Friday, November 27, 2009

Entrepreneurial Capitalism

The entrepreneurial society
Mar 12th 2009
From The Economist print edition

Better, on the whole, than managed capitalism

THE rise of the entrepreneur, which has been gathering speed over the past 30 years, is not just about economics. It also reflects profound changes in attitudes to everything from individual careers to the social contract. It signals the birth of an entrepreneurial society.

How can policymakers adjust to this change? The first thing they need to do is shed some common misconceptions about the meaning of entrepreneurial capitalism. In any discussion of entrepreneurship, the phrase most frequently invoked is Schumpeter’s “creative destruction”. That can be unhelpful, implying that “destruction” and “creation” carry equal weight and that mankind will be in for a rough time in perpetuity.

Columbia University’s Mr Bhidé points out that a great deal of creation is of the non-destructive variety. Rather than displacing existing products and services, many innovations promote and satisfy new demands. William Nordhaus, an economist at Yale University, points out that about 70% of the goods and services consumed in 1991 bore little relationship to those consumed 100 years earlier. There are worlds of non-destructive creation yet to be conquered—new cures for diseases, say, or innovations that will improve the life of elderly people. And even when the creation does involve some destruction, there is usually not a lot of it. Most innovations increase productivity and improve the general standard of living.


Entrepreneurialism promotes individual creativity as well as economic dynamism. One of the most chilling chapters in William Whyte’s “The Organisation Man” (1956), a study of corporate America at the height of managed capitalism, was entitled “The Fight Against Genius”. The thinking at the time was that well-rounded team players would be more valuable than brilliant men, “and a very brilliant man would probably be disruptive.” Entrepreneurial capitalism has brought the rehabilitation of the “very brilliant man”.

Illustration by Nick Dewar
Illustration by Nick Dewar

Entrepreneurial capitalism is not as disruptive as many of its friends—and most of its enemies—imagine. It produces a bigger pie and allows more people to exercise their creative talents. But it is disruptive nonetheless. It increases the rate at which companies are born and die and forces workers to move from one job to another. Policymakers have to find the right balance between flexibility and security.

The most urgent need for reform is in continental Europe. Policymakers in the larger European economies need to learn from the Scandinavian countries that it is possible to have a safety net without clogging up the labour market. If people are hard to sack, start-ups find it more difficult to get off the ground. And high unemployment rates discourage people from branching out on their own because they might not find another job if they fail.

America suffers from serious rigidities of its own. The mobility of American workers is severely restricted by the country’s reliance on employer-provided health insurance, a relic of the second world war. New firms often have to pay more for their health care because they have smaller “risk pools” than larger companies. America’s health-care system is bad at controlling costs, imposing a heavy burden on the whole economy, particularly the newest and most fragile firms.

“Every generation needs a new revolution,” Thomas Jefferson wrote towards the end of his illustrious life. The revolution for the current generation is the entrepreneurial one. This has spread around the world, from America and Britain to other countries and from the private sector to the public one. It is bringing a great deal of disruption in its wake that is being exaggerated by the current downturn. But it is doing something remarkable: applying more brainpower, in more countries and in more creative ways, to raising productivity and solving social problems. The “gale” that Schumpeter celebrated is blowing us, a little roughly, into a better place.


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