Overcoming Barriers to Entrepreneurship in the United States
Edited by Diana Furchtgott-Roth
Lexington, 174 pp., $24.95
Entrepreneurs are the rock stars of the business world. Politicians flatter them, investors clamor to discover them, and corporate executives claim to be them.
Sadly, none of this flash is likely to make it into your college economics class. There, the textbook drearily focuses on land, labor, and capital as the economy's basic ingredients. The entrepreneurs who stir the pot in brash and productive new ways are a mysterious force, difficult to chart with PowerPoint bullets. There is no doubt that innovation and risk-taking--the contributions of these master chefs of the economic stew--drive progress. But they are elusive, and will not hold still for measurements.
This sleek, nifty volume of essays seeks to pursue the beast--and if not to capture it, then, at least, to triangulate its position. Edited by labor economist Diana Furchtgott-Roth, it teaches us why venture capitalists cluster in places like Silicon Valley; why tax cuts may (or may not) encourage entrepreneurial risk-taking; why Mexican immigrants are less likely to go into business for themselves than other U.S. workers; and why larger firms are more likely to offer workers pension plans. Overcoming Barriers brings high-level analysis to entrepreneurship, and its breadth--from investment banking, to tax policy, to immigration, to retirement programs--underscores how far the pursuit ranges.
The studies are written for both serious and more casual readers, although the latter will want to breeze past thickets of analysis only an economist could love. Fortunately, the seven essays are well organized and nicely edited, communicating the basic narrative even to those who are not in it for the "t statistics." But the book is, caveat emptor, not a cheerleading manual: Neither Henry Ford nor Sam Walton nor Bill Gates is mentioned. The authors are social scientists at prominent institutions who probe substrata economic formations looking for clues as to what factors drive the self-employed to leave their wage jobs behind, and how public policies impact this migration.
For instance, the chapter on Silicon Valley's venture capital hub offers a fascinating window into the sociology of entrepreneurial nurturing. Venture capital investments in Silicon Valley appear to be made differently than elsewhere: They come earlier to start-ups, and lavish more capital on firms. Either due to this, or the other way around, start-ups there outperform those elsewhere, on average.
Why is this? The answer seems to lie in the commercial culture. Unlike investment bankers doling out high-risk, early-money investments on the East Coast, Northern California financial sources are run by technical experts possessing business experience--entrepreneurs funding entrepreneurs. These capitalists operate like bankers, but they know more. Which may account for the more frequent huge payoffs in Silicon Valley and a higher wipeout rate. No irony here: Risk is hardwired into the entrepreneurial economy, and ugly failures are inputs into spectacular successes.
Economist Junfu Zhang, the author of the VC chapter, concludes that the mission launched by many local or state governments--to replicate the Silicon Valley experience--is a fool's errand. The social networks that form are key; capital chases smart people connected to other smart people. Wealth is created when those dollars and networks combust. The best strategy is to eliminate the underbrush of tax and regulatory disincentives that inhibit productive economic activity generally. Or somewhat more ambitiously, create a Stanford University and let the graduate students figure out the rest.
In the essay on tax policy, written by Donald Bruce and Tami Gurley-Calvez, an interesting body of research is presented. It shows that the vast majority of business owners in the United States pay taxes as individuals, not corporations. This means that rate increases for high-income taxpayers reduce pay-offs for the start-up entrepreneur. And tax hikes on capital reduce the pool of risky funds that these new ventures seek to tap.
Soaking the rich sinks this ship. Entrepreneurship is all about creating new wealth while tax redistribution is premised on the assumption that resources are static and the collateral damage from tax hikes is no more than the cost of ear plugs to block out the whining at the country club. In the concluding essay, a real-life entrepreneur finally makes an appearance. Eric Meltzer is a University of Chicago MBA and the son of a famous economist, but otherwise he is perfectly normal--and enterprising. He invests in highly risky wireless communications plays, often at the frontier of technology. He counts passion and knowledge as primary inputs, with dumb luck perhaps dominant. But to capture that fortuitous return, you have to enter the game. And think hard. And pursue objectives energetically. That your "luck" improves with the skill, foresight, and strategic subtlety of the risk-taker is capitalism's very -special gift.
Thomas W. Hazlett is professor of law and economics at George Mason University.