The Wall Street Journal-20080130-Business Bookshelf- The Real Start of Something New
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Business Bookshelf: The Real Start of Something New
Full Text (791 words)The Illusions of Entrepreneurship
By Scott A. Shane
(Yale University Press, 208 pages, $26)
When we think of entrepreneurs, we are likely to imagine hard- charging visionaries building mega-success out of the Next Big Thing. Or, as Scott A. Shane puts it in "The Illusions of Entrepreneurship," we imagine "a jet-setting, Silicon Valley-residing engineer who, along with a couple of his buddies, has raised millions of dollars of venture capital to start a new company to make a patent-protected gizmo." Such people do exist, of course, and more power to them. But reality is less glamorous than that.
Entrepreneurship is "a very common vocation," Mr. Shane writes. "Each year in the United States more people start a business than get married or have children. And as much as 40 percent of the US population will be self-employed for some part of their work life." What is the typical entrepreneur like? Does he fit our popular image of the go-getting jet-setter? Not so much. He (and it is a he) "is a married white man in his forties who attended but did not complete college."
But surely he lives in a new-business hotbed such as Silicon Valley or the Boston Route 128 corridor. No, again. As it turns out, "he lives in a place like Des Moines or Tampa, where he was born and lived much of his life." Places like Silicon Valley are actually below the national average for business formation.
As for that novel technology or idea that makes for entrepreneurial success -- well, it is exceedingly rare. The new business of the average entrepreneur "is a low-tech endeavor, like a construction company or an auto repair shop." According to Mr. Shane, "every year only about 7 percent of new companies in the United States are started in . . . high technology, and only about 3 percent of business founders consider their new businesses to be 'technologically sophisticated.'"
What's more, America is no longer a particularly entrepreneurial country; nor are we in much of an entrepreneurial era. The rate of entrepreneurship in the U.S., Mr. Shane says, "has been flat or declining over the past twenty years." This is true for other industrialized countries as well, but there is no need for alarm: The richer a country is, the lower its rate of business starts. When a country gets wealthier and its real wages rise, Mr. Shane explains, "the opportunity cost of running your own business goes up because the amount of money you could have earned working for someone else increases." In short: Fewer people start businesses because they can make more money working for established companies.
If anything, the U.S. may encourage too much entrepreneurship. On average, Mr. Shane reports, most new businesses are less productive than existing ones. Moreover, "the average self-employed person earns significantly less than the average person who works for someone else." Even so, "local, state and federal governments in the United States . . . have adopted a wide array of policies to increase the number of entrepreneurs." These policies include transfer payments, loans and subsidies, bankruptcy protection, lower tax burdens, and exemptions from regulations.
And they are generally a bad idea. Citing statistics and studies, Mr. Shane shows that government intervention creates all sorts of inefficiencies -- for instance, causing people "to start companies disproportionately in competitive industries with lower barriers to entry and high rates of failure. Nor do the businesses formed in response to government intervention generate much employment or substantially enhance productivity."
For its myth-busting findings and analytical rigor, Mr. Shane's book is a welcome addition to the literature on a crucial part of any modern economy. But the book is not without flaws. Mr. Shane overstates his case sometimes, setting up straw myths to knock down. He writes, for example: "Descriptions of entrepreneurs are invariably positive." But think of Bill Gates, Larry Ellison or, for that matter, Sam Walton, all of whom have been portrayed, at one time or another, as cruel, rapacious capitalists.
And Mr. Shane nowhere mentions Joseph Schumpeter (1883-1950), the economist who theorized most profoundly about entrepreneurship and who predicted the attacks that its very success might engender. For Schumpeter, entrepreneurs were change agents, not just creators of business enterprises. Their chief function in society was to challenge established ways of doing things. Schumpeter believed that such disruptive newness -- though it created wealth and economic dynamism -- would inevitably meet resistance, sometimes strong resistance. Thus the long tradition of vilifying entrepreneurs, still evident today. Mr. Shane might have sampled from the tradition's more acerbic moments to make his portrait of entrepreneurial illusions even more vivid.
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Mr. Schulz, a research fellow at the American Enterprise Institute, is senior editor of The American magazine.
