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Do we have less of the good kind of entrepreneurship and more of the bad?
Regular AEIdeas readers have almost certainly seen some version of this chart showing a steady decline in US entrepreneurship:
Now, as discouraging as that chart is — and the lack of creative disruption it represents — things would be even worse if we saw a corresponding rise in unproductive entrepreneurship. In a new HBR piece, Ian Hathaway and Robert Litan write about what that means, keying in on the work of economist William Baumol:
A sizable body of research establishes that these “Schumpeterian” entrepreneurs, those that are “creatively destroying” the old in favor of the new, are critical for breakthrough innovations and rapid advances in productivity and standards of living.
Baumol was worried, however, by a very different sort of entrepreneur: the “unproductive” ones, who exploit special relationships with the government to construct regulatory moats, secure public spending for their own benefit, or bend specific rules to their will, in the process stifling competition to create advantage for their firms. Economists call this rent-seeking behavior.
Indeed, Hathaway and Litan are worried about a rise in unproductive entrepreneurship and offer a few bits of supporting evidence:
Perhaps most convincing, University of Chicago economist Simcha Barkai carefully tabulated the share of industry income distributed to labor, capital, and “profits.” (Normally, capital and profits are included together in one broad, residual “returns to shareholders” category.) He found that the share of income earned by workers has been falling, as others have pointed out, but also that the share earned by capital has, too. Indeed, both have been declining while the share of income going to “markups,” or rents, has been increasing.
To be clear, the presence of economic rents by itself doesn’t establish that there’s been an increase in unproductive entrepreneurship. For that to be true, there must be be evidence of an increase in rent-seeking — that is, concerted efforts to stifle competition by influencing the reward structure or rules of the game in a market.
James Bessen of Boston University has provided suggestive evidence that rent-seeking behavior has been increasing. In a 2016 paper Bessen demonstrates that, since 2000, “political factors” account for a substantial part of the increase in corporate profits. This occurs through expanded regulation that favors incumbent firms. Similarly, economists Jeffrey Brown and Jiekun Huang of the University of Illinois have found that companies that have executives with close ties to key policy makers have abnormally high stock returns.