Recently economist William Baumol passed away on the chronilogical age of 95. His death was universally mourned by members of the economics community, lots of whom shared the scene that he had passed before buying a much-deserved Nobel Prize. One among us (Robert) had the fantastic privilege of working with him, befriending him, and being able to regularly witness his economic wisdom, even during his retirement years.

Of Baumol’s many contributions to economics, the best is cost disease, which is the reason high-productivity industries raise costs and therefore prices in low-productivity industries. The insight is particularly relevant now, as economic activity 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 weighed down U.S. productivity growth overall.

But there’s a lesser-known notion of Baumol’s which is equally relevant today understanding that could help explain America’s productivity slump. Baumol’s writing improves the possibility that U.S. productivity is low because would-be entrepreneurs are centered on a bad sort of work.

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

A lot of people consider Cheap Entrepreneurship Books as being the “productive” kind, as Baumol described it, the location where the companies which founders launch commercialize something totally new or better, benefiting society and themselves in the operation. A big body of research establishes that these “Schumpeterian” entrepreneurs, people who are “creatively destroying” the old for the modern, are critical for breakthrough innovations and rapid advances in productivity and standards of just living.

Baumol was worried, however, by the very different type of entrepreneur: the “unproductive” ones, who exploit special relationships with all the government to make regulatory moats, secure public spending for their own benefit, or bend specific rules on their will, in the operation stifling competition to create advantage for their firms. Economists refer to this as rent-seeking behavior. As Baumol wrote:

…entrepreneurs will almost always be along with us try to play some substantial role. But there are a number of roles among that this entrepreneur’s efforts can be reallocated, and some of people roles tend not to stick to the constructive and innovative script which is conventionally due to see your face. Indeed, occasionally the entrepreneur may even lead a parasitical existence which is actually damaging for the economy. How the entrepreneur acts at a given time and put depends heavily for the rules with the game-the reward structure in the economy-that eventually prevail.

In Baumol’s theoretical framework, depressed rates of entrepreneurship aren’t to blame for periods of slow economic growth; rather, changing your a combination of entrepreneurial effort between the two kinds of entrepreneurship is to blame – specifically, a decline in productive entrepreneurship plus a coincident surge in unproductive entrepreneurship. But are these claims what’s actually happening in the U.S.?

Well, to begin with, we and others have documented a pervasive decline in the rate of latest firm formation over the past 3 decades with an acceleration in this decline since 2000. In fact, we found that by 2009 the rate of economic closures exceeded the rate of economic births the very first time in the three-decades-plus good our data. This decline in startup formation has took place each state and nearly all locations, as well as in each broad industrial sector, including modern day. There has been a slowdown in activity of high-growth firms, the relatively few companies that be the cause of the lion’s share of net job gains. All this items to a slowdown in the growth of productive entrepreneurship.

Think about another sort of entrepreneurship? Should we also see a surge in unproductive entrepreneurship, as Baumol theorized?

We don’t have a very smoking gun to verify this hypothesis, but there is smoke, also it also comes in two forms: rising profits, especially those earned with the largest businesses throughout the market, and suggestive proof a boost in efforts to shape the principles with the game. This pattern is in conjuction with the rise of economic rents and rent-seeking behavior.

For instance, Jason Furman and Peter Orszag, both former economic advisers to President Obama, wrote an influential 2016 paper that argued that economic rents are on the rise, particularly since 2000, and were a central factor in increasing wage inequality observed during this time period. Similarly, a group of economists from MIT, Harvard, and Zurich found that industries where top firms’ business had most increased had experienced the greatest declines in the share of capital gonna workers.

Perhaps most convincing, University of Chicago economist Simcha Barkai carefully tabulated the share of industry income given to labor, capital, and “profits.” (Normally, capital and income is included together in one broad, residual “returns to shareholders” category.) He found that the share of capital earned by workers may be falling, as others have talked about, but also how the share earned by capital has, too. Indeed, have been declining even though the share of capital gonna “markups,” or rents, may be increasing.

To be clear, a good economic rents on its own doesn’t establish that there’s been a boost in unproductive entrepreneurship. For that actually was, there must be be proof a boost in rent-seeking – which is, 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 may be increasing. In a 2016 paper Bessen shows that, since 2000, “political factors” be the cause of an amazing part of the increase in corporate profits. This occurs through expanded regulation that favors incumbent firms. Similarly, economists Jeffrey Brown and Jiekun Huang with the University of Illinois have discovered that companies which have executives with partners to key policy makers have abnormally high stock returns.

In a nutshell, Baumol was before his amount of time in warning that economies can suffer not only from your cost disease but also from its entrepreneurial counterpart – changing your the principles that shifts the distribution of entrepreneurial effort from activity that can help the economy toward activity that hurts it. Unfortunately, there exists strong suggestive evidence that Baumol’s warnings began to pass. When the U.S. will tackle its many problems, we intend to have to find methods to encourage would-be entrepreneurs to get started on 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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