Since the economic crisis broke out, capitalism has been under the microscope. Many have blamed evil businesses and market forces for the financial meltdown, and have lost confidence in private-sector engagement strategies for recovery. Luckily, in this country many more have experienced the positive impact of entrepreneurship either directly and indirectly. In a March 2009 survey, 63% of respondents said they “prefer giving individuals the incentives they need to start their own businesses as opposed to allowing the government to create new jobs directly.” A look at the role of new businesses in the economy reveals that it is not a matter of rejecting capitalism but rather of allowing more entrepreneurs into the economy.
Young businesses, as the dominant engines for job creation, will play a crucial role in the economic recovery. Kauffman Foundation research shows that in the last seven recessions it has been entrepreneurs who essentially restarted the economy. For example, more than half of the 2009 Fortune 500 companies started in a recession or bear market. Similarly, nearly half of the firms on the 2008 Inc. list of America’s fastest-growing companies were launched during a recession or bear market.
Careful design of entrepreneurial incentives is important to boost entrepreneurialism. The focus of economic recovery is too often tilted toward size (usually large companies or small businesses broadly), overlooking new and young firms when the ultimate source of jobs is the vibrant entrepreneurial churn (see Wall Street Journal article “New Business, Not Small Business, Is What Creates Jobs”). After all, it is firms younger than five years old that account for all net job creation from 1980 to 2005.
Entrepreneurial capitalism is not about disregarding large firms. As Carl Schramm and Bob Litan argued in Good Capitalism, Bad Capitalism, there is symbiotic relationship between well-established firms and young ones. They conclude that the best form of capitalism is one where entrepreneurs come up with the “next big things” and large, established businesses refine the new products, services, or methods of production to the point where they could be sold in the marketplace at prices such that large numbers of people or firms could buy them.
Yet when it comes to economic recovery, it is the younger firms that are a proven source of jobs and economic growth. Policymakers should therefore focus efforts on building an economy that is friendlier to entrepreneurial risk-taking. Today, it is the incentives for entrepreneurs that should matter the most to policymakers, rather than the survival of any specific firm or sector.
So, if we really care about new job creation and economic growth, our governments need to make a new year’s resolution to check that any new laws or regulations first do no harm to those potential new businesses that fuel innovation and build economies. Happy New Year!
Jonathan Ortmans is president of the Public Forum Institute, a non-partisan organization dedicated to fostering dialogue on important policy issues. In this capacity, he leads the Policy Dialogue on Entrepreneurship, focused on public policies to promote entrepreneurship in the U.S. and around the world. In addition, he serves as a senior fellow at the Kauffman Foundation.