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Is America Encouraging the Wrong Kind of Entrepreneurship? (2017)
- sky_rw 8y agoGarbage Clickbait Strategy for 2018: 1: Find a year old apolitical article from respected publication. 2: Figure out a way to make it about Trump.
- everdev 8y ago> since he was elected president last November, Donald Trump has paid more than 40 visits to Trump corporation properties. His Mar a Lago club in Florida makes twice as much profit as it did two years ago. Family friends fill government offices which oversee parts of the Trump business empire. The administration has hired dozens of former lobbyists, most of them working on issues they previously lobbied on. 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.
- posixplz 8y ago> 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.
- reaperducer 8y agounquestionably 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.
- weaksauce 8y agoCan you give recent examples of prior administrations doing this in the executive branch?
- jerf 8y agohttps://www.wsj.com/articles/the-death-of-obamas-slush-funds-1496878321 https://www.wsj.com/articles/the-death-of-obamas-slush-funds... seems pretty close. Different mechanism, sure, but similar result.
- weaksauce 8y agoStuff like the Volkswagon settlement being used to remedy the complaint have been going on for many years and is a nuanced thing[0]. not sure it belongs in the same category. That's also a pretty biased opinion column so I'll hold off on judgement of the practices until I do more research. Do you have a more neutral source than an opinion column with a few paragraphs of information? pdf page 351-352: [0] https://digitalcommons.law.byu.edu/cgi/viewcontent.cgi?article=2483&context=lawreview https://digitalcommons.law.byu.edu/cgi/viewcontent.cgi?artic...
- zeveb 8y ago> Can you give recent examples of prior administrations doing this in the executive branch? From https://www.economist.com/democracy-in-america/2017/08/03/unproductive-entrepreneurship-is-increasingly-common-in-america[0] 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
- zeveb 8y agoAnd, indeed, much of the article's solid evidence is from Mr. Obama's administration. That's not to excuse the appearance of self-dealing in President Trump's administration, of course.
- everdev 8y agoSo many down votes... yet the comments below seem to support my original comment. This is not a new phenomenon and the writing style seems opinionated and biased. 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.
- CompelTechnic 8y agoThis article does very little to discuss much about its supposed main point.
- torstenvl 8y agoIn 2009, the number of businesses that closed down exceeded the number of new ventures for the first time in three decades, a sign that productive entrepreneurial activity is declining. 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.
- ksdale 8y agoI agree with you, it also seems plausible that as the cost of starting a business continues to decline, the number of ventures closing will continue to go up relative to the number of new ventures until it's practically even. People will have fewer qualms about shutting everything down and moving on when all they have invested is a few hundred dollars worth of business licenses and files on a computer, rather than office or retail space and some inventory. 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.
- mrep 8y agoBusiness licenses and files on a computer are the least expensive thing for tech startups in my opinion. The real cost is the opportunity cost that the entrepreneurs and even the early employees take on by working for low/no pay when they could be making much more from big companies and consulting. 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).
- epberry 8y agoExactly. This jumped out immediately to me.
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- Simulacra 8y agoIf it makes money, keep doing it.
- berns 8y agoIt makes US Dollars. So, as long as the rest of the world is willing to save in USD, keep doing it.
- rotskoff 8y agoThe original article [1] is, in many ways, clearer than the economist's take on it and avoids political diversion. 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-kind-of-entrepreneurship https://hbr.org/2017/06/is-america-encouraging-the-wrong-kin... [2]https://home.uchicago.edu/~barkai/doc/BarkaiDecliningLaborCapital.pdf https://home.uchicago.edu/~barkai/doc/BarkaiDecliningLaborCa...
- deleted 8y ago[deleted]
- jeffreyrogers 8y agoThis makes intuitive sense to me. I think a related factor is that as you add regulations and red tape (for example in medicine and finance[0]) you create zero-sum industries that don't increase productivity but that everyone has to engage with in order to compete. This raises barriers to entry and keeps competition from lowering prices. It's no surprise that doctors and people working in financial services have seen their pay rise much more than the rest of the population over the past few decades. [0]: Obviously you need some regulation, but a lot of regulation serves to keep others from competing effectively rather than protecting consumers.
- sctb 8y agoOK, we've updated the link from https://www.economist.com/democracy-in-america/2017/08/03/unproductive-entrepreneurship-is-increasingly-common-in-america https://www.economist.com/democracy-in-america/2017/08/03/un.... Thanks! This was also discussed at the time: https://news.ycombinator.com/item?id=14942652 https://news.ycombinator.com/item?id=14942652.
- deleted 8y ago[deleted]
- User23 8y agoFully half of the startups I've worked for have the primary (unstated) business model of transferring assets from investors to executives, with the nominal business activity only pursued to the minimum extent necessary to further the executives' real aim. I wonder to what extent these numbers are caused by similar control frauds, or if I've just been particularly unlucky. https://en.wikipedia.org/wiki/Control_fraud https://en.wikipedia.org/wiki/Control_fraud
- thaumasiotes 8y agoI saw a fun one that looks much like money laundering: 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.
- hiram112 8y agoThis is no different than what a lot of flippers and small time real estate investors do by buying up numerous condos, duplexes, etc., in an upcoming neighborhood, throwing on a fresh coat of paint and some fake granite counters, and renting for 50% more than the month before. 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.
- thaumasiotes 8y agoIt is different in that the ownership of the capital changes. Going in it belongs to the company; coming out it belongs to the founder personally. 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.
- justinph 8y agoThe security industrial complex constructed after the wake of 9/11 certainly contributes to this, in addition to the preexisting military industrial complex.
- socrates1998 8y agoNot a very good article, but I agree with the idea that rent-seeking should be discouraged and we need to fight against it. 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.
- TAForObvReasons 8y ago> 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. 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.
- EvanAnderson 8y agoGovernment officials need to be impartial. Their personal relationships shouldn't come to bear in the decisions they make to spend public money.
- TangoTrotFox 8y agoI find it interesting that the article (referring to the original article [1], not the economist's which is mostly just some sort of political piece) considered unproductive rent seeking mostly in forms of corrupt relationships between government and industry. Quoting that article, "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-kind-of-entrepreneurship https://hbr.org/2017/06/is-america-encouraging-the-wrong-kin...
- rossdavidh 8y agoI suppose the idea would be that if you are selling a good or service that isn't actually worth much, then the companies that don't buy will have an advantage over those who do, and eventually it should be self-correcting, if only because people tend to imitate the winners. This wouldn't make all B2B entrepeneurship sensible, but it would not have a tendency to get worse over time. Whereas, in theory, rent-seeking via government has no such reason it would not get ever-worse, as attempts by one company to influence government result in competing companies doing the same at first as a defensive measure, and then while they're in the lobbying game why not try to get something for themselves as well.
- scottfits 8y agoThe article dances around interesting ideas but instead settles for the washed up thesis that people are abusing government handouts. 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.
- fergie 8y agoThis article does a pretty poor job of describing what rent-seeking is, and why it is bad, which is a shame. I strongly encourage HNers who haven't already done so to read up on rent-seeking (aka rent-extraction).
- flopdrol 8y agoThere’s also the leeches who make money on fixing the externalities produced by other industries. They tend to get gov lock in, so the externalities never get fixed. It’s like adding layers of bandaids in a software product.
- grosjona 8y agoAlso, the typical startup journey of "Incubator -> VC funding -> Corporate acquisition" is mostly rent seeking. Corporations use rent seeking (lobbying) to extract huge amounts of money from the government then startups use rent seeking to extract money from corporations. There hasn't been any meaningful 'creative destruction' in the last 10 years; it's all been tech gimmicks.
- andyidsinga 8y agoThe original article referred to ( https://www.colorado.edu/ibs/es/alston/econ4504/readings/Baumol%201990.pdf https://www.colorado.edu/ibs/es/alston/econ4504/readings/Bau... ) is really interesting (I'm part way through): > 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.
- eecc 8y agoUh, Monopoly Capital, Baran, Sweezy, 1966. Thick read. Resonates when it describes as capitalism’s endgame, what the article defines as merely the result of bad incentive structures... but it’s A Marxist read so heh...