Public Policy, Economics and Entrepreneurship: August 2010 Archives

The impact of the changes in public policy over the past decades -- increased direct government control over the direction of the economy, higher tax rates, more regulation -- are not just simple on/off switches.  Even if we were able to magically turn all of this around tomorrow, the lasting impact would remain for years to come.

What we often fail to understand is the impact of public policy decisions on our culture.  Just as on example, look at unemployment benefits.  Over the past years the tendency has been to extend government unemployment benefits during tough economic times.  While this seems on the surface a compassionate thing to do, the research into this clearly shows that such extensions actually extend the period of time that people remain unemployed.  It has also contributed to, along with many other policy decisions, an expectation in our society that the government will be there to support you.  Over the generations, this is now deeply embedded into our culture.

A direct result of increasing dependence on government is that the self-reliance that was such a fundamental aspect of the American culture for generations has been eroding.  And that value of self-reliance was a major driver of our entrepreneurial nature as Americans. 

Let's assume that we continue with the acceleration of government's role in our economy and our private lives.  Then some day in the future we wake up and realize that we have been heading in the wrong direction -- that socialism really does not work very well after all. 

So we elect an entrepreneur as President, who promises to unleash the free market to restore our economic engine of growth and prosperity.  This new leader slashes taxes and cuts through the red tape that has bogged down entrepreneurs for generations.

But then, very little changes in our behaviors.  Changes in public policy do not have the desired impact.  Is this a case where these policies are a dismal failure?  Not at all.  It means that with our years of government expansion, we have suppressed the very aspects of our culture that drive us to want to become entrepreneurs.

Want to see what this future looks like?  Take a look to our south at Chile. 

Like the ghost of Christmas yet to come in A Christmas Carol, Jonathan Ortmans offers a glimpse of this possible future.  One that we can avoid, but only if we change our ways.

Ortmans' writes a post at Policy Forum Blog in which he examines the fact that, while an economic success story in South America, Chile has not been able to unleash entrepreneurial growth in its economy. Its answer to this shortfall?  Put government in change of creating entrepreneurship.  Chile shows what happens when we have relied so long on government to fix things, to fix everything, that we wrongly assume that only government can create entrepreneurship.

Unfortunately, Chile is not yet a startup culture, and innovation still plays a minor role in the creation of new enterprises, according to the infoDev Incubator Support Center (iDisc) service from the World Bank. This may come as surprise since the Chilean government's investment in R&D has increased 70% since 2005 and much of it has flown into universities. It has also created the InnovaChile program to support innovation in various sectors, including biotechnology, energy and ITC.

This is what can happen in America if we do not change course very soon.  For you see when assumptions get ingrained into our culture, we do not consciously know they are our assumptions.  They are simply taken as a given.  The leaders of Chile cannot comprehend any solution but the government for their economic challenges.

The self-reliance that made America an entrepreneurial powerhouse is still evident.  I see it burning in the generation now in college.  But with each step toward socialism in our economic policy, the entrepreneurial flame fades a bit more in our culture.

On Monday, Scott Shane wrote a post at Small Business Trends titled "Do Small Businesses Matter in High Tech?"

As in most of Shane's writing he comes out swinging at small businesses in our economy.  In his opening sentence, he proclaims: "Small Businesses are much less important in technology-intensive industries than in the rest of the economy."

In a conversation with Aron S. Spencer, Ph.D., who is an Assistant Professor, School of Management at New Jersey Institute of Technology, I found yet another kindred spirit in those who continue to be dismayed at Shane's antagonism toward small business.

Spencer asserts that Shane's premise "flies in the face of the conventional wisdom -- and common sense -- about high-tech entrepreneurship. It's also completely wrong."

As in past writings, Shane selectively uses and interprets data to make his case.  "Shane begins his argument based on revenue share," said Professor Spencer, "citing evidence that small businesses generate small proportions of sales compared to overall high-tech sales. While this may be true, sales are only a small portion of the picture."

Spencer offers some specific evidence of his own.  "Take, for instance Shane's discussion of R&D. Small business, he says, account for only about 1/5 of R&D spending (other studies I've seen indicate it may be as low as half that), whereas businesses with more than 25,000 employees account for 42% of the spending. Yet he fails to mention that about half of all patents awarded go to small businesses. That means that small business are 5-10 times as efficient with their research dollars. Patents awarded to small business are also more than twice as likely than those awarded to large businesses to be important patents, based on their impact on future R&D and patenting."

Spencer also takes exception, as I have in previous posts, to Shane's use of employment data. Shane argues that "small business also accounts for a smaller portion of technical employment than its share of overall hiring."

Spencer makes the following rebuttal to this:  "The statistics he cites primarily indicate indicate that there are a lot of non-high-tech small businesses. The more interesting statistic is that small high-tech firms generate jobs at a rate over 5x their share of current employment (compared to just over 3x for non-high-tech small businesses), and therefor are among the most important drivers of employment growth."

Spencer also argues that Shane minimizes the importance of small high tech companies to the growth of the big ones.  "Many of today's large tech firms drive substantial portions of their revenue growth via acquisitions. Cisco, for instance, has a reputation for 'growth by acquisition'.  Harvard even wrote a case study about it. Google, in addition to their internal R&D efforts, has also shown a great appetite for purchasing outside technologies. Where do these acquisitions come from? Small high-tech business."

And that's why, once again, Professor Spencer and I both assert that Professor Shane is wrong.  Small business does matter.

It is nearing the time of the summer when I take a short break between teaching my summer graduate business class and the kick-off the for the fall semester.

I plan to finish two books I am reading right now, both of which show what is on this entrepreneurial mind right now.  I recommend both of them to all of you:

The first book is called New Threats to Freedom from Templeton Press. It includes thirty essays from a variety of people (for example, Christopher Hitchens, Daniel Hannan, Anne Applebaum, Jessica Gavora, Christina Hoff Sommers, Bruce Bawer, and David Mamet) writing about cultural phenomena that are slowly eroding our liberties.  Some powerful stuff have been compiled for this book.  The essay format makes it good beach -- or in my case back porch -- reading.



The second book is titled Right to Earn a Living by Timothy Sandefur (published by the Cato Institute).  Sandefur details numerous instances of local, state, and federal government interference with citizens' economic freedom, often turning their American dreams into a nightmare.  When special interests are involved, abuse of government 'oversight' can take many forms, from manipulating licensing laws and limiting free speech in advertising, to unfair rules that override private property rights.  The book includes many examples.

I have spent the weekend in Montreal at the annual Academy of Management meetings.  This group draws a large crowd of academics, some of whom have an interest in entrepreneurship. 

There are a few papers from there that offer some interesting insights.

David Ahlstrom of Chinese University of Hong Kong and Andrew Delios of Singapore National University debate the role of business in society.  Professor Ahlstrom directly argues that the role of business is to be entrepreneurial and create new jobs through innovation.  In response Professor Delios argues for a broader role for business in society. 

You can access these articles by clicking:

Innovation and Growth: How Business Contributes to Society

How Can Organizations Be Competitive but Dare to Care?

An article by Susanna Khavul examines the topic of microlending among the poor.  She reviews the evidence on microlending and highlights the debate on whether such lending is accomplishing what it is suppose to.  She also lays out an agenda to help ensure that microlending actually accomplishes its noble goal.

You can read her paper by clicking the following link:

Microfinance: Creating Opportunities for the Poor?

Top economics bloggers are feeling a renewed sense of pessimism about the U.S. economy, according to a new Ewing Marion Kauffman Foundation survey released today. Sixty-eight percent of economics bloggers who responded to the mid-July survey described the economy's overall condition as "mixed," with the rest split three to one toward an assessment of "weak" rather than "strong." Worse, only 5 percent of respondents believe the economy is "better than official government statistics show," while 47 percent think it is worse.

For this third Kauffman Economic Outlook: A Quarterly Survey of Leading Economics Bloggers, the Kauffman Foundation sent invitations to more than 200 leading economics bloggers as identified in the Palgrave's econolog.net December 2009 rankings. (NOTE:  I was one of the bloggers surveyed).  The Foundation surveys the bloggers each quarter about their views of the economy, entrepreneurship and innovation.

"Uncertainty is casting a shadow over the economy as well as the debate about the economy," said Tim Kane, senior fellow at the Kauffman Foundation and author of the study. "There is good news in the forecast, but it seems to have left the country. Expectations of global growth are more than double the projection for U.S. incomes. And bloggers' frustration with Congress seems to have hit a boiling point as well, yielding a grade point average of 0.8 on a four-point scale, which is roughly half the grade point given to Wall Street firms."

Research highlights include:

• None of the respondents assessed the U.S. economy's overall condition as "strong and growing." Overall opinion has shifted sharply negative since the previous quarter. Many bloggers acknowledged the possibility of a double-dip recession in response to a question from Econbrowser.com's James Hamilton: the average probability among respondents was 44 percent.
• The bloggers expect the U.S. budget deficit to grow stronger than any other variable over the next three years. They also see higher poverty (doubled from second-quarter expectations) and inequality levels in the United States, meager stock market growth, and a slight decline in U.S. competitiveness. On a brighter note, three-year projections also include a relatively strong increase in global output.
• A large majority--70 percent--of the surveyed bloggers say the federal government is too involved in economic matters, despite the largely non-partisan identification of the respondents.

The response that gave me the biggest concern was about small business.  A majority (57 percent) believe conditions for small business in particular are "bad" or "very bad."

Not good news for entrepreneurship -- the engine of economic recovery.