Photo of open sign by Francesco Ocello, veer.com
Entrepreneurs are some of the most heralded figures in American life today. The number of books and movies about the late Steve Jobs alone are testament to that fact. But while our press and our politicians celebrate the act of starting a business, economists don’t really understand the factors underpinning entrepreneurship that well. In fact, pinning down exactly what entrepreneurship is can be difficult at times, especially when moving from economics research to everyday conversations about the topic. That’s startling, given the important role of innovation, productivity, and (potentially) entrepreneurship.
A simple definition of an entrepreneur is just someone who starts a business. But this definition is almost certainly too broad for how we use the term in everyday conversation. This definition, for example, would put a plumber who starts his own firm to work as a contractor in the same category as the founder of a high-growth startup. The implications of each firm, however, are extremely different for the broader economy. At the beginning, they will both be small firms, but their end states are worlds apart.
That’s important given how much of U.S. policy tries to encourage entrepreneurship. Right now, policies target firms by their size—think of all the politicians you’ve heard make positive comments about small businesses. But small businesses aren’t the same as entrepreneurs.
As research by Erik Hurst of the University of Chicago and Benjamin Pugsley of the Federal Reserve Bank of New York shows, the motivations of most small-business owners have nothing to do with expanding the business. In fact, the majority of small-business owners are motivated by “non-pecuniary benefits”—in other words, they don’t do it for the money. Subsidies that only target businesses that happen to be small will end up subsidizing owners who probably will never expand their business and increase employment, let alone spread a new innovation across the economy. Small business might be worth subsidizing for some reasons, but not because they are critical for economic growth.
So what do we know about entrepreneurship? Well, the data about who entrepreneurs are and why they become entrepreneurs is still relatively sparse. A new paper by U.S. Census Bureau economists Christoper Goetz, Henry Hyatt, Erika McEntarfer, and Kristin Sandusky makes a pitch for using new data sets that match up employers and employees. The economists argue that these kinds of data sets can help answer questions about the kinds of people who actually work at start-ups, where they used to work, and also how changing demographics might have affected the start-up rate.
Our economy would benefit from better data and understanding about what causes people to start the kind of high-growth firms that most Americans think of when they think about economic growth and entrepreneurship. We do know enough to disrupt some falsehoods about the importance of all small firms, but the need for even more knowledge to make much better informed policy decisions is certainly there.