BUREAUCRATS DON'T INNOVATE (via Robert Duquette):

The entrepreneurship cult (Martin Hutchinson, 9/13/04, UNITED PRESS INTERNATIONAL)

The cult of entrepreneurship was demonstrated this week at two meetings: at the Center for Global Development Wednesday, where Liliana Rojas-Suarez discussed on behalf of the Latin America Shadow Finance Regulatory Committee how to produce more entrepreneurship in Latin America, and at the National Economists Club Thursday, where Robert Litan of the Ewing Kauffman Foundation discussed how to develop more entrepreneurship in the United States. Both speakers see entrepreneurship as a "magic bullet" that produces economic growth and general welfare, and both believe in intense mechanistic activity by government and the non-profit sector as a means to create such entrepreneurship.

The behavior of U.S. multifactor productivity in the relatively un-entrepreneurial and high marginal tax rate environment of 1947-73, compared to its behavior in the entrepreneur-worshipping 1990s, demonstrates that entrepreneurship does not produce productivity miracles, and may not therefore be the solution to all life's ills. (Multifactor productivity is a better measure than labor productivity of the true contribution from innovation, because it strips out the contribution of capital, which of course was available in deluging, tsunami-forming quantities in the late 1990s.)

Multifactor productivity growth averaged 1.91 percent per annum in 1948-73, minus a tiny 0.01 percent per annum in the sluggish decade of 1973-83, 0.71 percent per annum in the recovery decade of 1983-93, and 0.76 percent per annum in 1993-2001, the latest year currently available. No great increase after 1993 in other words.

The drop in 1973-83 is readily explicable; one of the major inputs into the U.S. economy, energy, quadrupled in price in 1973, and it took a decade to rebalance the economy to fit the new circumstances. The most remarkable statistic is that multifactor productivity growth in the years of the "miracle" after 1993 was less than half that of the quarter century 1948-73.

You can also compare multifactor productivity across eras by looking at periods which stretch across similar parts of the economic cycle; multifactor productivity, as one would expect, tends to decline during recessions and to be highest in the early years of long expansions. Hence, for comparison purposes, we can use three seven-year periods which stretch over similar economic territory: 1992-1999, 1982-1989 and 1960-1967. All three of these periods stretch from near the bottom of a recession to near the top of the long subsequent boom; they are thus as far as possible comparable.

Across the whole economy, multifactor productivity grew at an annual rate of 2.72 percent in 1960-67. This annual rate declined to 1.46 percent from 1982 to 1989, and declined further to 0.81 percent from 1992 to 1999.

Thus the rate of multifactor productivity growth declined from the 1960s to the 1990s, even as the level of entrepreneurship rose. This may be surprising to policymakers, but should not surprise us. Entrepreneurs are not the main innovators in the economy, because the character traits needed for successful entrepreneurship are not those that lead to great innovations. If you examine the top 25 on the "Forbes 400" list of the richest people in the United States, you find a lot of entrepreneurs, and heirs of entrepreneurs, but few great innovators.

In the 2003 listing (the most recent available) Bill Gates and Paul Allen, the founders of Microsoft, are numbers 1 and 3, while Steve Ballmer, its current chief executive officer, is number 11. Microsoft is a huge business success story, in many ways a model to others, but a famously un-innovative company; its two great successes were DOS, bought for $50,000 from a third party vendor and Windows, heavily dependent on software developed at the Xerox Palo Alto Research Center in the 1970s. Gates and Allen are entrepreneurs; Ballmer is a manager -- he joined Microsoft in 1980, five years after its formation. [...]

So there you have it, the 25 richest people in the United States, almost all of them entrepreneurs or heirs of recently deceased entrepreneurs (20 years ago there would have been much more "old money" in that list.) None of them, however, were great innovators, and only a few were significant innovators. Entrepreneurship is thus neither a necessary nor a sufficient condition for innovation.

Mr. Hutchinson would appear to have refuted his own argument here by demonstrating that major corporations are not very innovative, even if they were founded initially by innovative entrepreneurs. After all, no one believes the next great innovation will come from MicroSoft, do they? It will come from a small entrepreneur and then MicroSoft will steal it and drive them out of business.

Posted by Orrin Judd at September 21, 2004 4:27 PM