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The 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 entrepren

The 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...

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jeffreyrogers 8y ago
This 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 ago
OK, 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.
ethn 8y ago
I really don't believe that useful products, products which mitigate more cost than alternatives, fail.
- robotrout 8y ago
  What if your product never gets built, because you are unwilling/unable to navigate the legal and regulatory barriers that have been set up to keep you out? Not many startups do medical devices. Everybody knows why not. Many other industries are just as walled off.
  - w9r09eridlk 8y ago
    This is the one thing about the article that is a little off or misleading from my experience (which appropriately is in health care). When you have this rent-seeking, it not only encourages unproductive business, but shuts down good ideas that would have worked if they were implementable. The article seems to approach the problem as if there's these entrepreneurs sitting around trying to decide what to do, and then put their energy into unproductive but incentivized rent-seeking. I'm sure that happens, but just as often in my experience there are people who are in the right position to pursue good ideas, but are shut down, turned away, or whatever, because of the rent-seeking arrangements and regulation. I also think this rent-seeking subtly influences perceptions of the public at large in such a way that ideas get scoffed at or go under the radar. It alters peoples' whole perspective on things, such that they never question the basic assumption of why the rent-seeking arrangement needs to be to begin with. This, in turn, can have consequences for how certain problems and solutions are approached.
  - ethn 8y ago
    You're right that there are some regulations which make it artificially costly, but that doesn't disagree with what I'm saying.
- kansface 8y ago
  I can't count how many HN threads announce the shuttering of some startup that I never heard about and would have used. Alternatively, consider how many products which do not "mitigate more cost than alternatives" actually succeed.
brightball 8y ago
When it comes to products, the real driver is pain relief rather than usefulness. There are a lot of useful contraptions and services out there. Unless those innovations solve a pain point that I'm experiencing, I still don't have a huge incentive to use them. As an over the top example, when the iPhone came out it wasn't just a better phone. It solved serious pain points from all of the existing technology. Terrible software, terrible cameras, terrible data transfer, terrible mobile web browsing, terrible voicemail experience of dialing in and listening through an audio menu, terrible PDA experience of needing a separate device like a Palm Pilot. There were so many real pain points that people were experiencing that the iPhone solved, there's a reason people called it the Jesus Phone. That's not the same as somebody starting a small business of course. Even adding better restaurant selection to an area goes a long way to solving a pain point. The area where I live has a serious shortage of quality "healthy" food options near by...a single one opened up that fits the bill and tastes good and it's constantly packed. In dense metropolitan areas, there are usually businesses setup to address just about anything. The more rural you get, there's less of a market but more of a need. On the internet and in the software world where the entire world is the marketplace, it's really hard to find needs that have not yet been addressed so there are a number of fast-followers and incremental improvements. A lot of focus ends up being on technology that could potentially create new markets, like IoT, etc.
lorenzorhoades 8y ago
There are a number of reasons I disagree with the conclusions reached in this article. For one, what the author calls 'rent-seeking behavior' (getting favorable regulation) is because a lot of the entrepreneurship we see in America is fighting old incumbent industry's [1] (SpaceX, Uber, Airbnb). Obtaining favorable regulation is a necessity for these companies to stay alive. The arguments also suffer from the 'fixed wealth fallacy' in which inequality is deemed as an inherently bad thing. It is in many ways a very good thing [2] [1] The upstarts by Brad stone. A book about the rise of Airbnb and uber that shows the entrenched regulations they had to fight against the hotel and taxi industries. [2] Enlightment now by Steven pinker, Chapter 9

deleted 8y ago

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jeffreyrogers 8y ago

This 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 ago

OK, 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.

ethn 8y ago

I really don't believe that useful products, products which mitigate more cost than alternatives, fail.

robotrout 8y ago
What if your product never gets built, because you are unwilling/unable to navigate the legal and regulatory barriers that have been set up to keep you out? Not many startups do medical devices. Everybody knows why not. Many other industries are just as walled off.
- w9r09eridlk 8y ago
  This is the one thing about the article that is a little off or misleading from my experience (which appropriately is in health care). When you have this rent-seeking, it not only encourages unproductive business, but shuts down good ideas that would have worked if they were implementable. The article seems to approach the problem as if there's these entrepreneurs sitting around trying to decide what to do, and then put their energy into unproductive but incentivized rent-seeking. I'm sure that happens, but just as often in my experience there are people who are in the right position to pursue good ideas, but are shut down, turned away, or whatever, because of the rent-seeking arrangements and regulation. I also think this rent-seeking subtly influences perceptions of the public at large in such a way that ideas get scoffed at or go under the radar. It alters peoples' whole perspective on things, such that they never question the basic assumption of why the rent-seeking arrangement needs to be to begin with. This, in turn, can have consequences for how certain problems and solutions are approached.
- ethn 8y ago
  You're right that there are some regulations which make it artificially costly, but that doesn't disagree with what I'm saying.
kansface 8y ago
I can't count how many HN threads announce the shuttering of some startup that I never heard about and would have used. Alternatively, consider how many products which do not "mitigate more cost than alternatives" actually succeed.

brightball 8y ago

When it comes to products, the real driver is pain relief rather than usefulness. There are a lot of useful contraptions and services out there. Unless those innovations solve a pain point that I'm experiencing, I still don't have a huge incentive to use them. As an over the top example, when the iPhone came out it wasn't just a better phone. It solved serious pain points from all of the existing technology. Terrible software, terrible cameras, terrible data transfer, terrible mobile web browsing, terrible voicemail experience of dialing in and listening through an audio menu, terrible PDA experience of needing a separate device like a Palm Pilot. There were so many real pain points that people were experiencing that the iPhone solved, there's a reason people called it the Jesus Phone. That's not the same as somebody starting a small business of course. Even adding better restaurant selection to an area goes a long way to solving a pain point. The area where I live has a serious shortage of quality "healthy" food options near by...a single one opened up that fits the bill and tastes good and it's constantly packed. In dense metropolitan areas, there are usually businesses setup to address just about anything. The more rural you get, there's less of a market but more of a need. On the internet and in the software world where the entire world is the marketplace, it's really hard to find needs that have not yet been addressed so there are a number of fast-followers and incremental improvements. A lot of focus ends up being on technology that could potentially create new markets, like IoT, etc.

lorenzorhoades 8y ago

There are a number of reasons I disagree with the conclusions reached in this article. For one, what the author calls 'rent-seeking behavior' (getting favorable regulation) is because a lot of the entrepreneurship we see in America is fighting old incumbent industry's [1] (SpaceX, Uber, Airbnb). Obtaining favorable regulation is a necessity for these companies to stay alive. The arguments also suffer from the 'fixed wealth fallacy' in which inequality is deemed as an inherently bad thing. It is in many ways a very good thing [2] [1] The upstarts by Brad stone. A book about the rise of Airbnb and uber that shows the entrenched regulations they had to fight against the hotel and taxi industries. [2] Enlightment now by Steven pinker, Chapter 9