Last month economist William Baumol passed away at the age of 95. His death was universally mourned by members of the economics community, many of whom shared the view that he had passed before receiving a much-deserved Nobel Prize. One of us (Robert) had the great privilege of working with him, befriending him, and being able to regularly witness his economic wisdom, even in his later years.
Is America Encouraging the Wrong Kind of Entrepreneurship?
In a 1990 paper, “Entrepreneurship: Productive, Unproductive, and Destructive,” late economist William Baumol argued that not all entrepreneurs are equal: there are both “productive” and “unproductive” endeavors. Most people think of all entrepreneurship to be what Baumol referred to as the “productive” kind, where the companies that founders launch commercialize something new or better, benefiting society and themselves in the process. 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. Two recent trends indicate that this may be happening in the U.S. today: rising profits, especially those earned by the largest businesses in the economy, and suggestive evidence of an increase in efforts to shape the rules of the game. Baumol may have been ahead of his time. If the U.S. is going to tackle its many problems, we are going to have to find ways to encourage would-be entrepreneurs to start innovative, productive businesses, rather than dedicating their efforts to co-opting government in order to secure economic advantage.