Is America Encouraging the Wrong Kind of Entrepreneurship? (2017)
hbr.org
hbr.org
They summarize Baumol's theory for entrepreneurship as assuming that the total amount of entrepreneurial spirit remains fixed, but, for structural reasons, some of it can get channeled into unproductive rent-seeking behavior (like getting favorable regulation).
They then say that their empirical work (three decades of data so more than one recession in there) shows that there is a decline in new firm formation, "in each state and nearly all metropolitan areas, and in each broad industrial sector, including high tech."
According to Baumol, this should be offset by an increase in "unproductive" behavior. This appears to be harder to measure, but they point to [2], which argues that both labor and capital (i.e., returns to shareholders) have been in decline.
This is all very complicated from the perspective of innovation and entrepreneurial endeavors in tech, where money is often lost despite the fact that the product is useful.
[1] https://hbr.org/2017/06/is-america-encouraging-the-wrong-kin... [2]https://home.uchicago.edu/~barkai/doc/BarkaiDecliningLaborCa...
[0]: Obviously you need some regulation, but a lot of regulation serves to keep others from competing effectively rather than protecting consumers.
This was also discussed at the time: https://news.ycombinator.com/item?id=14942652.
Not many startups do medical devices. Everybody knows why not. Many other industries are just as walled off.
When you have this rent-seeking, it not only encourages unproductive business, but shuts down good ideas that would have worked if they were implementable.
The article seems to approach the problem as if there's these entrepreneurs sitting around trying to decide what to do, and then put their energy into unproductive but incentivized rent-seeking. I'm sure that happens, but just as often in my experience there are people who are in the right position to pursue good ideas, but are shut down, turned away, or whatever, because of the rent-seeking arrangements and regulation.
I also think this rent-seeking subtly influences perceptions of the public at large in such a way that ideas get scoffed at or go under the radar. It alters peoples' whole perspective on things, such that they never question the basic assumption of why the rent-seeking arrangement needs to be to begin with. This, in turn, can have consequences for how certain problems and solutions are approached.
There are a lot of useful contraptions and services out there. Unless those innovations solve a pain point that I'm experiencing, I still don't have a huge incentive to use them.
As an over the top example, when the iPhone came out it wasn't just a better phone. It solved serious pain points from all of the existing technology. Terrible software, terrible cameras, terrible data transfer, terrible mobile web browsing, terrible voicemail experience of dialing in and listening through an audio menu, terrible PDA experience of needing a separate device like a Palm Pilot. There were so many real pain points that people were experiencing that the iPhone solved, there's a reason people called it the Jesus Phone.
That's not the same as somebody starting a small business of course. Even adding better restaurant selection to an area goes a long way to solving a pain point. The area where I live has a serious shortage of quality "healthy" food options near by...a single one opened up that fits the bill and tastes good and it's constantly packed.
In dense metropolitan areas, there are usually businesses setup to address just about anything. The more rural you get, there's less of a market but more of a need.
On the internet and in the software world where the entire world is the marketplace, it's really hard to find needs that have not yet been addressed so there are a number of fast-followers and incremental improvements.
A lot of focus ends up being on technology that could potentially create new markets, like IoT, etc.
[1] The upstarts by Brad stone. A book about the rise of Airbnb and uber that shows the entrenched regulations they had to fight against the hotel and taxi industries.
[2] Enlightment now by Steven pinker, Chapter 9
As an entrepreneur/self-employed person who 100% does not have any special relationships in government and relies almost solely on referrals, it is very frustrating to see people "create" wealth because they have special relationships with government officials.
In my industry, education, it's pretty rampant. Textbook deals are particularly horrendous.
Even on the local level it can be pretty bad. At a local charter school near me, a math teacher working at the same school is the number one recommended math tutor for students in HIS program. While they are not allowed to be his current students, he has a very parasitic relationship with them.
He charges a very local high rate ($100+ per hour) to students that he has taught math to. It just blows my mind how corrupt this is. I have heard him bragging about making thousands of dollars a month and more than doubling his school salary from students in a math/science program that he is an administrator/teacher for.
And this is at a very competitive math and science charter school who routinely sends people to the top math and science colleges in the country.
I mean, I get it, people want to make money, but this type of behavior is just disgusting.
So you "create wealth" based on your special relationships to other people (who end up helping you by giving referrals and other assistance) and believe that is ok, but you don't find it acceptable when others do the same? The only difference, it would seem, is that the other people have deeper relationships to people in government than you.
I've seen that as well. Someone who worked in government and moved into the private sector who then used his government contacts to help along his contracting business.
Ironically, he was a "small government Republican", when his entire livelihood was dependent on the government and corruption.
If you looked at the deals that textbook companies get, you would realize that they sure as hell aren't negotiated well (or at all honestly). These deals are done at expensive dinners and trips paid for by the textbook companies. Or the companies donate to candidates campaigns, then the elected officials make sure these companies get the textbook deals, regardless of value or quality.
Government officials have an obligation to the citizens to be impartial to prevent this type of corruption.
My customers only represent themselves and their money. They are free to do whatever they want with it.
If the government squanders money through corrupt practices, I have no opt-out. I can say "I'm not paying my taxes until you fix this corruption problem", but men with guns will lock me in a cage. If a sufficiently large proportion of the electorate support or ignore that corrupt government, they can just take money from my paycheck and give it to their cronies with impunity.
Corporate corruption is bad, but it is fundamentally different to government corruption.
1) You can liquidate, move and bring your wealth with you to a new jurisdiction that would love the capital infusion. You can start a political movement and gather grassroots support to install a less corrupt administration. You can become a revolutionary and fight the state.
There are options; you just don't like them.
The big issue with corruption isn't "what can Joe Q. Average do to stop it".
2) You can't punish a private company by putting together an activist short sell play - it's private, not public.
If a public company squanders money through poor dealings, you probably can't punish them either.
Bill Ackman might be a wee bit of a dick, but he's got a war chest larger than yours and he got his firm, Pershing Square, beat the fuck up exercising his 'options' against Herbalife, who he believed was engaging in corrupt dealings. Right or wrong, Carl Icahn hates Ackman for a lawsuit Ackman won against him and decided to throw piles of money into a short squeeze against Ackman's play.
Note that does mean the practice of "taking a Representative to dinner" would also be an ethical violation at least, and possible anti-bribery statute violation at worst. I find the frequency with which I hear tales of this type of behavior most disturbing.
Yea, everyone should read about Feynman’s experiences of being on a textbook review committee for the state of CA. I think it was originally published in "Surely You're Joking, Mr. Feynman!" but here is an excerpt: http://www.textbookleague.org/103feyn.htm
> And this is at a very competitive math and science charter school who routinely sends people to the top math and science colleges in the country.
So that tutor helps do the job, and the rich parents find the rate acceptable.
Paying teachers and administrators for services creates a conflict of interest when it's time to grade papers, recommend students for advanced courses, or graduate students.
Like giving away needlessly complicated software and charging for support
I thought gaius may be referring to free or open source software?
Tutoring strictly past students seems to be a way of eliminating much of the glaring conflict of interest that you describe. (A smaller one remains yet: the possibility of doing a worse job of teaching the class, with the understanding that students who wish to be more rigorously prepped for post-secondary studies can just take the expensive tutoring.)
Other than that object, I don't see what's wrong with students who are no longer in that class paying for more tutoring (probably so they are better prepped for the entrance exams to those aforementioned post-secondary schools?)
There is supposed to a list of people/companies that the guidance counselors recommend, but that's not the case with this school.
They only give out his number. Honestly, he shouldn't even be allowed to tutor these students. He is an administrator in their program, it's a huge conflict of interest.
The subtleties of ethics are hard.
Edit, as the other poster pointed out, rent seeking is probably not the correct term. I stand corrected in that.
The possible conflict of interest is that he might do a poorer job of teaching in class. ("Those who want to be properly prepped can later join my $100/hour program.")
He has a special (and corrupt) relationship with the guidance counselors where they only give out his number when a student is struggling in a higher level math class.
This is only one of the issues I have with this charter school. It's really run like a pyramid scheme where almost 80% of the initial freshman fail out and end up having to transfer back to their home schools with bad grades.
Given how the school is run, the corrupt relationship with this teacher isn't surprising to me, but it is a pretty gross situation to witness.
The commons that the tutor exploits in this case is the natural authority that comes from managing the math department. That authority doesn't belong to him. It was entrusted to him, and he abuses it. His words, when disparaging rival tutors and complimenting himself, carry more weight with parents than they would if he were not in that position.
Honestly, I don't even think other private tutors/companies are even on the list. They just give him all the referrals.
He really shouldn't even be on the referral list, let alone the ONLY one they use, given that he is an administrator of these students in the math + science program.
The term rent seeking is probably misapplied, but it's clearly a conflict of interest and the type of corrupt relationship that we need to fight against.
It seems like people use "rent seeking" interchangeably with "making money in a way I don't like".
It's 100% a conflict of interest and a way to take advantage of his position in the program.
Many parents do find other tutors for cheaper, but he is the programs #1 referral for when a student is struggling in math and physics.
This is what happens:
Student is struggling in math class, so they meet with guidance counselor. Guidance counselor recommends hiring this teacher to tutor them.
He is ALWAYS recommended. Not because he is good, but because he is first on the list. Hell, I don't even think there is anyone else on the list.
This is a corrupt relationship as the teacher takes advantage of his privileged position in the school.
I haven't read the underlying paper, so this probably doesn't detract from the larger point. However, in terms of the Economist's article, I'm not sure that this is a good "sign" of any trend; rather, it would seem inextricably linked to the 2008 crash that led to the Great Recession.
I also think that even if an entrepreneurial activity isn't "productive" in an economic sense, it could still be useful from the perspective of a person getting out of an employment situation that makes them really unhappy. People starting and failing in a handful of businesses on their way to figuring it out probably doesn't measure out great in the stats, but it's good (hopefully) from a making people happy perspective.
With how much money is being thrown around in salaries and liquid RSU's these days, the costs of creating or joining a startup have never seemed higher (granted I'm relatively new to the industry).
Tech startups before 2008 generally made money by suddenly providing new and cool stuff. Think Google, Facebook, Twitter, Apple.
Tech startups now seem to be focussed to a greater degree on rent-seeking business models- think Uber, AirBnb, UpWork, Stripe, various ginormous tech mega-consultancies.
Do you see the difference? The former have won market share by making products that are clearly better than the competition. The latter are essentially attempts to capture "middle man" monopolies on existing transaction chains.
This is of course a bit of a generalisation, but rent-seeking _is_ a bad thing in a number of non-obvious ways, and should be called out to a much greater degree.
Rent seeking specifically means to extract extra money from an existing asset, but not produce any extra value (but purely by virtue of owning the asset).
You could say that anything to do with the "Sharing" or "Gig" economy is a play on rent extraction. Companies seek to own a marketplace in order to levy a rent on transactions.
I'm not convinced that the more recent rent-seeking companies are much different than the previous generation. Both were seeking to displace the incumbent rent seekers (Uber == taxis, AirBnB == hotels, Stripe == traditional credit card processors) by finding a more efficient or more modern way of accomplishing the existing use case. The only real difference between them and Google/FB/Twitter is that their products are aimed at consumers instead of advertisers.
I wonder to what extent these numbers are caused by similar control frauds, or if I've just been particularly unlucky.
VCs are very rarely willing to sue or press charges. The most egregious behavior I saw was at a VOIP startup where after being fired the executives stole the switching hardware from the data centers and started a new VOIP startup almost immediately.
This is the problem with control frauds and executive malfeasance. While it's negative sum as a whole, it's a sure thing for crooked executives which makes it highly tempting in an environment where there is no real risk of meaningful repercussions.
1. Receive investment from Imagine K12, under the company's name.
2. Rent four apartments in the heart of San Francisco.
3. List the apartments on airbnb, under the founder's name.
Now you've got a substantial income stream under your own name that happens to be funded purely out of your investors' pockets.
Instead of VC money, they're leveraging low interest funny money created by banks and de-facto guaranteed now by the feds.
I really don't think the VCs nor the banks care, as long as the rental and AirBNB money keeps flowing, allowing return of principle and even eventual profits. They could care less that it is adding to the unaffordability of homes for everyone else.
If I buy an apartment under my own name, renovate it, and then rent it out under my own name, that's a pretty normal business. If I work for a company that rents an apartment, and I, knowing the company isn't using it, personally rent that apartment out in exchange for payments directly to me, that is, more or less, embezzlement. I don't have the legal right to sell or rent the company's property to you.
"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."
However, should rent seeking behavior in traditional business to consumer (or business to business) relationships be excluded? Take for instance the explosion in software being sold as a service even when such things make very little practical sense. The 'cloud' certainly has some uses, but companies are trying to shoehorn it into absolutely everything and no small part of the motivation there is to justify charging an going rent for usage of software that's not fundamentally changing.
The same is, in a way, even increasingly true of entertainment. Ever larger number of games are designed around attempts to coerce players into engaging in ongoing purchases after buying the game, often to no end as in the case of buying consumable items or currency of various sorts. In the end it seems identical as the idea is to artificially increase revenue through the seeking of rent instead of the creation of new products.
[1] - https://hbr.org/2017/06/is-america-encouraging-the-wrong-kin...
> Here I shall proceed on the basis of historical illustrations encompassing all the main economic periods and places (ancient Rome, medieval China, Dark Age Europe, the Later Middle Ages, etc.) that the economic historians almost universally single out for the light they shed on the process of innovation and its diffusion. These will be used to show that the relative rewards to different types of entrepreneurial activity have in fact varied dramatically from one time and place to another and that this seems to have had profound effects on patterns of entrepreneurial behavior.
There is an interesting phenomenon we are seeing: entrepreneurship is suddenly more glorious, encouraged by governments but often with misguided incentive structures (i.e. rewarding those who are great at pitching or making shiny vanity products).
So a more interesting question is: how can a government encourage entrepreneurial activity without enticing wantrapreneurs to demand free cash?
One idea is reverse tax. The government could reward a startup that is making money even if it's a small amount, and that way, the government is amplifying the market's rewards and not creating a faux incentive structure.
I strongly encourage HNers who haven't already done so to read up on rent-seeking (aka rent-extraction).
There hasn't been any meaningful 'creative destruction' in the last 10 years; it's all been tech gimmicks.
1: Find a year old apolitical article from respected publication. 2: Figure out a way to make it about Trump.
I'm no Trump fan, but this article reads more like a political piece than a business one. The practice of securing government grants and not creating much wealth from them has a long history.
This is true, it does -- in Congress. (Pork barrel spending, logrolling, etc.) However, in the executive branch, this is unquestionably a new phenomenon.
It depends on how you define "new."
If you intend "new" to mean it is exclusive to the current administration, you are incorrect.
pdf page 351-352:
[0] https://digitalcommons.law.byu.edu/cgi/viewcontent.cgi?artic...
From https://www.economist.com/democracy-in-america/2017/08/03/un...
> Jeffrey R. Brown and Jiekun Huang, two researchers writing for the National Bureau of Economic Research, use data from White House visitor logs during the Obama administration to show that corporate executives’ meetings with White House staff were associated with a bump in their company stock price, more government contracts and positive regulatory decisions. Firms that had better access to the Obama White House also experienced a large drop in stock prices when the 2016 election result was announced.
0: that URL might be familiar: it's the article itself
The subject matter itself is certainly worthy of publicity and debate, but just in a more comprehensive manner that reflects US history. Politics is big business, because it's pays to know those in power at almost every level. If this administration is far more egregious than those in the past, then at least they could present their argument in a historical context rather than acting like it's come out of the blue.