A few weeks ago economist William Baumol died with the chronilogical age of 95. His death was universally mourned by folks the economics community, many of whom shared the view that he had passed before finding a much-deserved Nobel Prize. One of us (Robert) had the truly great privilege of utilizing him, befriending him, or being able to regularly witness his economic wisdom, even during his old age.

Of Baumol’s many contributions to economics, the favourite is cost disease, so in retrospect high-productivity industries raise costs and for that reason prices in low-productivity industries. The insight is particularly relevant now, as business activities has shifted into low-productivity services like medical and education, where price increases are devouring public and household budgets, and whose continued low productivity has overwhelmed U.S. productivity growth overall.

But there’s a lesser-known notion of Baumol’s that’s equally relevant today and that can help explain America’s productivity slump. Baumol’s writing adds to the possibility that U.S. productivity is low because would-be entrepreneurs are devoted to the wrong sort of work.

Within a 1990 paper, “Entrepreneurship: Productive, Unproductive, and Destructive,” Baumol argued that this amount of entrepreneurial ambition in the country is basically fixed with time, and that what determines a nation’s entrepreneurial output could be the incentive structure that governs and directs entrepreneurial efforts between “productive” and “unproductive” endeavors.

Many people imagine Kogan Page Entrepreneurship Books being the “productive” kind, as Baumol referred to it, where the companies that founders launch commercialize a new challenge or better, benefiting society and themselves along the way. A big body of research establishes why these “Schumpeterian” entrepreneurs, people who are “creatively destroying” the old in support of the modern, are crucial for breakthrough innovations and rapid advances in productivity and standards of just living.

Baumol was worried, however, by the very different sort of entrepreneur: the “unproductive” ones, who exploit special relationships together with the government to develop regulatory moats, secure public spending for their own benefit, or bend specific rules to their will, along the way stifling competition to make advantage for their firms. Economists label this rent-seeking behavior. As Baumol wrote:

…entrepreneurs are always with us and try to play some substantial role. But there are a variety of roles among which the entrepreneur’s efforts could be reallocated, and a few of these roles don’t follow the constructive and innovative script that’s conventionally due to that individual. Indeed, sometimes the entrepreneur could even lead a parasitical existence that’s actually damaging towards the economy. The way the entrepreneur acts at a moment and put depends heavily on the rules with the game-the reward structure inside the economy-that get lucky and prevail.

In Baumol’s theoretical framework, depressed rates of entrepreneurship aren’t the culprit for periods of slow economic growth; rather, a change in this mixture of entrepreneurial effort between the two sorts of entrepreneurship is always to blame – specifically, a decline in productive entrepreneurship as well as a coincident boost in unproductive entrepreneurship. But is this what’s actually happening inside the U.S.?

Well, first of all, we and others have documented a pervasive decline in the interest rate of recent firm formation during the last 30 years as well as an acceleration because decline since 2000. In reality, we found that by 2009 the interest rate of commercial closures exceeded the interest rate of commercial births the first time inside the three-decades-plus good reputation for our data. This decline in startup formation has took place each state and virtually all towns, plus each broad industrial sector, including hi-tech. We are seeing a slowdown in activity of high-growth firms, the relatively very few companies that be the cause of the lion’s share of net job gains. This points to a slowdown inside the development of productive entrepreneurship.

What about one other sort of entrepreneurship? Do we also visit a boost in unproductive entrepreneurship, as Baumol theorized?

We don’t have a very smoking gun to confirm this hypothesis, but there surely is smoke, and yes it comes in two forms: rising profits, in particular those earned from the largest businesses throughout the economy, and suggestive evidence an increase in efforts to shape the rules with the game. This pattern is like rise of economic rents and rent-seeking behavior.

By way of example, Jason Furman and Peter Orszag, both former economic advisers to President barack obama, wrote an influential 2016 paper that argued that economic rents are on the rise, particularly since 2000, and were a main factor in increasing wage inequality observed in those times. Similarly, a group of economists from MIT, Harvard, and Zurich found that industries where top firms’ share of the market had most increased had experienced the most important declines inside the share of revenue going to workers.

Perhaps most convincing, University of Chicago economist Simcha Barkai carefully tabulated the share of industry income provided to labor, capital, and “profits.” (Normally, capital and earnings are included together a single broad, residual “returns to shareholders” category.) He found that the share of revenue earned by workers has been falling, as others have pointed out, and also that this share earned by capital has, too. Indeed, both have been declining while the share of revenue going to “markups,” or rents, has been increasing.

In reality, the use of economic rents on its own doesn’t establish that there’s been an increase in unproductive entrepreneurship. To the to be true, there has to be be evidence an increase in rent-seeking – that’s, concerted efforts to stifle competition by influencing the reward structure or rules with the game in the market.

James Bessen of Boston University has provided suggestive evidence that rent-seeking behavior has been increasing. Within a 2016 paper Bessen shows that, since 2000, “political factors” be the cause of an important area of the boost in corporate profits. This takes place through expanded regulation that favors incumbent firms. Similarly, economists Jeffrey Brown and Jiekun Huang with the University of Illinois have found that companies that have executives with close ties to key policy makers have abnormally high stock returns.

In short, Baumol was ahead of his amount of time in warning that economies can suffer not just from your cost disease and also from its entrepreneurial counterpart – a change in the rules that shifts the distribution of entrepreneurial effort from activity that assists the economy toward activity that hurts it. Unfortunately, there is strong suggestive evidence that Baumol’s warnings have learned to pass. If your U.S. will almost certainly tackle its many problems, we are going to have to find approaches to encourage would-be entrepreneurs to start out innovative, productive businesses, as an alternative to dedicating their efforts to co-opting government to be able to secure economic advantage.
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