July 29, 2006

Entrepreneurship in America and Beyond

A few months ago, Internet entrepreneur and essayist Paul Graham published an essay entitled Why Startups Condense in America. He adduces ten reasons why America is so entrepreneurial (or, more specifically for his purposes, why America has Silicon Valley):

  1. It allows immigration
  2. It is rich
  3. It is not a police state
  4. Its universities are better
  5. It has less restrictive labor laws
  6. Work is not strictly identified with having a job
  7. It has fewer regulations
  8. It has a large domestic market
  9. It has venture capital funding
  10. Americans change careers more often

Graham argues that these factors lead to more examples of successful entrepreneurship in America (or in certain parts of America) and that attitude or "culture" doesn't have much to do it. (Inexplicably, he also associates startup-friendly environments with places that have lots of public transportation, which doesn't seem to have especially helped, say, Prague or Brussels.) And he says it doesn't hurt to have low (or no) taxes on capital gains.

How realistic is it that another will beat America at encouraging startups? The prospects don't look encouraging if you're not American...

First, very few countries in the world encourage immigration -- the short list is probably America, Canada, Australia, Argentina, Brazil, and to some extent Britain. It is unlikely that, say, China, Korea, Japan, Mexico, or Germany will suddenly welcome people from all over the world. It is even less likely that such countries will not only allow immigration but become a destination for immigrants in the way that the Anglosphere seedling countries (especially America) are.

Second, one reason America has traditionally been entrepreneurial is that labor costs have been much higher in America than they were in Europe or other parts of the world (i.e., America has been rich for a long time). This has driven the need to innovate in order to save costs. There is little incentive to save human labor in, say, India or China, since the costs are so low there.

Places like China don't come out so well on the "not a police state" score. Even democracies such as France, Spain, Germany, and Latin America have a long history of state regulation, centralized decision making, inflexible labor markets, and economic ossification (even corruption, in the case of China, India, and Latin America). It is extremely difficult to overcome that kind of history, especially since it's much easier for a would-be entrepreneur to leave for America or Canada or Australia than it is to reform one's home country.

Graham seems to think that the problem of creating a large domestic market will be overcome in Europe through the efforts of the European Union (and that national languages such as French and German will die out in favor of English), but those who have absorbed the point that there is no such thing as Europe know that this is more fantasy than reality. India and China perhaps have a better chance of creating large domestic markets, but they are still so poor that this will take many, many decades (if it ever happens).

Finally, I think Graham underestimates the importance of cultural attitudes. Why does America have a more flexible labor market, fewer regulations, and a more competitive educational market? Why do Americans have a greater propensity to welcome immigrants, invest time and money in risky ventures, devalue status in favor of accomplishments, and change careers or pick up stakes in pursuit of new opportunities? These phenomena do not exist in a vacuum and are expressions of the American culture of freedom, opportunity, flexibility, openness, rebelliousness, novelty, optimism, hard work, pragmatism, and all the rest. American attitudes provide a cultural medium for the organic growth of new organizations in many fields -- not just high tech companies (consider American entrepreneurship in, say, retailing and logistics) and not even just companies (consider American entrepeneurship in religion, philanthropy, education, and even government -- we have 50 state governments, over 3,000 county governments, countless town and city governments, and an ever-increasing number of special-purpose entities that cross jurisdictional boundaries). In a way, the first American settlers were entrepreneurs, and most subsequent immigrants were attracted by the entrepreneurial opportunities of the New World. Americans have thus by and large self-selected for entrepreneurship. It's difficult to see how any other nation could come close to building that kind of culture (especially nations outside the Anglosphere). Not that they shouldn't try -- but it would be unrealistic to expect strongly positive results anytime soon.

(Cross-posted at one small voice.)

Posted by Peter Saint-Andre at July 29, 2006 11:18 PM

It's also valid that in America failure and even bankrupcy is seen as just part of trhe risk...and not a reason for personal or family shame. In some cultures like Japan or Germany, the social shame of a business bankruptcy generates social-pressures towards suicide rather than face social stigma of "failure".

Here, you dust yourself-off and start again. It's not that unusual for a succesful business-owner to have one or two failed attempts in his past; and it's viewed as a sign of perseverance, not as "weakness of character".

Posted by: Ted B. (Charging Rhino) at July 31, 2006 09:52 AM

I learned in Econ 101 that where labor is scarce and expensive, businesses have an incentive to invest in labor-saving technology—which often results in higher productivity growth by enabling fewer workers to produce more. Didn’t the industrial revolution begin in countries where workers were relatively few, rather than in societies where people were cheaper than machines? Why does the United States now lag behind Japan and Australia in the advancement of mechanical harvesting (think viniculture)? Why does the US building industry remain notoriously inefficient?

Posted by: Greg B. at August 1, 2006 08:57 AM

Tim: You make a good point about risk-aversion and social stigmas on failure. Such attitudes and behaviors are deep-seated and not easily changed.

Greg: The relative advancement of mechanical harvesting in various countries is not an area in which I have knowledge. However, it's news to me that the U.S. building industry is notoriously inefficient -- do you have comparative statistics on that? Former McKinsey director William Lewis argued just the opposite in his book "The Power of Productivity" -- see James McCormick's review from a few months ago on this very site at http://anglosphere.com/weblog/archives/000268.html

Posted by: Peter Saint-Andre at August 1, 2006 10:50 AM

+Mecahnical harvseting in viniculture? I don't understand the refernece in connection with Japan, ahich has no wine industry, but I can certainly see why you might insist on hand harvesting of grapes if you had any hope of getting any level of quality. But America has had plenty of experience with mechanical harvesting. I remember inedible, horrible tomatoes on the market whose only possible good point was that a machine could pick them within mashing them.

OTOH, come to think of it, one of our on-going agonies just now is cheap immigrant labor in agriculture

Posted by: Jim at August 1, 2006 12:40 PM

Sorry, the larger question was lost in my too casual reference to the wine and housing industries. My general point is that where labor is scarce and expensive, businesses have an incentive to invest in labor-saving technology. Graham's pro-migration argument is too general: migrants with particular skill sets helped build Silicon Valley, not immigration in general.

BTW, acquiring "any level of quality" in grape harvesting is not dependant on hand picking. The Australians more than hold their own using machines: http://www.iwsc.net/resultsWine.cfm

Posted by: Greg B. at August 1, 2006 04:33 PM

Glad to hear that the Australians have cracked the code n machine picking of grapes. We all benefit from that!

Posted by: Jim at August 2, 2006 04:18 PM

"most subsequent immigrants were attracted by the entrepreneurial opportunities of the New World. Americans have thus by and large self-selected for entrepreneurship"
I suppose you're intentionally excluding Black Americans, who didn't exactly self-select. But do you not realise how many white immigrants were pushed rather than pulled?
Transported convicts and paupers from Britain in the colonial period (mainly to the southern colonies; see eg Moll Fanders).
Paupers and orphans sent from Europe on one-way tickets.
The Famine Irish - selected for emigration by British rule in Ireland.
Most of the voluntary immigrants c1900 were motivated by the misery of the lower classes in southern and eastern Europe, or driven out by pogroms etc. Even when there was more choice, the emigrant was often chosen by the family as one who wouldn't be missed. For the majority of immigrants the "American Dream" was of not starving to death, or of making a living wage as an unskilled labourer.

Posted by: John of London at August 3, 2006 09:36 AM

John is right about all those groups he discusses, and more to the point, people descended from those groups are as entrepreneurial in the US as any others.

Even most migrants form Central America or Mexico are not exactly entrepreneurial, but they are ambitious enough to leave their misery for some kind of better life, entrepreneurial or not. That may be enough ambitiousness to make them entreprenurial after a generation or two.

Posted by: Jim at August 4, 2006 03:05 PM

Some historical perspective would help.

My impression is that entrepreneurialism was in decline in America from, say, the stock market crash of 1929 to roughly the late 1970s. This was an era of growth of huge organizations. Then there was a sharp turn-around in attitudes, and start-ups became highly fashionable in the 1980s and 1990s, before fading slightly in this decade.

Some of this had to do with changes in government policy, such as the capital gains tax cuts of 1978. My vague theory is that the tax cuts of 1978-1983 were important both for increasing incentives and for, more generally, signaling that the government had shifted from being suspicious of businessmen in the 1970s to being supportive in the 1980s. This boosted what Keynes would call the "animal spirits" of businessmen. (This was analogous to the effect of Deng's contemporary statement in China: "To get rich is glorious.")

Another cultural shift that encouraged entrepreneurialism was the 1960s hippie revolt against the "organization man." This began to have economic consequences in the late 1970s with the rise of long-haired entrepreneurs like Jobs and Wozniak of Apple.

Elite immigration played a helpful role in the entrepreneurial boom But the vast growth of unskilled labor didn't do much for the economy. For years I've been looking for examples of any of California's 12 million Mexican-Americans playing a significant role in California's Silicon Valley, and I've finally found one -- the new ceo of #2 chipmaker AMD. But he's close to being the exception that proves the rule. Similarly, Mexican-Americans play almost no role whatsoever in California's other main entrepreneurial industry, Hollywood.

Medium skilled immigrants have taken over a lot of small businesses, but the overall effects on the economy are limited. They don't create a lot of jobs for other Americans because their clannishness encourages them to mostly hire relatives and fellow countrymen.

Posted by: Steve Sailer at August 5, 2006 02:48 AM

America entrepreneurship is easy because the goverment encourages it, and risk taking of indiviuals in America is a great thing. On the question of Immigration? We need more workers in a lot of low skilled industries because a lot of people want the desk job, or the blue collar jobs that pull over 50k a year.

Posted by: gizzy at August 6, 2006 01:12 AM