The Deal Economy 2013

Home | Event | Blog | Awards

Print | Share | Discuss | Reprint

The decline of the entrepreneur?

by Robert Teitelman | Published July 12, 2012 at 11:28 AM

Barry Lynn and Lina Khan, both from the New America Foundation, have an article in the Washington Monthly that takes serious issue with the notion that America is some paradise of entrepreneurs. That modern idea of the entrepreneur as an embodiment of American exceptionalism and capitalism isn't all that old; you can trace its most recent incarnation back, like so much of the mental furniture of our age, to the '70s, when economic history turned from Keynes to Friedman and Hayek. Entrepreneurs were vehicles of the free-market revolution. Entrepreneurs were insurgents, revolutionaries, flesh-and-blood transformers, creating wealth and growth, battling bureaucratic and corporate sclerosis and bringing creativity and dynamism. In short, entrepreneurs were no longer perceived as shady operators, used-car salesmen, peddlers and pitchmen who couldn't get corporate jobs; they were the spirit of capitalism itself. (This is a little different from the self-employed Americans, mostly farmers, Lynn and Khan quote James Madison praising. Madison, of course, was himself a plantation proprietor and slave owner.) Not surprisingly, the historical roots of this entrepreneur-as-ideal were considerably more complicated than that ideological construct. Arguably, the paradigm for the New Age entrepreneur was Apple's Steve Jobs, who emerged in the '70s. Jobs was no anxious Calvinist saver and builder. He emerged out of the counterculture, which he always contrasted to the conformism of the giant corporation--even after Apple became one itself.

Lynn and Khan accept the entrepreneur-as-ideal (and thus find themselves in odd company, with, for example, Romney friend and former Bain partner Edward Conard in his recent "Unintended Consequences"), but argue that it's in decline in America. They try to prove that various measures of entrepreneurial activity--business startups, young companies, new employer businesses, levels of self-employment--have been falling at least since the '70s, and while their statistics are sketchy, they seem to argue that the decline is accelerating; the headline on the piece calls it a "a slow-motion collapse." Now this is contrarian. The '70s represent the period when the modern entrepreneur, like Jobs, was both deified in the press and assumed a key role in an ascendant free-market ideology. They are thus suggesting not only that we have significantly overestimated the role of entrepreneurs but that, in fact, just as entrepreneurs were being lionized, the rot had set in. Although they don't elaborate on this, their implication is that the period before the '70s, which is normally depicted as dominated by stable large corporations, was actually far more "entrepreneurial" than what came later. Why the decline? They blame the defanging of antitrust launched by Reagan in the '80s and the "radical consolidation" of banking and "concentration" of corporate power.

This is quite a critique. Lynn and Khan may even be partially right. They certainly provide a tonic to a highly romanticized view of a land of entrepreneurs endlessly promoted by politicians. But one should tiptoe through their statistics carefully. They never rigorously define "entrepreneur." Instead they search out various metrics that seem to capture the more general and hazy class of self-employment. Is all self-employment entrepreneurial? No, they say, eliminating consultants and farmers, though they seem to accept "freelancers" as entrepreneurs. In some cases they wrestle with complexities, in other cases not. They also have a tendency to pluck numbers from two time periods and come up with large declines, leaving one to wonder what lies in between. Their comparative periods vary, from three years to four decades. They have no view before the '70s because their stats only begin there, and so they really can't compare levels from the '80s or '90s, say, with the '50s or '60s. This is important only because they try to draw sweeping conclusions from these stats. But they can't really tie those conclusions to what's really occurring in the entrepreneurial economy.

In short, they treat the past five decades as a kind of static system in which a few policy choices--reduced antitrust and increased consolidation--are the only two variables. But that's not the case at all. Even if you accept their argument that entrepreneurship was declining, there are other explanations besides Reaganism (not to say Clintonism). Clearly, the creation of small businesses has been shaped by complex social, demographic, economic and technological changes. First, consider the rise of postwar suburbia, with its malls and highways. Main streets in towns, villages and large cities were often hit hard, eliminating many small, mostly retail, businesses. See many butcher shops anymore? True, some of them moved to shopping malls and retail complexes. But many of them (think hardware stores) were wiped out by large national retailers foreshadowed by big-city department stores and the likes of Sears Roebuck. This wasn't Reagan's fault; the real decay became visible in the '60s. In fact, given the destruction of small, local businesses, there wasn't an antitrust case to be made in most of these cases. It goes without saying, by the way, that digital technology further accelerated this decline of small businesses; in fact, it's now undermined the department stores and malls themselves. On top of that, it has, in many cases, created even larger economies of scale--the Wal-Mart effect. Second, there's a changing population. As baby boomers become adults, one would expect more new-business creation. As they hit middle age or senior status, those numbers should decrease. That's just demographics. Third, there's globalization, including immigration. Fourth, there's the decline of industry and the rise of services. Fifth, there's macroeconomics. Lynn and Khan often fix on activity over the past four years to make their point about decline. Well, we've just gone through a financial crisis with high unemployment. It would be nice to compare, say, 2010, with 1935 or even 1975, to see what actually happens to entrepreneurs in serious downturns. But to suggest that this is the new normal is to mistake the outlier for the median.

Lastly, Lynn and Khan leave out the trend du jour, which also seems to be accelerating throughout the post-'70s era: increasing inequality, which would, in theory at least, dampen entrepreneurial activity. What's behind that? Take your pick, from education to globalization to technology.

They leave all that out, except for digitization and the Internet, which they decide isn't enough to explain a decline of such a magnitude. (They're probably right.) Meanwhile, they exaggerate both antitrust and consolidation. (Lynn, Khan and the NAF have made this argument about concentration - Lynn calls it a new age of monopolization - and jobs in the past. See here.) They're correct that venture capital doesn't involve enough startups to make a difference in the kind of volume numbers they're looking for (they ignore problems in the VC startup process, ranging from poor returns to the allure of emerging markets to a dwindling number of initial public offerings, the traditional exit for VC investors)--though in terms of growth and productivity, VC punches above its weight. Most entrepreneurs traditionally raised their own capital to start businesses or borrowed from the local bank. The number of local banks has declined, not only through consolidation but also through the mass death of the S&L crisis. That decline doesn't necessarily mean there's less capital to lend. There remain thousands of banks, and while lending is down, it may have more to do with the deleveraging aftermath of the financial crisis than consolidation. In any event, they offer no evidence that reduced antitrust and consolidation depressed entrepreneurial activity.

They also romanticize the past and ignore complicating factors. Getting money from local banks was never that easy, particularly if you were an outsider, a minority or trying something different. Small businesses have complained for generations, back to the Grange populists, about miserly local banks. Moreover, the trend that accompanied banking consolidation was the rise of nontraditional private capital--asset-backed lenders, mezzanine finance, regional securities firms, and, yes, the dreaded, if essential to the middle market, private equity--whose main focus was on smaller businesses, and which provided an option to traditional hat-in-hand bank loans. The middle market today is dense with these financial institutions serving local markets--undoubtedly more so than in the '70s. In fact, consolidation at the top may have stimulated new financial providers further down.

Lynn and Khan may have stumbled upon something significant, though it requires a lot more research to nail it down. It's certainly an interesting argument, despite its kneejerk politics. What they haven't succeeded in doing, however, is offering up a persuasive causal explanation and thus any kind of solution that makes any kind of sense.
--Robert Teitelman

Share:

blog comments powered by Disqus

Free preview

This is only a preview of The Deal's sophisticated coverage. Explore the real-time intelligence as researched and reported on by our team of financial journalists with a license to The Deal Pipeline. Click here for more information.

Meet the journalists

Robert Teitelman

Editor in chief

Bob Teitelman, editor in chief and a member of the company’s executive committee, is responsible for editorial operations of print and electronic products. Contact

Movers & Shakers

Goldman, Sachs & Co. veteran Tracy Caliendo will join Bank of America Merrill Lynch in September as a managing director and head of Americas equity hedge fund services. For other updates launch today's Movers & shakers slideshow.

Video

Fewer deals despite discount debt

When will companies stop refinancing and jump back into M&A? More video

Free preview

Editor in chief

Movers & Shakers

Sectors