ASKING THE IMPORTANT QUESTIONS: Is America Encouraging the Wrong Kind of Entrepreneurship?

In a 1990 paper, “Entrepreneurship: Productive, Unproductive, and Destructive,” Baumol argued that the level of entrepreneurial ambition in a country is essentially fixed over time, and that what determines a nation’s entrepreneurial output is the incentive structure that governs and directs entrepreneurial efforts between “productive” and “unproductive” endeavors.

Most people think of entrepreneurship as being the “productive” kind, as Baumol referred to it, where the companies that founders launch commercialize something new or better, benefiting society and themselves in the process. A sizable body of research establishes that these “Schumpeterian” entrepreneurs, those that are “creatively destroying” the old in favor of the new, are critical for breakthrough innovations and rapid advances in productivity and standards of living.

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.
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In Baumol’s theoretical framework, depressed rates of entrepreneurship aren’t the culprit for periods of slow economic growth; rather, a change in the mix of entrepreneurial effort between the two kinds of entrepreneurship is to blame — specifically, a decline in productive entrepreneurship and a coincident rise in unproductive entrepreneurship. But is this what’s actually happening in the U.S.?

Well, for starters, we and others have documented a pervasive decline in the rate of new firm formation during the last three decades and an acceleration in that decline since 2000. In fact, we found that by 2009 the rate of business closures exceeded the rate of business births for the first time in the three-decades-plus history of our data.

Washington is diverting ever more of the country’s creative energies away from innovation and towards “pull peddling.”

Atlas Shrugged was not supposed to be a how-to manual.