Here is Marc Andreessen -- investor, Netscape founder, and general serial entrepreneur -- talking about predicting the entrepreneurial future via hanging out in university research labs:
Here is Marc Andreessen -- investor, Netscape founder, and general serial entrepreneur -- talking about predicting the entrepreneurial future via hanging out in university research labs:
A worth watching video follows of Trevor Loy of Flywheel Ventures testifying why venture capitalists aren't a source of systemic risk in financial markets. He makes the reasonable case that losses are limited to actual investments, derivatives don't play a role, venture capital is tiny, and debt is mostly non-existent.
Having said the preceding, I still have issues. First, Loy cites numbers that I and others have taken issue with with respect to the percentage of the U.S. economy that can be attributed to venture capital. People need to stop citing these flawed figures if they want credibility on the subject of venture capital's real role in the economy. Further, he doesn't discuss how the dot-com debacle -- a financial crisis, of sorts -- can be separated from venture capital activities.
I'm not saying that VCs are sources of systemic risk, because I don't believe they are, but I'm also left unconvinced by their arguments. If Congress feels the same way we could readily end up with over-broad and unhelpful systemic risk regulations.
A few weeks ago, I wrote about "the pernicious Dystopian Myth that middle class incomes are stagnant." I am trying to take on the great inequality debate which is a staple of political economics.
At issue is this claim: I don't think you can square a belief in progress with a belief that the the poor are getting poorer, or being left behind, or whatever catchphrase the dystopians are using. Progress through economic growth is either universal or it is not. And I pretty firmly believe in progress. The irony is that the so-called progressives do not.
The problems with inequality accounting are numerous and well known. They ignore immigration. They ignore accurate measures of inflation, and disaggregated inflation. Worse, annual income data comparing, say,the poor in 1989 and 2009 ignore entirely the obviousness that these are different groups of people. The lowest incomes are recorded by retirees and students. Despite the fact that students in 1989 are making "big" incomes now, an income-based inequality factoid ignores the wealth of the supposedly poor groups (namely retirees with no income and large wealth ... that's the reality). Honestly, it is heart-breaking that the public and media wastes time on the Dystopian Myth, because it comes at the expense of poverty's actual causes and solutions.
Today I've found two new sources taking on the PDM. Both are great:
First, an NBER paper by Robert Gordon (hat tip Tyler Cowen): Misperceptions About the Magnitude and Timing of Changes in American Income Inequality - http://www.nber.org/papers/w15351
The rise in American inequality has been exaggerated both in magnitude and timing. Commentators lament the large gap between the growth rates of real median household income and of private sector productivity. This paper shows that a conceptually consistent measure of this growth gap over 1979 to 2007 is only one-tenth of the conventional measure.
As shown by my Brookings Institution colleagues Gary Burtless and Pavel Svaton, medical spending as a share of personal income averaged across all Americans jumped from 7% in 1960 to 21% in 2007. If medical care were paid for out of the pockets of health-care consumers, the huge growth in health spending would have little or no bearing on income inequality, since it would come out of personal income. But about 75% of spending on health care comes from sources other than personal income, namely private insurance mostly paid for by employers and government payments made by Medicaid and Medicare. In other words, one of the biggest single sources of consumer spending by families — and one that is growing rapidly each year — is ignored in most inequality calculations.
Thus, the inequality debate is not nearly as relevant to the more important question of mobility as it sometimes seems to many advocates and politicians. Inequality is a cloudy lens through which to understand the problems of poverty and mobility, and it does not point toward solutions. Great wealth is not a social problem; great poverty is. And great wealth neither causes poverty nor can readily alleviate it. Only by properly targeting poverty, and by understanding its social, cultural, and moral dimensions, can well-intentioned policymakers hope to make a dent in American poverty — and thereby advance mobility and sustain the American Dream.
The last post about entrepreneurship rates around the world (from World Bank data) raises an obvious question: what is the relationship between the rate of entrepreneurship and the rate of economic growth? Does a higher rate of entrepreneurship mean faster economic growth? This is sort of the holy grail of entrepreneurship research, and I'm not claiming to be original, but we have some cross-country data here so let's see what we come up with.
Our most basic intuition is that, yes, more entrepreneurship should mean more innovation, higher productivity (new, more productive firms ideally push out, or make more productive, existing firms), and thus higher wages and a higher standard of living. The World Bank researchers who put together this dataset have found that entry rates (the rate of new business entry) is positively correlated with a country's per capita income. So perhaps more entrepreneurship does make a country richer. Or, obversely, richer countries have more entrepreneurship because there is greater scope (financial, psychological, societal) for taking the entrepreneurial leap. Of course, the World Bank researchers also show a positive correlation between entry rates and the business density rate: how many firms there are per capita. How do you get a higher business density rate? By creating more (surviving) firms, of course. So we're already on sort of a circular path of logic: to get more entrepreneurship, you need . . . more entrepreneurship. Right. Well, let's see what else we have.
How about growth rates? Whether or not causation runs from income level to entrepreneurship or vice versa, we should also be interested in the rate of growth, which can be more important than the absolute level of income. So first we'll take the 2005 entry rates from the previous map, and compare them against GDP growth rates for 2005:
There doesn't appear to be much of a relationship between current-year entry and current-year growth. So this is interesting but certainly not very revealing. And it makes sense--we would expect entrepreneurship rates to pay economic dividends down the road if new firms are to be allowed time to grow. They will certainly create a lot of jobs at the time of their founding, but their contribution to GDP growth will come if they expand their revenues and payroll and contribute to productivity. Naturally, then, we need to compare 2005 entry rates and subsequent growth.
Not much here either. (Note: I have removed two outliers, Azerbaijan and Armenia because their growth rates are astonishingly high, as in 26 and 14 percent in 2005, reflecting more their starting points than performance.) OK, so maybe we haven't given the new firms in 2005 enough time to grow and contribute. It would be nice to go back to an earlier year and make comparisons between entry and subsequent growth, but we will lose some countries along the way due to data limitations. But let's say causation runs the other way, that growth increases entrepreneurship. We can look backward from 2005 to economic growth in the preceding few years. Perhaps this will tell us something:
Well, sort of, but not really. There are plenty of countries the grow quickly, leading to low entrepreneurship rates; countries that grow slowly yet still have high entry rates. And there are plenty of countries that have high (low) entrepreneurship and low (high) subsequent GDP growth rates. Based on this very quick and very rudimentary glance at entry rates and economic growth, can we say anything of substance regarding the relationship, if any, between entrepreneurship and economic growth?
First, we have to make caveats about data. The data I've just used and the graphs just presented are far from perfect and far from being conclusive about the growth-entrepreneurship link. Entry rates, while more or less consistent within countries, will vary across countries for different reasons--quality or ease of data collection being the biggest. And we might also consider that developing countries will have a larger "informal" sector and so some amount of economic activitiy won't get captured by entry rates or macreconomic statistics. Comparing entrepreneurship across countries, moreover, may not mean anything if the quality or nature of entrepreneurship differs. Richer countries could tend to have more "higher quality" entrepreneurs because they have immediate access to cutting edge technology and know-how. This would lead us down an unsatisfactory vicious/virtuous circle path.
It may also be the case that GDP and GDP growth aren't the best indicators to look at; it might be better to dig into specific industries, or measures like personal income, happiness, etc. Of course, there are also continuing doubts about the usefulness of GDP itself as an economic indicator, as Michael Mandel ably discussed a couple of weeks ago.
In any case, notwithstanding these data issues, the above charts do present some interesting puzzles. For example, entry rates are pretty steady from year to year for any given country, while growth rates, even in developed countries, are more volatile. If the rate at which people form new firms is consistent, and if new firms are important to economic growth, why does growth bounce around so much? One answer is that there is a lot more that goes into growth than new firm formation. This is sort of troubling because it suggests that raising the entrepreneurship rate in any given country won't provide any sort of payoff (at least not in the next few years). It suggests a (harder) focus on the population of firms that gets founded and their survival and performance. And it also takes us back to the squishy issue of quality: a low (high) entrepreneurship rate could tell us nothing about the (poor) (good) quality of those firms.
At some point, it's probably inevitable that such an analysis resorts to qualititative factors. If you work backward from economic growth, locating the sources of such growth, you will likely focus on innovation. Where do innovations come from? From new and existing firms, although the conventional typology is that former account for more incremental innovations while the latter generally create breakthrough innovations. So entrepreneurs create those innovations that drive growth. That's the familiar narrative, and it could be true irrespective of entry rates.
I need to end this post at some point, and we're not going to come to anything resembling a resolution, so I'll just end by throwing it open to readers. Your thoughts? Charts? Arguments?
I have refrained from commenting on Paul Krugman's lengthy critique of macroeconomics which was published earlier this month in the NYTimes Magazine. I am not sure if I have anything useful to add. It is an important essay that is part of the conversation economists will be having for years to come (which I am calling the "Macro War"). It is quintessential Krugman being Krugman: brilliant, funny, nasty, and a puzzling blend of revelation and overstretch. And forgive me for protesting, but if I see the baby co-op story in print again, I'm submitting Krugman to the authorities for unfairly regurgitating the same pop material to pad his pubs.
If you are genuinely interested in the macro war, do not miss an alternative critique recently published by Northwestern 's distinguished professor Robert Gordon. I highlight five sections here: the entire abstract, three clips on growth vis-a-vis macro, and his assessment of Krugman. It is amazing. (Thanks to Greg Mankiw for the pointer).
Is Modern Macro or 1978‐era Macro More Relevant to the Understanding of the Current Economic Crisis?
This paper differs from other recent critiques of “modern macro” based on DSGE models. It goes beyond criticizing these models for their assumptions of complete and efficient markets by proposing an alternative macroeconomic paradigm that is more suitable for tracing the links between financial bubbles and the commodity and labor markets of the real economy.
The paper provides a fundamental critique of DSGE and the related core assumptions of modern business cycle macroeconomics. By attempting to combine sticky Calvo‐like prices in a theoretical setting that otherwise assumes that markets clear, DSGE macro becomes tangled in a web of contradictions. Once prices are sticky, markets fail to clear. Once markets fail to clear, workers are not moving back and forth on their voluntary labor supply curves, so the elasticity of such curves is irrelevant. Once markets fail to clear, firms are not sliding back and forth on their labor demand curves, and so it is irrelevant whether the price‐cost markup (i.e., slope of the labor demand curve) is negative or positive.
The paper resurrects “1978‐era” macroeconomics that combines non‐market‐clearing aggregate demand based on incomplete price adjustment, together with a supply‐side invented in the mid‐1970s that recognizes the co‐existence of flexible auction‐market prices for commodities like oil and sticky prices for the remaining non‐oil economy. As combined in 1978‐era theories, empirical work, and pioneering intermediate macro textbooks, this merger of demand and supply resulted in a well‐articulated dynamic aggregate demand‐supply model that has stood the test of time in explaining both the multiplicity of links between the financial and real economies, as well as why inflation and unemployment can be both negatively and positively correlated.
Along the way, the paper goes beyond most recent accounts of the worldwide economic crisis by pointing out numerous similarities between the leverage cycles of 1927‐29 and 2003‐06, particularly parallel regulatory failings in both episodes, and it links tightly the empirical lack of realism in the demand and supply sides of modern DSGE models with the empirical reality that has long been built into the 1978‐era paradigm resurrected here.
(Krugman critique mentioned)
The malaise of modern macroeconomics has recently been the subject of strikingly vitriolic accusations. The Economist (p. 70) quotes Paul Krugman’s LSE Lionel Robbins Lecture of 10 June 2009 as stating “most macroeconomics of the past 30 years was spectacularly useless at best, and positively harmful at worst.” More recently Krugman (2009) has amplified this criticism in a long and overly argumentative denunciation of modern macroeconomics. In notably similar language that might have inspired Krugman, Buiter (2009) wrote three months earlier that “the typical graduate macroeconomics. . . training received at Anglo‐American universities during the past 30 years or so may have set back by decades serious investigations of aggregate economic behaviour and economic policy‐relevant understanding. It was a privately and socially costly waste of time and other resources.”
(Three sections that mention growth are below)
The adjective “business cycle” in front of the phrase “modern macro” represents an important qualification to the scope of this paper. Much of modern macro escapes its critical overview, including such broad areas of modern macro progress as growth theory, search and matching models of unemployment, theories of why prices and wages are only partial flexible, and attempts to use modern versions of production functions and factor input measurement to develop empirical counterparts to longstanding 1978‐era macro constructs such as potential GDP growth and the GDP gap.
Viewed more broadly, a more basic similarity between the 1920s and the period between 1995 and 2006 was the view that permanent prosperity had arrived, and that the good times should be allowed to roll. The underpinning of this benign environment was the parallel upsurge in productivity associated with the invention of new “general purpose technologies” (GPTs, Bresnahan and Trajtenberg, 1995). In the 1920s productivity was boosted by the delayed payoff of the invention in the late 19th century of two revolutionary GPTs, electricity and the internal combustion engine. Many of the reasons for the delay in the application of electricity to manufacturing in the analysis of David (1990) apply as well to the internal combustion engine which required technical development and highway construction fully to transform transportation and distribution. Likewise, in the late 1990s the invention of the internet together with other delayed applications of the computer, including bar‐code scanning, boosted productivity growth for several years after the collapse of the late 1990s investment boom itself. More rapid productivity growth held down inflation and in this decade allowed the Fed to justify its maintenance of low interest rates.
The required condition for continued full employment is the opening of a gap between the growth rate of nominal GDP and the growth rate of the nominal wage (Gordon, 1984, p. 40) to make room for the increased nominal spending on oil. If nominal wages are flexible, one option is for the growth rate of wages to become negative, allowing the growth rate of nominal GDP to remain fixed. At the alternative extreme with rigid wages, to avoid a decline in nonenergy output an accommodating monetary policy must boost nominal GDP growth by the amount needed to “pay for” the extra spending on oil, but this will lead to an inflationary spiral if expectations respond to the observed increase in the inflation rate. A third alternative, and the one that actually occurred in the 1970s, was a combination of wage rigidity with a partial response of nominal GDP growth, pushing down both real non‐energy spending and employment.
Historians/economists describe a GPT or general purpose technology as something that has a broad impact on the economy -- electricity is a canonical example. Clearly, the computer / microchip is a GPT and its effects are still unfolding. It is to be expected that the computer's effects will continue to unfold and surprise us for the next many decades.
Farhad Manjoo makes me wonder if the "general purpose device" is itself a GPT. In this Slate.com essay titled "The iPod is dead," Manjoo writes:
In time, these players, too, will morph into computers. That's the way computing goes—as Jobs says, general-purpose devices eventually supplant everything else. There was a time when people bought portable word processors because computers were too expensive and all they wanted was something to write with. But in time PCs got cheaper, more portable, and more useful, and it no longer made sense to buy a writing machine. More recently, folks bought little devices called PDAs, tools to keep your appointments and contacts in order on the road. That was short-lived: Now every cell phone is a PDA. It's also a camera and a jukebox. And then there's the case of the Kindle, a dedicated device for reading books. Uh, Jeff Bezos—you might want to watch your back.
If you don't know his bio:
Farhad Manjoo is Slate's technology columnist and the author of True Enough: Learning To Live in a Post-Fact Society. You can e-mail him at email@example.com and follow him on Twitter.
Earlier this week Kauffman's Dane Stangler and I gave a talk on the rise and fall and rise of U.S. cities. Here is a graphic the kind folks at Tableau put together to assist us in the discussions. It shows the trajectory of the largest 50 U.S. cities in 1920, as well as what happened since in terms of new cities and their rise and fall.
Lesa Mitchell and I at Kauffman talked recently at Foo Camp with Paul Graham of Y-Combinator fame, and he was passionate on the subject of immigrant founders. Why do we make it so darn hard for smart and motivated company founders to come to this country and create great companies? We shouldn’t.
What should we do? How about a Founder’s Visa. That is the idea Graham has proposed, and it is getting strong backing from Brad Feld at Foundry Ventures, as well as other VCs and entrepreneurs. It is even getting attention from politicians.
The particulars are still getting worked through, but it has to do with getting a modicum of funding ($250,000) and approval from an independent board that this represents a real startup deal, not some backroom finagling for a visa, and that’s it: You’re in the country and you’re off and running.
This is a big idea worth getting behind.
The Kauffman Foundation is starting a movement.
Beginning this month, the Foundation is launching a campaign, entitled Build a Stronger America, that seeks to foster a national dialogue around the importance of entrepreneurship to the economy and what can be done to encourage more firm creation. (Or, alternatively, to look at what might done but shouldn't because it would harm entrepreneurs.)
Jim Hamilton, founder of the blog econbrowser and one of my dissertation advisers, writes in reaction to some University of California professors who suggesting a strike on the first day of class as a protest against the system-wide salary cut:
If some of my colleagues perceive that they now have better opportunities than teaching at the University of California, I'd encourage them to resign so that they can take advantage of those opportunities.
Impressive statement. And yes, a sad situation for the great state of California. While I strongly oppose bailouts for individual states, I would have preferred a stimulus bill that gave block grants to all 50 states (population weighted, of course). Alas.
California remains an important story for its lesson in political failure, cousin of the term market failure. Its ambitions overstretched its capacities, and now the government is struggling to find balance with a handful of dysfunctional political institutions in the way. We can only hope they get a constitutional convention in place that establishes a workable government -- and not one that just jacks up tax revenue potential. That way spells brian drain.
Time will tell. But we should be thankful for the government employees who remain committed to service even while paying for the sins of their leaders.
Paul Krugman has a monstrously long econo-flagellatory piece in the weekend NY Times magazine. It is worth reading in its entirely, but here is the tag cloud for those of you not up for the word count of the Full Krugman. As a related aside, the word “wrong” appears three times in the piece.
Mark Zuckerberg famously quipped that Facebook is a once-in-a-century technology, implying that he was right up there with Gutenberg or Ford.
At the time, I scoffed at the arrogance of such a statement, but now that I've watched this video, I'm not so sure.
Terry Matthews of Mitel, Newbridge, March Networks and many other companies fame is among my favorite entrepreneurs in the world. He is smart, aggressive and repeatedly successful, and he does things his way.
Terry gave a speech recently in Los Angles about his way of being an entrepreneur and company founder. As he said, he has founded almost 100 companies (!), making him among the most prolific serial entrepreneurs in the world. His model is different from typical venture capitalists, however, even though he runs only a couple of the companies he has founded. Instead he seeds the company with his expertise, money and ideas, plus tries to find synergies with other things he is doing in existing companies, thus giving the companies a head-start down the path to success.
It’s a fascinating model. Here is a brief clip of his keynote, and you can read more coverage here. Among other things, Terry calls for the end of Sarbanes-Oxley and a stand-still on private equity/VC regulation.
Guest post by Charles C. Johnson
Unveiled in 2000 by the United Nations, the Millennium Development goals have consistently unmet despite pledges from much of the industrialized world.
On his blog, Bill Easterly of NYU explains why, "Each aid organization tries to meet all MDGs and each fails to specialize. Therefore some aid agencies are forced to supply things they are bad at ... for which there is no demand."
Easterly explains in further detail:
UNICEF is working on swine flu, the traditional province of WHO, who is distracted by trying to do development research, which is the traditional specialty of the World Bank, who is in turn distracted by a new emphasis on children, which is the strength of – just to complete the circle – UNICEF.
Even very small aid agencies fail to specialize – Luxembourg’s $141 million aid budget was divided among 30 different sectors (out of a possible 37). The tiny Luxembourg budget also went to 87 different countries.
With high overhead costs for each separate activity for each country, the ratio of overhead costs to funds for the activity gets extremely high, sometimes over 100 percent. UNDP has one of the very LEAST specialized aid budgets by country and by sector, and it actually does have a ratio of overhead costs to aid disbursed of 129%.
One suspects overhead costs devoured even more of program costs for the $20,000 Greece spent on worldwide post-secondary education, the $30,000 the Netherlands spent on promoting worldwide tourism to developing countries, the $5,000 Denmark spent on worldwide emergency food aid, or the $30,000 Luxembourg spent on conflict, peace, and security. (Remember, these small sums may have been split even further among country recipients.)
One could think of many political economy reasons why aid agencies resist specialization. From my casual experience in a large bureaucracy (the World Bank), the primeval bureaucratic instinct is to give a tiny piece of the pie to every possible lobby group (internal or external). But what’s most clear is that it shows aid agencies lack of accountability, because it is such a wasteful practice that also drives the aid recipients crazy with duplication of efforts by every aid agency in every sector in every country.
I suspect that this problem is even more pronounced than Easterly recognizes. Part of the reason groups specialize, in accordance with Adam Smith, is that they receive a market signal such as a price rise to specialize and thereby innovate, but what evidence is there that there is any such signal in aid agencies? Remember, nobody loses his job for failing to stop poverty.