Last week economist William Baumol perished on the chronilogical age of 95. His death was universally mourned by people in the economics community, lots of whom shared the view he had passed before finding a much-deserved Nobel Prize. One of us (Robert) had the great privilege of working with him, befriending him, or being able to regularly witness his economic wisdom, during his later years.

Of Baumol’s many contributions to economics, the favourite is cost disease, which explains why high-productivity industries raise costs and thus prices in low-productivity industries. The insight is very relevant now, as economic activity has shifted into low-productivity services like medical care 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 idea of Baumol’s which is equally relevant today and that might 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 a bad form of work.

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

A lot of people think about Buy Entrepreneurship Books beeing the “productive” kind, as Baumol described it, the place that the businesses that founders launch commercialize new things or better, benefiting society and themselves in the process. A big body of research establishes that these “Schumpeterian” entrepreneurs, people who are “creatively destroying” the old and only the modern, are critical for breakthrough innovations and rapid advances in productivity and standards of just living.

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

…entrepreneurs will always be around and try to play some substantial role. But there are a variety of roles among which the entrepreneur’s efforts might be reallocated, and some of the roles do not continue with the constructive and innovative script which is conventionally caused by the face. Indeed, sometimes the entrepreneur might even lead a parasitical existence which is actually damaging on the economy. How a entrepreneur acts in a with time make depends heavily for the rules with the game-the reward structure from 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 the amalgamation of entrepreneurial effort backward and forward forms of entrepreneurship would be to blame – specifically, a decline in productive entrepreneurship plus a coincident rise in unproductive entrepreneurship. But are these claims what’s actually happening from the U.S.?

Well, for starters, we yet others have documented a pervasive decline in the speed of recent firm formation throughout the last three decades as well as an acceleration in this decline since 2000. In reality, we found out that by 2009 the speed of commercial closures exceeded the speed of commercial births the first time from the three-decades-plus reputation our data. This decline in startup formation has happened in each state and nearly all locations, plus each broad industrial sector, including modern day. There has been a slowdown in activity of high-growth firms, the relatively very few businesses that are the cause of the lion’s share of net job gains. All this suggests a slowdown from the growth of productive entrepreneurship.

What about another form of entrepreneurship? Will we also visit a rise in unproductive entrepreneurship, as Baumol theorized?

We don’t have a smoking gun to ensure this hypothesis, but there surely is smoke, plus it also comes in two forms: rising profits, especially those earned with the largest businesses throughout the market, and suggestive evidence of a rise in efforts to shape the guidelines with the game. This pattern is similar to the rise of monetary rents and rent-seeking behavior.

For 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 rising, particularly since 2000, and were a main factor in increasing wage inequality observed during this time period. Similarly, a small grouping of economists from MIT, Harvard, and Zurich found out that industries where top firms’ business had most increased had experienced the greatest declines from the share of capital likely to workers.

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

To be clear, the use of economic rents on it’s own doesn’t establish that there’s been a rise in unproductive entrepreneurship. For that really was, there should be be evidence of a rise 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 has been increasing. In the 2016 paper Bessen shows that, since 2000, “political factors” are the cause of a considerable area of the boost 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 businesses that have executives with partners to key policy makers have abnormally high stock returns.

To put it briefly, Baumol might have been before his amount of time in warning that economies can suffer not only coming from a cost disease and also by reviewing the entrepreneurial counterpart – a change in the guidelines that shifts the distribution of entrepreneurial effort from activity that can help the economy toward activity that hurts it. Unfortunately, there is strong suggestive evidence that Baumol’s warnings have started to pass. When the U.S. will tackle its many problems, we’re going to have to find approaches to encourage would-be entrepreneurs to get started on innovative, productive businesses, as opposed to dedicating their efforts to co-opting government to be able to secure economic advantage.
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