Entrepreneurial Economies

Academic institutions increasingly are recognizing the importance of entrepreneurship to the performance of an economy, and in response, many (including my own institution, Florida State University) have established entrepreneurship programs to give students some skills that can help them succeed as entrepreneurs. I’m supportive of these efforts, but the degree to which individuals in an economy are entrepreneurial is affected more by an economy’s institutions than by characteristics of individual entrepreneurs.

Some economies are more entrepreneurial than others.

Entrepreneurial economies have low tax rates and minimal government regulations that interfere with entrepreneurs who want to introduce innovations into the economy. They protect property rights and establish rule of law, so that everyone is treated the same under the law. These institutions assure entrepreneurial innovators that if they introduce products or production processes that add value to the economy, they will be able to profit from doing so.

Entrepreneurial economies create an environment that fosters more entrepreneurship, for several reasons. One is that aspiring entrepreneurs can look at successful entrepreneurs as examples that show them how to succeed. When people see that others can succeed as entrepreneurs, that encourages others to follow their lead.

Another reason entrepreneurial economies foster entrepreneurship is that when innovations are introduced into the economy, that opens the opportunity for other innovations. One can see that the mass production of automobiles created opportunities for others to establish gas stations and auto repair shops. It also opened the opportunity to develop supermarkets, shopping malls, and suburban living, because people could transport more goods in their cars and did not have to rely on mass transit. Consider, in the twenty-first century, the entrepreneurial opportunities that were created by personal computers, smart phones, and the internet.

Yet another reason entrepreneurial economies foster entrepreneurship is that institutions that support entrepreneurship flourish in entrepreneurial economies. For example, venture capital will be difficult to find in economies that are not entrepreneurial, because there is little use for it. Entrepreneurial economies create opportunities for venture capital and other services that support entrepreneurs.

All of this depends on having economic institutions that support innovation, make it easy to start new businesses, and make it easy to introduce new products into markets. Taxes and regulations that impose costs on innovators stifle entrepreneurship.

One thing innovative entrepreneurs like Henry Ford, Steve Jobs, Elon Musk, and Jeff Bezos have in common is that none of them studied entrepreneurship. Their successes came from understanding the markets they were entering, more than understanding entrepreneurship. Another thing they have in common is that they resided in the world’s most entrepreneurial economy: the United States.

Their successes were facilitated more by working in an entrepreneurial economy than by an academic understanding of entrepreneurship.

We all benefit from living in an entrepreneurial economy, and are inclined to take the economic progress that comes with it for granted. If we want this to continue, and want the US to remain the world’s most innovative economy, the way to do so is to maintain an economic environment in which people can introduce innovations into the economy without being hindered by taxes and regulations, and with the assurance that if their innovations create value for consumers, they can profit from them.

Every economy has individuals in it who are potential entrepreneurs. In some, heavy-handed institutions thwart their attempts to be entrepreneurial; in others, the institutional structure removes barriers to successful innovation, moving out of the way and allowing entrepreneurs to bring forward those innovations that generate economic progress.

Entrepreneurial economies are more the result of institutions that foster entrepreneurship than of the actions of particular individuals. I discuss these ideas further here.

We don’t create entrepreneurial economies by teaching people how to be entrepreneurial, but by creating an environment in which people who are entrepreneurial can profit by adding value to the economy.

Randall G. Holcombe is a Senior Fellow at the Independent Institute, the DeVoe Moore Professor of Economics at Florida State University, and author of the Independent Institute book Liberty in Peril: Democracy and Power in American History.
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