How Not to Encourage Entrepreneurship

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shaker heights, ohToday I am going to do something different. Instead of using a bunch of data to illustrate a point, I am going to discuss a single example of a town whose central planners discourage entrepreneurship. Lest you think I will pluck the case study from a World Bank study of a developing country, let me clarify that I am talking about Shaker Heights, Ohio.

Last month, the town’s Planning Commission rejected a plan by Compass Self Storage, a Cleveland-based developer of self-storage units, to move into space that has been vacant since the auto dealership that had occupied it closed three years ago.

This would be a non-event were it not for the fact that the city of Shaker Heights says that it is trying to encourage entrepreneurship. As the mayor Earl Leiken told WKYC News at the opening the town’s business incubator;

“We’re welcoming business and looking for a strong business presence in our city.”

In fact, to encourage more entrepreneurship, the city paid part of the cost of renovating the incubator location and is allowing tenants to occupy the space rent free for four years.

Unfortunately, in its evaluation of Compass Self-Storage’s efforts to expand into Shaker Heights, the town’s Planning Commission has fallen right into the trap that Nobel Prize winning economist Friedrich Hayek called the “fatal conceit” – the idea that centralized planners can make decisions better than a free market.

The Planning Commission thinks it knows better than the market what the former auto dealership should be used for. But Hayek explained that no one organization can know all of the information necessary to match supply and demand as well as a free market. Efforts by centralized planners to intervene in free markets, he explained, do little more than keep them from operating effectively.

Economists have identified a very good way to encourage entrepreneurial activity – by reducing the regulations that deter people from starting and growing businesses. They have found that the very activity that the Shaker Heights Planning Commission engages in – having more procedures to start a company – reduces business formation. Moreover, this business-formation-deterring “red tape” lowers economic growth and employment.

If the town really wants more entrepreneurship, then its elected officials need to think harder about the economics here. You get more job and wealth creation if you let free markets operate.

So Planning Commission members: If you need a refresher on economics, there’s this professor I know really well who teaches a course you might want to take …

Shaker Heights, OH Photo via Shutterstock

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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.

6 Reactions
  1. I’m from N.E.OH and work in Euclid, OH. My city taxes are as high as my state taxes and Euclid does not play nice with other towns by sharing any offset with where you live. You pay twice.

  2. Mark @ ThinkTraffic

    Great post scott. I have started a few businesses in my time and it is always frustrating when people in positions of power claim to be encouraging business and yet continue to restrict entrepreneurs with red tape and bureaucracy.

  3. What was the commissions justification for turning down the plan? What did they think would go better in the space?

  4. An excellent article. But this story is but the tip of the iceberg. Local planning commissions haven’t a clue about economic growth, but these problems go all the way to the Federal level. If we, as a country can find a way to unleash free enterprise, and keep the bureaucrats out of the way, our economy would grow exponentially.

  5. My town of Bellingham Washington is the same way. We have an area of town designated for light industrial that was set up over 30 years ago. It is still partially empty as, depending on who is in office, don’t want businesses that may hurt the environment, or the current ideals about the town. No thought to living wage jobs. Even the Pepsi Distributor, who has donated hundreds of thousands of dollars in his life to causes in town, moved to the next town due to this attitude and months of roadblocks. Took lots of tax money and living wage jobs to the next town down the freeway. Why do towns do this?