It is hard to start a business that works. Most people do not attempt it. The reasons are complex, but the World Bank’s Doing Business report finds only a handful per 1,000 adults worldwide start new ventures. Alexander S. Kritikos notes just how rare it is; “Even in innovation-driven economies, only 1-2% of the work force starts a business in any given year.”
In addition, given that most who try do not succeed, woe is compounded when business failures are due to excessive regulation by governments. Some signs in wealthier countries seem discouraging with respect to boosting entrepreneurship; for example, the U.S. Census Bureau recently found startups in America at a 40-year low, a trend we hope is in a sustained process of reversal.
It was never inevitable that humanity would figure out how to create wealth. However, it did, albeit not yet for everyone. Fortunately, in today’s hyper-connected world, the pursuit of economic liberty has also moved to the international level as economic freedom in any one country can influence policies in others, and as countries become more interdependent in their efforts to increase wealth. However, so, too, have threats to wealth creation globally become more salient given that so few carry the load.
An aim of policymakers in today’s world should be to make a 21st Century case for completing Liberty’s Unfinished Business: That business consists of affirming linkages between the regulatory climate (economic, social, environmental, paperwork, frontier sectors, you name it) and entrepreneurship, and then taking action to maximize global economic freedoms and, in turn, the prospects for entrepreneurship, wealth and job creation.
Most policymakers have bid good-riddance to the 20th Century’s dark age of central planning; but they must likewise reject planning’s little brother—the presumptuous administrative state—before it takes root in emerging economies and those recently free of dictatorship. They must also uproot the administrative state excesses in advanced nations experiencing declining rates of entrepreneurship.
Pioneering entrepreneurship and innovation economists Israel Kirzner and Joseph Schumpeter did not fret entrepreneurship’s “antecedents, institutional or otherwise” (see Steven W. Bradley and Peter Klein 2016) when describing the centrality of the all-important judgmental role of an entrepreneurial prime mover with free will.
Nonetheless, the linkages between regulation in a society and the presence of entrepreneurship and economic growth (A search of Google Scholar of “effect of regulation on entrepreneurship” gives over 100,000 results) appear to be as well documented as regression analysis and correlations allow one to affirm that some condition “causes” another. Researchers employ a great many (imperfect) proxies for both dependent variables (those quantities we want to say are gauges of entrepreneurship) and the innumerable independent variables that influence entrepreneurship. Naturally, the analytical enterprise suffers from left/right and partisan disputes, as manifested in questions over, say, regulation’s impact on jobs and the debatable concepts of market failure (as distinct from political) and agency “expertise.”
Cronyism meanwhile impedes both entrepreneurship itself and the measurement of it. Even where agreement exists that regulation affects entrepreneurship, we quickly realize that there are wildly different institutions and different categories of regulation, just as there are different categories of entrepreneur. Cultural attitudes also matter to budding entrepreneurs, and those attitudes can be affected by many things, as the intercollegiate-consortium based (and encyclopedic, covering over 60 countries for nearly two decades) Global Entrepreneurship Monitor describes. Impressions of how a society treats entrepreneurs, whether or not people believe entrepreneurs are respected, how the media treats them, whether or not becoming an entrepreneur is a good career choice, the status accorded being an innovator, and impressions of whether or not society makes it harder than necessary on entrepreneurs — negativity in any of these can lead to the choice to bag it and work for someone else instead.
Naturally, we would like ironclad working definitions of entrepreneur and entrepreneurship; yet of course, there are different shades of meaning and emphasis. The entrepreneurship of being one’s own boss is most obvious, as some see entrepreneurship as startup activity and the act of creation itself; others might include in the definition being an employer of others or even creativity and innovation on the part of going concerns. Still others might credit a going concern reacting to competition by keeping abreast of and surpassing it. There can even be entrepreneurial behavior by employees, activity that also differs from country to country and culture to culture, as highlighted in the GEM.
Alas, “While research has grown considerably in the last two decades, there is still no consensusregarding the meaning of entrepreneurship.” Of course, in the classical liberal movement, the archetypal formulation by Israel Kirzner in Competition and Entrepreneurship (1973)emphasizes the entrepreneur’s alertness to the dispersed knowledge that classical economics tended to treat as perfectly known and assumed unimportant. Jim Blasingame of the Small Business Advocate, author of Age of the Customer, gives a solid definition useful for academics and practitioners alike: “An entrepreneur attempts to create a new product, service or solution while accepting responsibility for the results.” Unfortunately, government regulation can both undermine responsibility and interfere with good results. Indeed “political entrepreneurship” can negate the real thing.
Global regulators should recognize that as an institution, capitalism doesn’t just make the world richer, but fairer and safer, as Fred L. Smith Jr. describes in “The Morality and Virtues of Capitalism and the Firm: Defending Capitalism in Theory and Practice.” While we acknowledge frequent rent-seeking by corporations, in its essence, the corporate configuration is one of the most democratizing forces yet devised. Indeed, it is arguably the prominent form of voluntary organization for allocating risk, fostering shareholder wealth accumulation, and enabling economic interactions between strangers (the latter mimicking the “connections” the well-off have always had and always will have in non-free societies; if you’re well-known or rich or powerful, you can always transact and acquire resources). Despite disdain for capitalism among the millennials who will be leaders in short order, the institutions of economic freedom are necessary for entrepreneurship, prosperity and well-being, and for creating the level playing field statists claim to champion.
These assertions are not merely theoretical. Long-term trends toward more material wealth (and one hopes more freedom and liberty) show things objectively better than ever. “Until about 1800, the vast bulk of people on this planet were poor. And when I say poor, I mean they were on the brink of physical starvation for most of their lives,” according to Joel Mokyr. The World Bank in 2016 classified less than 10 percent of the global population as living in extreme poverty,compared to 37 percent in 1990 and 44 percent in 1981. No matter where one resides in the world, our grandparents or great grandparents had no refrigeration, no air conditioning—often no indoor toilet if you go back only two or three generations. Technologies in the hands of the poorest today would astonish our forebears. The first successful transatlantic cable carried eight to 17 words per minute, and it was expensive. Today, for the price of connection, the Internet pairs free luxuries prior generations had to pay for (news, maps, entertainment, networking, publishing) with growth that leaves out earlier infrastructure steps, such as the developing world’s ability to wirelessly leapfrog the expensive wired networks western nations built.
By and large, “technology we take for granted was worth billions not long ago,” and the hours of labor it takes to earn things like a washing machine or 2000 calories continually drop (while the ability to sit around doing nothing rises. Thus real wealth, if not dividends or income streams collected, is gigantic in terms of the explosion of material conditions and life expectancies that had been abysmal before 1800. Such “externalities” of global wealth increasingly enrich everyone, but of course, interference matters, such as taxes and regulation that render the poor who do manage to build assets unable to invest creatively, start entrepreneurial ventures, or transfer that wealth to descendants, thereby aggravating income inequality.
In a book chapter on the foregoing topics, I highlighted key research pointing to well established (typically but not always) inverse connections between excess regulations and entrepreneurship, and the well-trod importance of institutions of economic liberty and their positive relationship to entrepreneurship. In the process, I covered a slice of the profusion of global governmental reports and academic and scholarly articles detailing current inquiry into measures and determinants of entrepreneurship. All that notwithstanding, it is important to recognize the limitations of modeling (the impervious-to-calculation nature of regulatory costs, “infinite” variables, the upending of the entrepreneurial landscape by networking and automation, and endogeneity), and other uncertainties.
The takeaway for policymakers is that administrative-state dominance, regulations and barriers to investment need to be reduced and reformed and monitored in order to improve incentives for entrepreneurs. More than anything, a framework of economic freedom within the rule of law, whatever other root causes of entrepreneurship there may be, is essential to afford the best possible opportunity for those who take that all-too-rare and courageous step to become entrepreneurs.
Hurdles to carrying out reforms will include the tensions created by inadequate institutions, the stubborn prevalence of rent-seeking, and the related insistence on the part of even those doing the measuring of entrepreneurship that regulation performs as intended rather than gets routinely undermined by unintended consequences. That faith needs tempering by the recognition that it can be naive to assume regulation can be largely counted on to “behave” rather than misbehave, or that some consequences may not be unintended after all.
Finally, and vital in advancing economic freedom and entrepreneurship, we cannot let the private sector off the hook; the business and entrepreneurial sector has its own duty to and form “Do-er/Thinker” alliances to defend economic liberty in the face of wide opposition and opportunism.
(Note: This article is in part excerpted from my introduction to my chapter “Liberty’s Unfinished Business: How to Eliminate Political Barriers to Global Entrepreneurship,” which appears in the Fraser Institute’s new book Demographics and Entrepreneurship: Mitigating the Effects of an Aging Population. One may read the chapters of Demographics and Entrepreneurship at the volume’s landing-page here.)