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The Entrepreneurial Frontier

Article by Carl J. Schramm February 1, 2013 //   6 minute read

One of our country’s most troubling economic trends is the decline in the number of new businesses. During the 2000s, approximately 700,000 firms came into existence each year, but the figure is closer to 500,000 today. What’s the cause? Do we have a supply problem or a demand problem when it comes to entrepreneurship? Do entrepreneurs get pulled into risk taking by perceiving that an opportunity exists to form a firm and make a bunch of money? John Maynard Keynes might have thought of this as a case of his infamous “animal spirits” that move economic behavior. Joseph Schumpeter might have seen the entrepreneur’s initiative as responding to an insight into how something in the market might be improved through innovation. Economists might describe this line of thinking as “demand pull.” An opportunity to innovate, create a company, and displace a non-competitive dinosaur firm is irresistible to those touched by the entrepreneurial dream. But the counter-hypothesis is a variant of “supply-push.” Since we have come, albeit slowly, to understand the importance of entrepreneurs to the success of the entire economy, we have initiated various educational initiatives — mostly at the college level — to train people how to be entrepreneurs. Colleges quite clearly believe that if we train more entrepreneurs they will create more businesses. Programs that focus on developing skill competency abound in the business school curriculum. It is likely that 250,000 business plans will be developed in American colleges this year. Tom Donlon insightfully examined this view in a recent Barron’s piece titled “Recruiting Entrepreneurs.” But in reality, such entrepreneurship programs may be something like sleeve buttons on a man’s suit — they are there but serve no real purpose. Maybe students think entrepreneurship courses hold the key to being the next Facebook billionaire. Perhaps alumni hear a convincing story of how the university is directly helping the economy, in a manner that provides cover for the anti-business leanings of most institutions. It just might be that teaching entrepreneurship is one of the easiest jobs in academe — there is no agreed upon canon of information to transmit. Because large data sets don’t exist, research in the field can never be rigorous as it is in, say, economics. Professors proliferate — entrepreneurially. Indeed, the nation has at least 6,000 professors of entrepreneurship today. Students flock to their courses because there is increasing interest about creating a new business in an economy where students may have to make their own jobs. But the troubling reality is that as we have deployed more professors of entrepreneurship, the number of new firms has decreased (see my related article for the Harvard Business Review Magazine). So this approach to stimulating the overall economy requires us to think seriously about the demand and supply of entrepreneurs. This is a de novo exercise. Yet labor economists and other branches of economics exhibit little interest in entrepreneurs, who remain an obscure and largely ignored actor in conventional economic theory. The entrepreneurship problem facing us today is driven by macroeconomic conditions relating to demand for new businesses. The decline in the “pull” of market opportunity, where the promise of success appears insufficient to overcome the risks that individuals undertake in starting a company, is a more complex problem to solve. Recent surveys by the Travelers Institute suggest that entrepreneurs are reluctant to start and expand new businesses because they cannot judge the costs likely to be imposed on them by the federal government. Tax increases, the implementation of The Affordable Care Act, and aggressive expansion of business regulations all look likely. Credit and other critically important sources of capital are harder to obtain because of the yet larger uncertainties that banks and investors face. And a not so obvious risk to the entrepreneur remains high unemployment (as I discuss in a recent article). While this might suggest cheaper labor for a new business, its more telling implication is that in the event of failure, the entrepreneur’s own chance of getting a job in an existing firm is much lower. Simply, the option of bankruptcy is higher and Congress has made bankruptcy less friendly. There is little that can be done in the short run to accelerate the rate of new business formation. Localities will focus on a predictable list of “entrepreneurial” stimulants, most especially creating localized venture funds. (They will never see local regulations — one of the most important barriers to new firm formation — as a problem.) But without relief from the larger business-depressing constraints, even free capital would make no significant difference. In previous recessions good ideas found money! The problem is that the entrepreneurial frontier is just more risky than in the past. And, as noted, the single best indicator of risk is the level of unemployment. When there is no safety net in the way of good private sector jobs if a new venture blows up, the risk of starting a new business is judged as just too high. My forecast for 2013 is fewer new businesses than in 2012. Nothing on the horizon suggests our unemployment or lackluster demand problems are going away.