Louder Applause + Less Regulation = Greater Entrepreneurship


Unleashing entrepreneurship is a global imperative, evidenced by worldwide governmental passion for classifying and measuring entrepreneurship, such as the World Bank’s Doing Businessreport series, and by a mounting consensus that excessive entry regulation and other impediments dampen entrepreneurial innovation.

Alvaro Vargas Llosa’s Lessons from the Poor:Triumph of the Entrepreneurial Spirit, for example, demonstrates how regulations can contribute to worldwide poverty. In that vein, the Fraser Institute’s brand new book Demographics and Entrepreneurship: Mitigating the Effects of an Aging Population (edited by Steven Globerman and Jason Clemens) examines a range of challenges facing the entrepreneurial future, such as reduced startup rates where countries’ populations are aging. (Here’s my own little salute to the book in Forbes recently.)

My chapter in the volume, “Liberty’s Unfinished Business: How to Eliminate Political Barriers to Global Entrepreneurship,” provides an overview and assessment of what available contemporary theory and evidence have to say about the linkages between government regulation in the marketplace and entrepreneurial activity. It also reviews what we do not know and perhaps cannot measure; I often joke that if I really thought we could truly measure the costs of compulsory regulatory interventions, I could be a central planner! Sadly that intractability benefits only the planner mentality.

The best news is that countries can learn from both the good institutions that have allowed other nations to prosper, as well as from mistakes those nations have made. Policymakers’ task—and that of entrepreneurs themselves—is to affirmatively reduce existing and avoid new administrative and regulatory constraints beyond the foundations necessary for maintenance of rule of law and sustaining property rights.

With that foundation, the chapter details policy prescriptions to elevate economic freedom and promote entrepreneurship, while cautioning against excessive zeal in “promoting” entrepreneurship via political means. Classically liberal Constitutions may not rescue global entrepreneurship in the short run, but incremental steps today can certainly lay important groundwork to elevate global prosperity. Importantly, along with governments, the entrepreneurial/business sector itself has an urgent, still-unappreciated role to play in forging “Do-er/Thinker alliances.”

In the course of my research, I particularly appreciated the observation of entrepreneur John Chisholm in Unleash Your Inner Company, demonstrating how important minimizing regulations’ deleterious effects can be in the context of entrepreneurship.

Define any metric that you wish of potential entrepreneurs that combines ratings of such qualities as skill, passion, perseverance, self-confidence, ambition, and resources. Your metric will distribute the entrepreneurs along a [bell-shaped] curve…. No matter how you define your metric, many potential entrepreneurs, especially at the low end of your rating scale, are being blocked by regulations. The numbers blocked each decade grow as regulations grow. The very men and women in society who find it hardest to provide for themselves and their families and live in self-sufficient dignity are blocked.

Indeed, downturns and stagnation are often aggravated by government intervention that perpetuates non-market-clearing prices for labor, goods and services, as W. H. Hutt describes. The proper government role usually is not to “Act!” but to abstain from its own manipulation of wages and prices, which instead must adjust to market-clearing levels for recovery and entrepreneurship to resume. That wealth created by entrepreneurs in turn forms the foundation for future entrepreneurs to establish even greater wealth and well-being.

Projected decline in key entrepreneurial age group (25-49)

By now, scholars have adequately established that regulations can negatively affect entrepreneurship, yet regulators continue to downplay deleterious impacts of their rules and often hope to improve rules’ “quality.” Clearly, a better appreciation of regulatory costs and the real-life responses of entrepreneurs to regulation, such as the disinclination to start a business in the first place, or to hire part- rather than full-timers, should remain a priority. Policymakers need to become “entrepreneurial” themselves when it comes to rolling back the regulatory enterprises they oversee.

When reflecting upon entrepreneurial transformation versus subsistence, or the haves and have nots, an elephant in the room is the explosive growth of the United States in its early years. Over the past century-and-a-half, America’s GDP doubled every few decades. Then in the 1800s, isolated Japan industrialized in just a few decades. If the U.S., unaided, went from, to borrow the modern terms, subsistence to transformational entrepreneurship beginning 200 years ago, others should be able to emulate that process where artificial barriers are not present but rule of law is.

Equally important, developing nations that improve faster than today’s rich, but regulation-bound and stagnant economies, also teach lessons and serve as role models, too. There are lessons for all sides in today’s world.

Numerous pressures can constitute barriers to entrepreneurship, such as economic, labor and environmental regulation; “competition policy”; frontier sector regulation; rent-seeking and more. Halting further encroachment of over-regulation, and maximizing economic freedom around the world to unleash entrepreneurship, constitutes Liberty’s Unfinished Business.

(Note: A version of this column appeared on Fraser Forum, the Fraser Institute’s blog. One may read the chapters of Demographics and Entrepreneurship at the volume’s landing-page here.)

Originally published in Forbes.