Why Entrepreneurship Matters
Like apple pie, everyone is in favor of entrepreneurship, but most of us take it for granted. We know it takes a lot of work to turn ideas into practical offerings, but we assume it just happens, while the action that really matters lies elsewhere. In different ways, four recent history works press this approach. Meanwhile my co-author Howard Wolk and I recently published Launchpad Republic: America’s Entrepreneurial Advantage and Why It Matters. So we need to respond to these explicit and implicit criticisms, which we can put in four categories.
-
This is perhaps the most basic critique of entrepreneurialism. What do economies need in order to develop? Back in 2012, Michael Lind wrote Land of Promise: An Economic History of the United States. He argued that the country developed because of the strong nationalist policies promoted by Alexander Hamilton and his followers in the forming of the United States. Those policies included a large, open domestic market, stable currency, property rights, and strong tariffs, and they prevented the country from becoming a neo-colonial dependency of Great Britain. Lind sees the opposition of Thomas Jefferson and his localist followers as only a minor hindrance to the great national project. As for entrepreneurs, they simply followed through on the Hamiltonians’ hard work.
Then in a recent article in Tablet magazine, Lind doubled down on the argument. Against those who celebrate Silicon Valley entrepreneurs, he says what really mattered was government support:
Ironically, during the Cold War, when the U.S. supposedly illustrated the virtues of free enterprise, the U.S. had its own successful developmental-state industrial policy, orchestrated by the Defense Department through the Defense Advanced Research Projects Agency (DARPA) and other agencies. In the 1990s, libertarians and neoliberals claimed that the information technology revolution proved the superiority of the free market to government when it comes to innovation. But the major tools of the computer age, from digitization to the global internet to the computer mouse were developed by government contractors reliant on U.S. taxpayer money.
Lind assumes that what matters in this case is government’s demand for innovation. And it’s true that Silicon Valley arose in an environment where federal spending funded major breakthroughs. The crucial early customers for semiconductor chips, for example, were NASA and the U.S. military. But Lind assumes that this demand is what matters, and that we can take the resulting entrepreneurship for granted.
We can see the fallacy of this assumption by digging into the history. It was scientists at AT&T in 1947 that invented the transistors at the heart of semiconductor chips. But AT&T, for all its government connections, wasn’t interested in developing the clever new technology, and it licensed the patent for a low price. William Shockley improved on AT&T’s design and tried to develop a practical product, but turned out to be a terrible manager who couldn’t retain the talented engineers needed to overcome the myriad technical problems.
It was only the “traitorous eight” at breakaway Fairchild Semiconductor who finally commercialized the invention. When engineers at MIT, under a NASA contract, heard about the advance, they ordered a large batch, and the chips’ superiority to vacuum tubes eventually made the Moon landing possible.
Lind’s readers might be tempted to think that NASA was somehow encouraging the entrepreneurship behind the scenes. Instead, it took passionate, even crazy entrepreneurs to make chips happen, and their spectacular success became an example that created Silicon Valley as we know it. As Chris Miller points out in his recent history of semiconductors, the initial government demand actually kept the industry back, once it had made the fundamental innovations. It was only demand from the non-governmental sector that drove full commercialization.
Plenty of similar examples abound. AT&T wasn’t the only lumbering giant that couldn’t make use of what it invented. Xerox’s Silicon Valley office, PARC, developed several key advances for personal computers, yet nothing happened until crazy entrepreneurs such as Steve Jobs “stole” those breakthroughs and put them in actual products.
Lind continues his demand fallacy in assessing recent developments:
It is no coincidence that U.S. productivity and innovation sputtered in this century, when neoliberal Democrats and libertarian Republicans decided to let the free market develop the next wave of technologies. It turns out that venture capitalists and advertisers are more interested in addictive online sites like Facebook and Twitter than in robots and cures for cancer. Without exception the major advances in basic technology during the post-1980s era of free market utopianism have been largely funded by the federal government. Think of the sequencing of the human genome, the vaccines to combat COVID, electric cars like Tesla, and the rockets of Elon Musk and Jeff Bezos. Neoliberal America, symbolized by Silicon Valley, is living on the technological capital inherited from developmentalist America, symbolized by the Pentagon.
Again, let’s dig into those stories. Take electric vehicles. If Lind was right, EVs should have taken off in the 1990s. That’s when federal regulators prodded General Motors to build EV-1, the first commercial electric cars launched in 1992. But GM cancelled the line three years later when regulators changed the requirements that had made EVs attractive. Nothing happened for ten years, until the entrepreneurs at Tesla, soon joined by Musk, were crazy enough to start a company that made only electric vehicles. Congress supported the effort with subsidies, but only when the cars started selling. When Tesla veered toward bankrupt in 2007, Musk didn’t ask for help from the government; he drew on his own savings and urged his colleagues to persist.
The story of rockets is even worse for the government. At SpaceX, Musk assembled the engineering talent to make crucial innovations that drastically reduced the cost per takeoff. Yet when he tried to interest buyers in the U.S. military and NASA in the technology, they refused to let a startup bid for projects. The bureaucrats had a cozy relationship with incumbents and didn’t want to lose it.
SpaceX had to sue the government – its would-be customer -- to be considered in the bidding. In a remarkable turn of events perhaps unique in world history, federal judges agreed and forced their colleagues in the executive branch to treat the company equally. When the bureaucrats finally came around, they realized the tremendous advantages of SpaceX’s technology, and now it has become a crucial factor in establishing a base on the Moon and perhaps on Mars.
A similar story took place centuries before. Lind praises Hamilton as the brilliant visionary who drove economic development, but his brilliance would have been for naught if it weren’t for those crazy entrepreneurs. In 1790, Hamilton knew that his young country needed to invest in manufacturing, and he took time from his day job as Secretary of the Treasury to launch the Society for the Encourage of Useful Manufactures (SEUM). Besides tariffs on British textiles, he got a tax-free license to use Passaic river waterpower from the governor of New Jersey, and his Wall Street friends contributed the startup capital. SEUM hired a few immigrants who had stolen designs from innovative English mills and started up the business.
Unfortunately, the government protection had lulled everyone into a false sense of security. Hamilton’s grandiose vision (he even hired Pierre L’Enfant, future architect of Washington D.C., to design the factory complex) had made the venture vulnerable. Then the Panic of 1793 led some of the directors to embezzle funds, which caused a shortage of cash that left workers without wages. By 1795 SEUM had collapsed.
Meanwhile Moses Brown, a Rhode Island merchant, was looking for a new venture now that independence had closed off access to British ports. He had the same idea as Hamilton, but he lured another such immigrant, ambitious Samuel Slater, with the promise of a partnership – not employment. Slater came to Rhode Island in 1790 and his diligence made the venture work -- the cautious merchants in Brown’s firm gave him only enough working capital to get by. Brown even wrote to Hamilton to tell him about the initial success, but the latter was too busy founding the country to bother with a little Rhode Island firm. Eventually Slater got tired of sharing profits and left to launch his own company, which built mills throughout the area.
Government support definitely helped – Brown’s firm benefitted from tariffs as well. But entrepreneurship was what really mattered. That’s why Slater, not Hamilton, became the father of the American industrial revolution.
-
Lind is impressively well-read and does his homework, but is not a trained historian. So I was eager to read the prominent economic historian Bradford DeLong’s new Slouching Toward Utopia: An Economic History of the Twentieth Century. This detailed and well-written book covers not just an expanded version of the past century, from 1870 to 2010, but all of the West, and arguably the entire world.
Like Lind, DeLong celebrates the role of government in the astounding improvements in standards of living across North America and Western Europe. Aside from an odd discussion of Nikola Tesla’s struggles to improve electricity, the book pays little attention to entrepreneurs, and far more to military tactics and political infighting. Innovation comes more from corporate research labs than from daring startups. DeLong writes that government officials were “in charge of the economy,” as though they directed the efforts of entrepreneurs instead of merely establishing conditions for success.
More important, the book challenges the primacy of entrepreneurship in three ways. Let’s take each in turn. First, it suggests that other countries developed fine without the entrepreneurial advantages of American political economy (a pro-consumer orientation that balanced the right to property with the right for outsider to compete). By 2010, Canada and most of Western Europe were nearly as well developed as the United States, and arguably had come closer to utopia with their generous welfare states.
Their success, however, came largely from adopting innovations from American entrepreneurs – in fact American companies played a crucial role in rebuilding their economies after World War II. It’s always easier to adopt what has succeeded elsewhere than to try out a risky idea for the first time. That how quasi-authoritarian countries in East Asia were able to rise quickly from poverty. But take away American entrepreneurship, and where would those countries be?
The book assumes that great ideas easily get commercialized, that it’s simply a matter of managers allocating resources and marketers springing into action. But as we saw with AT&T and Xerox, big companies are just as likely to let ideas fester as to commercialize them. DeLong draws heavily on the arguments of Alfred Chandler, who greatly advanced business history in the 1980s and 90s with his focus on corporate managers. Chandler showed how big companies boosted the economy by stabilizing and scaling up production – but said little about whence the basic advances came. As Clayton Christensen and other business scholars have pointed out, big companies are good at churning out reliable products in large quantities at low cost, but not at breakthrough innovation. Chandlerian theories of growth make sense in static economies with readily accepted ideas, but neither has been true of countries since 1870.
Second, DeLong points out the fastest growth in the U.S. and in Europe came in the mid-20th century, 1940s through ‘60s, when big companies were at their height and did a lot to raise productivity by spreading innovations and improving management. If entrepreneurs were truly central to development, this should have been when growth was slowest. So entrepreneurship must not have mattered much, at least by that period.
The trouble here is the timing. The 1930s and early ‘40s were actually a time of impressive innovation, most of it under the duress of the Great Depression and an existential world war. After the war, big companies had enormous demand to fulfill, whether from war-weary consumers or countries rebuilding from wartime damage. To meet that demand, they readily drew on those earlier advances, and became ever larger and mightier. If DeLong is right, then the 1970s and ‘80s should have been a golden age, when big companies showed what they could do at full strength. Instead, with all that artificial demand slackening and new rivals emerging from the ashes, the big companies struggled.
Third, related to that trend, DeLong suggests that when entrepreneurialism came back in the 1970s and especially after 1990, we got slower growth and much higher inequality. He thinks the West should have been able to continue the “trente glorieuses,” as the French called the postwar golden age. Instead, he says, policymakers lost their nerve and let a minor recession in the 1970s become an excuse to open up the economies with neoliberalism: deregulation, tight money, and lower taxes.
It’s true that economic growth rates in the West have indeed fallen since the 1960s, just as the “entrepreneurial revolution” was taking off. But DeLong mistakes the cause with the cure. Leaders of both parties embraced neoliberalism as a solution to what looked to them as deep-seated problems. The postwar economy was running out of steam, and needed something to jumpstart its engines. DeLong assumes a static economy, where all we need is continued good management. But companies are like any other human institution, susceptible to complacency and empire building. What starts off well can easily degenerate into inefficiency and stodginess. Hence the ongoing need for entrepreneurs not just to innovate, but to keep big companies on their toes.
DeLong is right that neoliberalism and entrepreneurialism tends to exacerbate income inequality, but he pays short shrift to how these changes promoted social and political equality. When government officials hold enormous power, as still happens in many European countries, the result is a kind of cronyism that alienates people just as income inequality can do. Just ask the Yellow Vest protesters in France.
Indeed, the book praises Karl Polanyi, the philosopher in mid-20th century who called for greater attention to social and other non-economic needs. DeLong concludes that governments should have done more to satisfy “Polanyin rights” with a strong welfare state. But Polanyi himself distrusted governments as much as companies. He thought people could best take care of themselves with democratic participation and strong local communities. He feared that strong governments would undermine not just entrepreneurship but society itself.
-
Here the problem is not so much in what entrepreneurs did, but in what they didn’t do. Jonathan Levy, another economic historian, published last year the magisterial Ages of American Capitalism: A History of the United States. Like Lind and DeLong, Levy cites the great overall success of the American economy, but he faults it for unfair results. Most of the book describes not what entrepreneurs or companies did to drive capitalist advance, but how they, and the governments they improperly influenced, failed to share the resulting prosperity broadly in society. Like DeLong, Levy suggests that capitalism is mainly about giving luxuries to the rich. Yes, ordinary people now have living standards that earlier generations would have likened to paradise. But really we should have done much better. What matters is not the reality of improvement, but how the gains matched our expectations – and here, capitalism has been woefully disappointing.
The fallacy here is a very American one. James Patterson, in his Grand Expectations: The United States, 1945-1974, explained that when World War II ended, many Americans worried about returning to depression. What would the economy do without the artificial stimulus of military spending? Three decades later, when those fears had disappeared amid remarkably high and stable growth, opinion surveys actually showed greater trepidation about the economy. People now saw steady growth as the new normal, and were upset that business was now slowing down a bit. No matter how good we have things, we want better. It’s actually one reason why Americans are so entrepreneurial – most of us reject static thinking and keep thinking of improvements.
In Levy’s hands, though, that fallacy can be dangerous. There’s no question that both companies and governments could have done better – but their failings pale in comparison with the amazing improvements over the past two centuries. From Levy’s negative account, readers may well conclude that capitalism has failed the United States and that we need something very different. Maybe not total government control – both he and DeLong are at least clear-eyed about the shortcomings of “really existing socialism.” Levy doesn’t explore in detail what that alternative might have been; instead he just carps at missed opportunities. He ends the book calling for a new age of American capitalism that somehow distributes the fruits of abundance more equitably.
-
It’s not so surprising that all of the authors described here focus on the efforts of political leaders more than business people. That’s partly because, with the demand fallacy, they believe governments have the guiding hand in economic development. But it’s also because they’re writing for general readers, who have an easier time relating to government actions than the work of private businesspeople.
Writers for a general audience also tend to fall into what has gone by many names, but here we can call the fallacy of coherent policymaking. Whatever policies happen to be in effect, writers assume, must follow from some sort of broad consensus about what needs to be done.
That fallacy dominates The Big Myth: How American Business Taught Us to Loathe Government and Love the Free Market, by Naomi Oreskes and Erik Conway. The book tells how a loose array of “business elites, trade associations, wealthy powerbrokers, and media allies” came together in the 1920s and 1930s and played a long game in convincing Americans to distrust big government. If not for their efforts, the book suggests, the 1970s+ neoliberalism decried by DeLong and Levy never would have happened.
Oreskes and Conway are historians of science and technology, not economics or politics, and it shows. They claim that by 1920, the “U.S. government’s guiding role in economic life was largely accepted.” But Americans have long distrusted powerful governments – hence the insistence, little seen in other countries, on the right for outsiders to compete. What the authors see as nefarious interference is no different from what many interest groups in society have long done. A similar array of elite interest groups had long pushed for greater government intervention, yet the authors see nothing nefarious in that.
It’s also no surprise that the book says the free-market proponents were playing a long game. Just as the group was mobilizing, the federal government began a series of unprecedented interventions in markets that stayed in place and even intensified until the 1970s. So much for its supposed power. And when the federal government did gradually embrace neoliberalism, it seems to have been due more to the obvious shortcomings of Keynesian regulation, not the workings of a cabal.
The larger problem is that Oreskes and Conway see government policymaking as more coherent than it really is. In fact, government actions are far messier, discordant, and context-specific than we realize. Start with the beginnings of the federal government in 1789. Schoolbooks portray enlightened founding fathers brilliantly laying out a structure for sustainable republican rule (or, as some now say, wickedly scheming to perpetuate white supremacy). But the states only barely agreed to the federal constitution, and the early republic struggled with bitter conflicts over power and policymaking. What we see as the wise decentralization of power was more the product of concessions than principles.
Indeed, most of the founding fathers, from George Washington and Hamilton to even Thomas Jefferson, were dismayed at how “democratic” politics had become. They preferred the rule of well-educated, virtuous leaders who sought the greater good, not the unpredictable rabble of self-interested common people. But it turns out the democracy was the better approach in the long run. Out of that fractious struggle of interests came a remarkably flexible governance that prevented the great danger of any organized society: entrenched rule by cronies that stifled the aspirations of everyone else. Just as the adversarial litigants and trial by jury yields better results than the wise rulings of judges, so we got better policies from our bottom-up democracy than the top-down rule in other countries.
Sometimes governments favored certain companies, but rarely let them get powerful enough to distort the economy and discourage entrepreneurship. That fractious struggle made sustained, coherent policymaking impossible – to the chagrin of intellectuals who kept trying to impose it. But it yielded a remarkably open, competitive society that not only energized entrepreneurs, but continues to draw immigrants in vast numbers.
Even now, those immigrants keep preferring a messy, incoherent government over coherent governments as in China. In 2014, Oreskes and Conway wrote The Collapse of Western Civilization – predicting that Western governments would fail to rise to the challenge of climate change and that only authoritarian countries, such as China, would survive. A few years after the book came out, the Chinese government announced a new policy of “common prosperity,” where entrepreneurs would have to share their riches with ordinary people – just what DeLong and Levy were recommending.
The result was such a slowdown in growth that the government has recently reversed course. But meanwhile it undermined potential world-class competitors as Alibaba and Tencent, because governments strong enough to enact major industrial policy inevitably get captured by elites who use their power to stifle potential competitors, including successful entrepreneurs.
The Chinese government also announced in 2019 an intensive industrial policy to catch up and surpass the United States in semiconductor chips – but in early January of this year, admitted the policy had failed due to corruption and a lack of creativity. Despite what Lind, DeLong, Levine, Oreskes and Conway suggest, entrepreneurship really matters.