
Is America Encouraging the Wrong Kind of Entrepreneurship? (2017) - jmngomes
https://hbr.org/2017/06/is-america-encouraging-the-wrong-kind-of-entrepreneurship
======
rotskoff
The original article [1] is, in many ways, clearer than the economist's take
on it and avoids political diversion.

They summarize Baumol's theory for entrepreneurship as assuming that the total
amount of entrepreneurial spirit remains fixed, but, for structural reasons,
some of it can get channeled into unproductive rent-seeking behavior (like
getting favorable regulation).

They then say that their empirical work (three decades of data so more than
one recession in there) shows that there is a decline in new firm formation,
"in each state and nearly all metropolitan areas, and in each broad industrial
sector, including high tech."

According to Baumol, this should be offset by an increase in "unproductive"
behavior. This appears to be harder to measure, but they point to [2], which
argues that both labor and capital (i.e., returns to shareholders) have been
in decline.

This is all very complicated from the perspective of innovation and
entrepreneurial endeavors in tech, where money is often lost despite the fact
that the product is useful.

[1] [https://hbr.org/2017/06/is-america-encouraging-the-wrong-
kin...](https://hbr.org/2017/06/is-america-encouraging-the-wrong-kind-of-
entrepreneurship)
[2][https://home.uchicago.edu/~barkai/doc/BarkaiDecliningLaborCa...](https://home.uchicago.edu/~barkai/doc/BarkaiDecliningLaborCapital.pdf)

~~~
ethn
I really don't believe that useful products, products which mitigate more cost
than alternatives, fail.

~~~
robotrout
What if your product never gets built, because you are unwilling/unable to
navigate the legal and regulatory barriers that have been set up to keep you
out?

Not many startups do medical devices. Everybody knows why not. Many other
industries are just as walled off.

~~~
w9r09eridlk
This is the one thing about the article that is a little off or misleading
from my experience (which appropriately is in health care).

When you have this rent-seeking, it not only encourages unproductive business,
but shuts down good ideas that would have worked if they were implementable.

The article seems to approach the problem as if there's these entrepreneurs
sitting around trying to decide what to do, and then put their energy into
unproductive but incentivized rent-seeking. I'm sure that happens, but just as
often in my experience there are people who are in the right position to
pursue good ideas, but are shut down, turned away, or whatever, because of the
rent-seeking arrangements and regulation.

I also think this rent-seeking subtly influences perceptions of the public at
large in such a way that ideas get scoffed at or go under the radar. It alters
peoples' whole perspective on things, such that they never question the basic
assumption of why the rent-seeking arrangement needs to be to begin with.
This, in turn, can have consequences for how certain problems and solutions
are approached.

------
socrates1998
Not a very good article, but I agree with the idea that rent-seeking should be
discouraged and we need to fight against it.

As an entrepreneur/self-employed person who 100% does not have any special
relationships in government and relies almost solely on referrals, it is very
frustrating to see people "create" wealth because they have special
relationships with government officials.

In my industry, education, it's pretty rampant. Textbook deals are
particularly horrendous.

Even on the local level it can be pretty bad. At a local charter school near
me, a math teacher working at the same school is the number one recommended
math tutor for students in HIS program. While they are not allowed to be his
current students, he has a very parasitic relationship with them.

He charges a very local high rate ($100+ per hour) to students that he has
taught math to. It just blows my mind how corrupt this is. I have heard him
bragging about making thousands of dollars a month and more than doubling his
school salary from students in a math/science program that he is an
administrator/teacher for.

And this is at a very competitive math and science charter school who
routinely sends people to the top math and science colleges in the country.

I mean, I get it, people want to make money, but this type of behavior is just
disgusting.

~~~
kazinator
Tutoring isn't rent-seeking. It is not in any way analogous to charging money
for some commons that would otherwise be free (like the toll-chain-across-the-
river example). If the parents feel that $100 is excessive, they can find
another tutor. That teacher doesn't have a monopoly on mathematics.

> _And this is at a very competitive math and science charter school who
> routinely sends people to the top math and science colleges in the country._

So that tutor helps do the job, and the rich parents find the rate acceptable.

~~~
nostromo
It's not rent seeking, it's a conflict of interest.

Paying teachers and administrators for services creates a conflict of interest
when it's time to grade papers, recommend students for advanced courses, or
graduate students.

~~~
kazinator
That is clear, but from the limited information given by OP it seems that the
tutored students are not enrolled in that class any longer: _" While they are
not allowed to be his current students, he has a very parasitic relationship
with them. [...] He charges a very local high rate ($100+ per hour) to
students that he has taught math to"_

Tutoring strictly past students seems to be a way of eliminating much of the
glaring conflict of interest that you describe. (A smaller one remains yet:
the possibility of doing a worse job of teaching the class, with the
understanding that students who wish to be more rigorously prepped for post-
secondary studies can just take the expensive tutoring.)

Other than that object, I don't see what's wrong with students who are no
longer in that class paying for more tutoring (probably so they are better
prepped for the entrance exams to those aforementioned post-secondary
schools?)

~~~
socrates1998
He is the number one recommended tutor that they all go to when they are
struggling in the program.

There is supposed to a list of people/companies that the guidance counselors
recommend, but that's not the case with this school.

They only give out his number. Honestly, he shouldn't even be allowed to tutor
these students. He is an administrator in their program, it's a huge conflict
of interest.

------
torstenvl
_In 2009, the number of businesses that closed down exceeded the number of new
ventures for the first time in three decades, a sign that productive
entrepreneurial activity is declining._

I haven't read the underlying paper, so this probably doesn't detract from the
larger point. However, in terms of the Economist's article, I'm not sure that
this is a good "sign" of _any_ trend; rather, it would seem inextricably
linked to the 2008 crash that led to the Great Recession.

~~~
fergie
To put it another way:

Tech startups before 2008 generally made money by suddenly providing new and
cool stuff. Think Google, Facebook, Twitter, Apple.

Tech startups now seem to be focussed to a greater degree on rent-seeking
business models- think Uber, AirBnb, UpWork, Stripe, various ginormous tech
mega-consultancies.

Do you see the difference? The former have won market share by making products
that are clearly better than the competition. The latter are essentially
attempts to capture "middle man" monopolies on existing transaction chains.

This is of course a bit of a generalisation, but rent-seeking _is_ a bad thing
in a number of non-obvious ways, and should be called out to a much greater
degree.

~~~
vonmoltke
How are Uber, AirBnB, UpWork, and Stripe rent-seeking business models?

~~~
chii
Rent seeking is the wrong term for those businesses. A more appropriate term
might be a market maker.

Rent seeking specifically means to extract extra money from an existing asset,
but not produce any extra value (but purely by virtue of owning the asset).

~~~
fergie
What you say is true in the purest sense. Building on this, some economists
regard monopolies of exchange as "assets". Baumol (the economist referenced in
the article) did a lot of research into "Contestble Markets Theory",
essentially concluding that markets which are not contestable generate free
money for incumbants/owners/monopolists

You could say that anything to do with the "Sharing" or "Gig" economy is a
play on rent extraction. Companies seek to own a marketplace in order to levy
a rent on transactions.

------
User23
Fully half of the startups I've worked for have the primary (unstated)
business model of transferring assets from investors to executives, with the
nominal business activity only pursued to the minimum extent necessary to
further the executives' real aim.

I wonder to what extent these numbers are caused by similar control frauds _,
or if I 've just been particularly unlucky.

_[https://en.wikipedia.org/wiki/Control_fraud](https://en.wikipedia.org/wiki/Control_fraud)

~~~
thaumasiotes
I saw a fun one that looks much like money laundering:

1\. Receive investment from Imagine K12, under the company's name.

2\. Rent four apartments in the heart of San Francisco.

3\. List the apartments on airbnb, under the _founder 's_ name.

Now you've got a substantial income stream under your own name that happens to
be funded purely out of your investors' pockets.

~~~
hiram112
This is no different than what a lot of flippers and small time real estate
investors do by buying up numerous condos, duplexes, etc., in an upcoming
neighborhood, throwing on a fresh coat of paint and some fake granite
counters, and renting for 50% more than the month before.

Instead of VC money, they're leveraging low interest funny money created by
banks and de-facto guaranteed now by the feds.

I really don't think the VCs nor the banks care, as long as the rental and
AirBNB money keeps flowing, allowing return of principle and even eventual
profits. They could care less that it is adding to the unaffordability of
homes for everyone else.

~~~
thaumasiotes
It is different in that the ownership of the capital changes. Going in it
belongs to the company; coming out it belongs to the founder personally.

If I buy an apartment under my own name, renovate it, and then rent it out
under my own name, that's a pretty normal business. If I work for a company
that rents an apartment, and I, knowing the company isn't using it, personally
rent that apartment out in exchange for payments directly to me, that is, more
or less, embezzlement. I don't have the legal right to sell or rent the
company's property to you.

------
CompelTechnic
This article does very little to discuss much about its supposed main point.

------
justinph
The security industrial complex constructed after the wake of 9/11 certainly
contributes to this, in addition to the preexisting military industrial
complex.

------
TangoTrotFox
I find it interesting that the article ( _referring to the original article
[1], not the economist 's which is mostly just some sort of political piece_)
considered unproductive rent seeking mostly in forms of corrupt relationships
between government and industry. Quoting that article,

" _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. Economists call this rent-seeking behavior._
"

However, should rent seeking behavior in traditional business to consumer (or
business to business) relationships be excluded? Take for instance the
explosion in software being sold as a service even when such things make very
little practical sense. The 'cloud' certainly has some uses, but companies are
trying to shoehorn it into absolutely everything and no small part of the
motivation there is to justify charging an going rent for usage of software
that's not _fundamentally_ changing.

The same is, in a way, even increasingly true of entertainment. Ever larger
number of games are designed around attempts to coerce players into engaging
in ongoing purchases after buying the game, often to no end as in the case of
buying consumable items or currency of various sorts. In the end it seems
identical as the idea is to artificially increase revenue through the seeking
of rent instead of the creation of new products.

[1] - [https://hbr.org/2017/06/is-america-encouraging-the-wrong-
kin...](https://hbr.org/2017/06/is-america-encouraging-the-wrong-kind-of-
entrepreneurship)

~~~
rossdavidh
I suppose the idea would be that if you are selling a good or service that
isn't actually worth much, then the companies that don't buy will have an
advantage over those who do, and eventually it should be self-correcting, if
only because people tend to imitate the winners. This wouldn't make all B2B
entrepeneurship sensible, but it would not have a tendency to get worse over
time. Whereas, in theory, rent-seeking via government has no such reason it
would not get ever-worse, as attempts by one company to influence government
result in competing companies doing the same at first as a defensive measure,
and then while they're in the lobbying game why not try to get something for
themselves as well.

------
andyidsinga
The original article referred to (
[https://www.colorado.edu/ibs/es/alston/econ4504/readings/Bau...](https://www.colorado.edu/ibs/es/alston/econ4504/readings/Baumol%201990.pdf)
) is really interesting (I'm part way through):

> Here I shall proceed on the basis of historical illustrations encompassing
> all the main economic periods and places (ancient Rome, medieval China, Dark
> Age Europe, the Later Middle Ages, etc.) that the economic historians almost
> universally single out for the light they shed on the process of innovation
> and its diffusion. These will be used to show that the relative rewards to
> different types of entrepreneurial activity have in fact varied dramatically
> from one time and place to another and that this seems to have had profound
> effects on patterns of entrepreneurial behavior.

------
scottfits
The article dances around interesting ideas but instead settles for the washed
up thesis that people are abusing government handouts.

There is an interesting phenomenon we are seeing: entrepreneurship is suddenly
more glorious, encouraged by governments but often with misguided incentive
structures (i.e. rewarding those who are great at pitching or making shiny
vanity products).

So a more interesting question is: how can a government encourage
entrepreneurial activity without enticing wantrapreneurs to demand free cash?

One idea is reverse tax. The government could reward a startup that is making
money even if it's a small amount, and that way, the government is amplifying
the market's rewards and not creating a faux incentive structure.

------
fergie
This article does a pretty poor job of describing what rent-seeking is, and
why it is bad, which is a shame.

I strongly encourage HNers who haven't already done so to read up on rent-
seeking (aka rent-extraction).

------
grosjona
Also, the typical startup journey of "Incubator -> VC funding -> Corporate
acquisition" is mostly rent seeking. Corporations use rent seeking (lobbying)
to extract huge amounts of money from the government then startups use rent
seeking to extract money from corporations.

There hasn't been any meaningful 'creative destruction' in the last 10 years;
it's all been tech gimmicks.

------
eecc
Uh, Monopoly Capital, Baran, Sweezy, 1966. Thick read. Resonates when it
describes as capitalism’s endgame, what the article defines as merely the
result of bad incentive structures... but it’s A Marxist read so heh...

------
sky_rw
Garbage Clickbait Strategy for 2018:

1: Find a year old apolitical article from respected publication. 2: Figure
out a way to make it about Trump.

~~~
rotskoff
The economist piece is a year old as well.

~~~
sky_rw
Ahh, you are correct. So it's more like, hacker news upvote clickbait strategy
- post year old article.

------
Simulacra
If it makes money, keep doing it.

~~~
berns
It makes US Dollars. So, as long as the rest of the world is willing to save
in USD, keep doing it.

------
everdev
> since he was elected president last November, Donald Trump has paid more
> than 40 visits to Trump corporation properties. His Mar a Lago club in
> Florida makes twice as much profit as it did two years ago. Family friends
> fill government offices which oversee parts of the Trump business empire.
> The administration has hired dozens of former lobbyists, most of them
> working on issues they previously lobbied on.

I'm no Trump fan, but this article reads more like a political piece than a
business one. The practice of securing government grants and not creating much
wealth from them has a long history.

~~~
posixplz
> The practice of securing government grants and not creating much wealth from
> them has a long history.

This is true, it does -- in Congress. (Pork barrel spending, logrolling, etc.)
However, in the executive branch, this is unquestionably a new phenomenon.

~~~
reaperducer
_unquestionably a new phenomenon._

It depends on how you define "new."

If you intend "new" to mean it is exclusive to the current administration, you
are incorrect.

~~~
weaksauce
Can you give recent examples of prior administrations doing this in the
executive branch?

~~~
jerf
[https://www.wsj.com/articles/the-death-of-obamas-slush-
funds...](https://www.wsj.com/articles/the-death-of-obamas-slush-
funds-1496878321) seems pretty close. Different mechanism, sure, but similar
result.

~~~
weaksauce
Stuff like the Volkswagon settlement being used to remedy the complaint have
been going on for many years and is a nuanced thing[0]. not sure it belongs in
the same category. That's also a pretty biased opinion column so I'll hold off
on judgement of the practices until I do more research. Do you have a more
neutral source than an opinion column with a few paragraphs of information?

pdf page 351-352:

[0]
[https://digitalcommons.law.byu.edu/cgi/viewcontent.cgi?artic...](https://digitalcommons.law.byu.edu/cgi/viewcontent.cgi?article=2483&context=lawreview)

