Although I’ve temporarily stopped blogging, I felt an obligation to say a few words about Brink Lindsey’s new paper on entrepreneurship and free markets. Brink’s been very supportive of me, and I am quite sympathetic to the arguments he makes. The basic premise is that entrepreneurial capitalism is especially important when a country is near the technological frontier, and when there is great uncertainty about which products to produce, and how to produce them. And that means that free market policies that promote entrepreneurship are now more essential than ever.
To see the distinction between the “what to produce” and the ”how to produce” questions, consider Viagra and Facebook. Viagra was a product for which the need was well understood (as rhinos have learned to their dismay) but where it was not understood how to produce the product. Facebook was a discovery of a need that had been heretofore overlooked. Entrepreneurial firms are especially good at solving these sorts of questions, although that doesn’t necessarily mean the firms must be small (as we saw with Viagra.) Central planning is relatively good at producing steel and washing machines and apartment buildings–well understood needs with easy to follow blueprints for production.
In an earlier study I found that if one excluded size of government, the country with the world’s most market-friendly policies was actually Denmark. So if Brink is right, you’d expect tiny Denmark to be an entrepreneurial hotbed. I decided to check out the ranking on entrepreneurial activity by country, and came across this survey for 2010:
Denmark: The entrepreneur’s paradise
Entrepreneurship is a hot political topic at the moment. David Cameron in a speech to the Conservative Spring Conference stated that he was on the side of ‘go-getters’ who would create growth and jobs in the British economy. Britain could certainly do with an infusion of entrepreneurship according to the Global Entrepreneurship and Development Index (GEDI), a new measurement of enterprise and entrepreneurial activity created by Zoltan Acs of George Mason University, Laszlo Szerb of the University of Pecs, and Erkko Autio of Imperial College Business School.
So Denmark isn’t just the most free market economy, and the most egalitarian, and the most civic-minded, and the happiest. It’s also the most entrepreneurial. And is has the world’s best restaurant. Thank God the weather will always be awful. Oh wait . . . global warming is coming.
Brink didn’t focus on the role of finance, but it seems to me that finance is far more important in an economy where it’s not clear what needs to be produced nor how it should be produced. So I’d expect the share of national income going to finance (broadly defined to include finance-like activities within firms) to rise sharply in a high-tech economy on the technological frontier. That’s not to deny that there are enormous problems with our actual finance system, associated with moral hazard and risk-shifting. But it remains an open question as to which factor best explains the rising share of GDP going to finance.
And since high-tech activities are often low MC/high fixed cost activities, income should become more unequal. Of course economic inequality has little to do with income inequality, and it is economic inequality on which we should focus.
I also think it’s important to distinguish between socially productive entrepreneurship and socially unproductive entrepreneurship. The latter takes advantage of government subsidies like Medicare (see McAllen, Texas) and/or regulatory arbitrage. The best way to promote socially productive entrepreneurship is not by trying to directly promote entrepreneurship, but rather by promoting free (and non-distorted) markets.
[On the other hand Paul Krugman assures us that the problems in McAllen, Texas should not occur, as doctors are motivated by a code of ethics, not self-interest.]
PS. One problem with vacations is that others beat you to the story. I have been growing increasingly dismayed by progressive blog posts on taxing the rich, and was planning a post pointing out that it was impossible to tax Bill Gates and Warren Buffett more heavily, as no plausible tax regime would lower their consumption bundle (or even the consumption bundle of their heirs.) Alas, Steven Landsburg beat me to it. I guess it attracted a lot of criticism. My reaction:
1. I’m shocked that people found his argument novel or controversial.
2. I’m shocked that progressive bloggers that are so dismissive of no-nothing conservatives are themselves so ignorant of public finance 101. Tax incidence is all about expected future consumption streams, as is pretty much all of economics. I thought people knew that.
3. Neither party is being honest with its supporters. If we don’t cut spending (and neither party wants to) we will need a progressive consumption tax—which will place a heavier tax burden on almost everyone (except Gates and Buffett.)
Back to non-blogging oblivion.