programs can duplicate no matter how much of the economy they absorb.

[Brilliant]

The Dems will put an end to this.

Mexicanize it just a little bit more and the shear burden of socialism will bring it down.

Which is really what they've wanted all along.

[x_plus_one]

One intentionally overlooked benefit of serfdom is the sense of safety it provides serfs.

The most overwhelming sense that serfs get is their mandatory military conscription to fight and die for 1) their owners and 2) their liege lord king.

Aside from that, the insecurity of women who are chattel and have no personal rights and the right of seigneur of the owner to take any woman even on their wedding day

Yes, serfs had it great.

Today's bureaucrats and wage slaves have it great too.

[x_plus_one]

Mexicanize it just a little bit more

Mexico's top down oligarchy and institutionalized govt.corruption prevent serious enforcement of govt edicts such as OSHA and EPA.

As Ralph (Emmanuel) Cleaver __ congressman from Kansas City once said - A little corruption is a good thing for progress...../S

[Jason_b]

bump

[quesney]

Along those lines we should be strengthening our ties to budding entreprenurial meccas across Eastern Europe (especially the Baltic States, from which Skype originated), Kurdish Iraq (which badly wants to emulate our entreprenurial success), and enlightened business-friendly (and strategically placed) Latin American countries such as Panama and Canadian provinces such as Alberta (which is highly entrepreneurial and enjoys massive reserves in the oil sands that may dwarf any other on Earth).

We definitely need to reassess who are our natural allies, and who isn't. George Washington warned against permanent alliances. We've wasted too much time and effort already on fair-weather friends who drain more than they contribute to our security and prosperity.

[khnyny]

bump for later read.

[Wonder Warthog]

"To my way of thinking, an innovator who develops a new product within the safe confines of a university, a government agency, or an existing corporation is an intrepreneur, not an entrepreneur."

Only if the university, government agency, or existing corporation then takes interest and commercializes the development. Far more likely is that the employer will show no such perspicacity, and the employee will then take his idea outside---at which point he (or she) DOES become an entrepreneur.

[GOPJ]

Thanks for the ping.

[FastCoyote]

This is a first rate article and accompanying commentary.

I am now a self-employed entrepreneur, doing both the risk and startup sides of the equation, so I am a prime example of what is discussed above.

[djreece]

marking

[traviskicks]

bkmarmk

[Cacique]

bump for later read

[Porterville]

Western Europe is the birthplace of death and suicide. That is all.