Why is entrepreneurship on the decline?

WSJ: Decline of Entrepreneurship

A couple weeks ago, Ben Casselman of the WSJ presented some trends about entrepreneurship in the United States. Nowadays, he writes,

Companies add jobs more slowly, even in good times. Investors put less money into new ventures. And, more broadly, Americans start fewer businesses and are less inclined to change jobs or move for new opportunities.

The changes reflect broader, more permanent shifts, including an aging population and the new dominance of large corporations in many industries. They also may help explain the increasingly sluggish economic recoveries after the past three recessions, experts said.

Stephen Bainbridge added some thoughts as to why entrepreneurship is declining. He writes, “First, the dearth of US citizens pursuing careers in science and engineering. Second, the impact of law and regulation.” A lot of folks seem to be echoing his first point. I don’t buy it, and will share more about why at the end of this post. But, I completely agree about the second point. Bainbridge elaborates:

When you add up the growing costs of regulation and the growing risk of litigation, there’s no wonder smaller firms and start ups struggle. Only big firms can achieve the sort of economies of scale that make such costs bearable.

Regulation and litigation are absolutely stifling the growth of new businesses, and completely favoring large, established corporations. I’ve written some about that (here and here and here and here), and many other people have as well. Even so, all the bellyaching doesn’t seem to be altering the growth trajectory of litigation and regulation.

Here are a few more reasons why I believe entrepreneurship is on the decline:

The academic bias against business is pervasive as early as high school. I recently offered to connect a high school headmaster with a network of entrepreneurs to facilitate paid summer internships for his students. He turned me down; they were more focused on facilitating unpaid internships in social services and nonprofits. Every private high school I know of requires that their students volunteer at a non-profit in order to graduate (is it really volunteering if it’s required?), but I don’t know of a single one that facilitates job opportunities for young people. If there are some out there, that’s great and kudos to them, but they are definitely the exception.

The bias continues in higher education. Isaac Morehouse described it perfectly when he asked the question, “What would learning to ride a bike look like in school?

[In college], they’d be encouraged to hone their skills and really learn to ride by paying tens of thousands of dollars to spend the next four years getting drunk and hearing specialized bike-related knowledge. They’d hear the history of bikes, mostly from professors who hate bikes [italics mine; that comment rings so true]. They’d hear about the ecosystem where the rubber trees grow that go into bike tires, except any connection between that ecosystem and the actual building and riding of bikes would be deemed in poor taste. They’d learn a great many other things and come away with a certificate declaring their level of bike preparedness.

The broadening of intellectual property protections clearly favors big businesses. We’re well passed the point on the Tabarrok Curve where IP protections promote innovation, and we’re well into the area where they accelerate the concentration of wealth among established IP holders. We should have listened to Jefferson’s admonish against intellectual property.

There is also a demographic self-reinforcing downward spiral. By the fifties and sixties, you have several decades of a fully entrenched education system dissuading entrepreneurship. Added to that, you’ve got the prevailing big-business organization man mentality. Now you’ve got entrepreneurship out of the mainstream. Now demographics start to kick in: fewer entrepreneur parents beget even fewer entrepreneur children. According to studies conducted in the last decade,

The single strongest predictor of entrepreneurship is parental entrepreneurship. Having an entrepreneur parent increases the probability that a child ends up as an entrepreneur by a factor of 1.3 to 3.0.

Personally, I’m a third-generation entrepreneur and two of my parents’ four children are entrepreneurs.

What’s not a factor in the decline of entrepreneurship? I don’t believe the decline in the number of students pursuing engineering and science degrees results in fewer people pursuing entrepreneurship. It may dampen the pace of technological innovation within large businesses, or make it more difficult for businesses to execute technological innovations, but I don’t think you see a big percentage of engineers and scientists starting businesses. Also, how many titans of the industrial era have a degree in engineering? Did such a thing even exist in 1800?

I’m a non-technical founder of an internet business. Prior to that, I was (and am, still) a part owner of a real estate development company. I can no more operate a motor grader than I can write a line of code.

I didn’t study civil engineering, and I don’t know any real estate developers who did. I do know some architects who have become real estate developers, but their desire preceded their education, and they were all pretty disappointed to learn that their schooling gave them literally zero preparation for the profession of real estate development (and practically no preparation for the profession of architecture).

Of the eight founders in my Entrepreneurs’ Organization forum, only two of us have undergraduate degrees in a major that directly relates to their field. Similarly, I’m guessing Richard Branson is a pretty crummy musician and, while he might be an instrument-rated pilot, I doubt he leveraged those skills in launching his airline.

So, what attributes do successful entrepreneurs have? It’s usually a handful of the following:

  1. Parents who are entrepreneurs;
  2. An early start in their own business. Self-employed under the age of 25, and often in their teens;
  3. Guts;
  4. A sustainable inner drive to chart their own course, and an oblivious disregard for conventionality.

What other characteristics do entrepreneurs tend to share? And, perhaps a more importantly, what can we do to reverse the decline?

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