The search for good policy must truly be our own

CHRISTIAN BJØRNSKOV & NICOLAI J. FOSS wrote this fine sentence in a September 2006 paper:

However, one seeks in vain in the classical statements for more precise discussions of the institutional and economic policy antecedents to entrepreneurial activity, perhaps because the notion - now entirely commonplace - that institutions imply systems of incentives was not widespread at the time when Schumpeter and Knight wrote.

The article -- Economic Freedom and Entrepreneurial Activity: SOME CROSS-COUNTRY EVIDENCE -- is available at SSRN.  The study is interesting, and I am not sure what to make of the findings given the small sample size (29 countries), in addition to the fact the government size and economic freedom tend to be positively correlated (in larger samples) - a fact that causes some teeth-gnashing among those of us who prefer smaller government and economic freedom.

It is compelling, at least, to think that our search for policies and institutions that promote entrepreneurship and growth is truly our search and not something resolved or even well defined by our intellectual ancestors. Good hunting!

Comments

[Bob Knaus]

My experience visiting countries in Central America and the Caribbean has been that all of them are less friendly to entrepreneurs than the US. I'm pretty sure they all spend less on government as a % of GDP than the US... because that's all the government they can afford.

What these "small government" countries do is favor oligarchs, not entrepreneurs. Their business licensing regulations tend to favor those already in business.

To some degree, it's a chicken-and-egg problem. Because there are few entrepreneurs, they have little influence in government. Because they lack influence, they are unable to establish a favorable policy environment.

A big government, by contrast, has room for many voices. Including lobbyists for entrepreneurs.

[Mr. Econotarian]

The big government / economic freedom may be due to the fact that rich countries often need big armies, plus there may be more desire for actual redistribution.

Personally, I'd prefer simple cash redistribution over annoying & useless regulation that provides the same level of deadweight losses.

[Christian Bjørnskov]

Thanks for referring to our paper, which was published this spring in Public Choice with a couple of additional tests and changes. Wrt. the small sample problem, let me refer interested readers to Kristina Nystrøm's new paper - also forthcoming in Public Choice - where she basically replicates our findings in a much larger panel dataset, using self-employment as a proxy for entrepreneurial activity.