November 24, 2014

Balancing Economic Control and Entrepreneurship

The London-based Think Tank Legatum Institute recently offered empirical evidence of what many Americans have been thinking lately. Our national well-being is slipping.

Over the past four years, prosperity has increased around the globe, while it has remained stagnant in the United States, the Legatum Institute reports. As a result, the Institute ranked the United States 12th out of 142 countries on its 2012 Prosperity Index, putting the country outside the top ten for the first time.

government balance

Returning us to prosperity is central to the agenda of our newly elected and reelected leaders. But doing so requires an understanding of the causes behind our stagnant wellbeing. The Legatum Institute finds that a decline in entrepreneurship and economic opportunity, rather than slippage in education, health, safety or personal freedom, is to blame.

In particular, the authors say that the fall in prosperity:

“. . .is driven by a decline in the number of US citizens who believe that hard work will get them ahead.”

Quite a change from traditional American attitudes.

So what’s driving the shift?

Here’s one hypothesis: In recent years, policy makers have sought to curb rent seeking – what economists call efforts to make money by shifting wealth away from others, rather than by increasing productivity.

Think of private equity moguls taking advantage of lower tax rates on carried interest to make their fortune instead of technologists inventing new ways to search for information on the Internet. Those efforts have, unfortunately, adversely affected interest in entrepreneurship. By this I mean, working hard in pursuit of economic opportunities.

Like many efforts to influence economic behavior, efforts to curb rent seeking involve regulation. Regulation, even when well-intentioned and directed to a particular purpose, limits the free operation of markets. Tilting the balance away from free markets, in turn, influences people’s attitudes toward entrepreneurship.

Therefore, our efforts to control rent seeking, the argument goes, have dampened interest in the entrepreneurship we need to be prosperous.

While rent seeking remains a relatively small part of what people with entrepreneurial inclinations do to make money in the United States compared to many nations of the world, and government regulation to control rent seeking remains relatively light as compared to other places, a negative trend is emerging. Since the start of financial crisis and Great Recession, the typical American’s attitude has shifted, ever so subtly, away from a belief that free markets and entrepreneurship are central to economic prosperity.

As they put behind them a fractious presidential election in which the question of whether more regulation or freer markets was best way to revive American prosperity was prominent, the President and his advisors need to be cautious. They won because the American people favored more economic control rather than freer markets, but by the slimmest of margins; and the electorate remains highly polarized on the issue.

When putting more economic controls in place, the President and his team will need to try hard to minimize inadvertently creating barriers to entrepreneurship and innovation.

I hope they can achieve this balance and return our nation to prosperity, but I fear that doing so proves difficult in a highly polarized political environment. The likely result is more control over economic activity, but at the cost of some of the entrepreneurship necessary for future prosperity.

Balance Photo via Shutterstock

27 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

27 Reactions

  1. Great perspective. You are dead on and it’s a very tough balance to achieve. One thing is for sure, something has to be done. I’m very interested to see how this all plays out in Washington.

  2. “Returning us to prosperity is central to the agenda of our newly elected and reelected leaders.”

    Bwahahaha! You’d think policies that produce prosperity were some kind of perplexing formula. Although when your first hard assumption is preserving and expanding the 40% federal-state-local take, I suppose it is.

  3. “In recent years, policy makers have sought to curb rent seeking – what economists call efforts to make money by shifting wealth away from others, rather than by increasing productivity.”

    Hahaha. Rent-seeking is alive and well in Washington DC. What policy makers were YOU referring to?

    • I think Mr. Shane should have said “enable” instead of “curb”. For example, the tax penalty on the self-insured, coming from Obamacare, makes health insurance even more of a rent-seeking market than it already was.

      Similar things happened with the take over of GM and Chrysler. Those labor unions got an unfair boost to their pricing power thanks to the feds. A bunch of unions also got to waive some of the Obamacare requirements for a few years.

  4. Everyone tries to “rent seek” – it’s the easy life. It’s also very difficult to do in a free market, where competition is always hacking away at set-ups that provide easy money.

    The successful rent-seekers are instead those who operate away from the market and take advantage of some regulation that sets up special privileges and makes them immune to competition.

    Creating more regulations to try to correct this problem is typical of the political process – rather than repeal the regulations that made rent-seeking profitable in the first place.

    • Brett,
      I like your brand of econ better than
      .
      .
      “Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University.”

  5. “Here’s one hypothesis: In recent years, policy makers have sought to curb rent seeking – what economists call efforts to make money by shifting wealth away from others, rather than by increasing productivity.”

    Recent years must not include the last four.

  6. Part of believing in hard work is to see it succeed, and by contrast, to see those who take shortcuts or other less than ethical actions fail.

    Unfortunately, at this point, we have a government attempting to insulate private industries from the consequences of their actions via the use of taxpayer money, and/or regulation favorable to them.

    As an individual, it appears that hard work is not necessary for success, however, playing the political games will lead to “success”, regardless of the actual business model or work expended.

  7. The author is a business professor, but it seems his understanding of public choice economics is wanting. Rent-seeking is a response to regulation. When regulations are piled on when rent-seeking is noticed, the reaction by those in the business of making their way in the world is to do even more rent-seeking. The way to lessen the evil is to reform what got it started in the first place and lessen the regulatory burden.

  8. Sorry but you jump to a few too many conclusions here. Yes, the “can you get ahead” did decrease from 88.8 people agreeing to 85.2 but far more shocking is the similar drop in “do you have confidence in the honesty of elections” or the even larger drop in “do you have confidence in your government” or the increase in the number of people who think business and government are corrupt.

    To fix the woes in this country and restore prosperity, we need an effective government which means compromise and shared costs.

  9. No surprise here. We’re going through the Great Depression all over again – this time, in living color. Hoovervilles are back!

  10. Another first for the “Food Stamp/Downgrade” President.

    FOREward!

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