“We’re entrepreneurs; we’re in a business for ourselves,” Brooke Taylor said in a recent New York Times article describing those who work in the world’s oldest profession.
Like many academics and policy makers, Ms. Taylor defines entrepreneurs as people who run their own businesses. By this definition some entrepreneurial efforts would be undesirable to many of us. This, in turn, raises the question: should we encourage all types of entrepreneurship?
If you listen to most policy makers, members of the media and academics, the answer is “yes.” To many in society, entrepreneurship is a magic bullet that creates jobs, generates wealth, promotes innovation, and otherwise benefits all of us.
Despite this rhetoric, however, some observers argue that we shouldn’t cheer entrepreneurship in all its forms. Even if businesses like Ms. Taylor’s create jobs and generate wealth, they say, we don’t really want more of them.
Unfortunately, if there are types of business creation that we’d prefer not to encourage, then we’re faced with the daunting task of identifying what “desirable” entrepreneurial activity looks like. How, exactly, do we do that?
A first cut might be to say that we want to encourage entrepreneurial activities that are within the law. Unfortunately, the legal-illegal distinction doesn’t work very well because the same business activities are legal in some places but illegal in others. Ms. Taylor’s business, for instance, is legal in some parts of Nevada and in the Netherlands, but not in other U.S. states and many countries. And what about opening a bar? It’s a perfectly acceptable activity in the United States, but you can’t do it in Saudi Arabia.
Alternatively, we might try to separate desirable and undesirable entrepreneurship by the degree to which the activity benefits society. But how do we measure societal benefit? Amsterdam’s cannabis coffee shops and brothels create jobs, bring in tourist revenue, and contribute to the Netherlands’ gross domestic product. They may, in fact, make a bigger contribution to these economic measures than many Dutch small businesses.
Moreover, how do we weigh economic benefits against social costs? For instance, consider entrepreneurial activity that promotes cigarette usage – from tobacco growing to cigarette manufacturing to the retail sale of smokes. These businesses create jobs, generate export revenues, and contribute to the gross domestic product. Yet the strong evidence that cigarette smoking is a health hazard suggests that society would be better off without the entrepreneurs in the tobacco business. So should we be encouraging more entrepreneurship who make and sell cigarettes?
What about the forms of entrepreneurship that merely shift wealth from one person to another? For example, many hedge funds make money at the expense of other investors, who need to lose money on transactions for the hedge funds to earn their profits. As profitable as these businesses may be to their owners, society as a whole is no better off for their presence. So do we want to encourage people to create more of them?
What about the multitudes of people who go into business for themselves but never employ anyone – roughly four-fifths of new businesses created in the United States today? Is this entrepreneurial activity we want to encourage? For all the satisfaction such efforts may provide those who strike out on their own, many of these people would have been more productive – generated more of what society needs for each hour of their effort – if they had remained working for others. For instance, the self-employed house painter may be happier on her own, but she’d have more efficiently painted houses working for someone else who could achieve greater economies of scale in the administration of the house painting business.
So where does all of this leave us? We could pretend that all entrepreneurial activity is equally desirable even if we don’t believe that it is. But if we recognize that we want some types of entrepreneurship more than others, then we need to identify the types of entrepreneurship we want to encourage. On this, I wonder if we can do more than just take a page from Justice Potter Stewart’s famous line about pornography – and say we know desirable entrepreneurship when we see it.