06.30.2009 0

The Barstool Economist: The Unseen Losses of Entrepreneurship

  • On: 07/22/2009 09:45:50
  • In: Economy
  • The Unseen Losses of Entrepreneurship

    By Justin Williams

    Benjamin Franklin, Henry Ford, Thomas Edison are but a few of the countless luminaries in American history who have captured the imagination of school children for their innovative spirit as private sector entrepreneurs. Their contributions, along with millions of unsung entrepreneurs, have made America the leader in almost every economic indicator since it’s conception.

    Entrepreneurship, simply put, is the process of finding new ways of combining resources, which in turn drives every economy around the world. It doesn’t matter whether it’s Apple inventing the new iPod or Nigerians using motorcycle taxis to avoid the massive potholes that make regular taxis otherwise useless, entrepreneurship is the key to advancements.

    Even more simply, entrepreneurship is the innovative human mind at work, so that where there is a demand, there will almost always be a supply.

    But, the sad fact is, entrepreneurship is not possible when politicians and lobbyists corrupt the free market system. For example, companies – like General Motors – often invest a large amount of resources in keeping a strong lobby in Washington, so that in case of a possible business failure – like right now – they can secure political favors to stay alive.

    And in keeping themselves alive, they kill off the entrepreneurial spirit of those who would otherwise have risen from their ashes.

    These political favors are usually in the form of internal and external barriers to help prevent competition — and, of course that now includes taxpayer bailouts in extreme circumstances.
    Internal barriers usually involve regulations or licensing, while external barriers are in the form of trade quotas or tariffs. Political institutions that erect such barriers prop up corpses and abort innovation.

    Lobbying, in a pure market sense, is a complete waste of resources. These resources could better be used to create a new product or cure a disease. Instead, businesses allocate funds to prevent unfriendly regulations, pass friendly regulations, and — if the politician is corruptible – restrict competition.

    This in turn, causes substantial losses in entrepreneurial activity, as these barriers raise the costs upon current entrepreneurs and, in many cases, prevent new competitors from entering the market altogether.

    It is hard for the average person to see this without studying Congress and the nefarious effect of the various regulations that pass. But even if a motivated citizen did ferret out the damage done to existing businesses, it would be impossible to see all of the inventions and businesses that were never created.

    Economists Steven Kreft and Russell Sobel have found a direct correlation between economic growth and entrepreneurial activities. In a later paper, Sobel with two other co-authors, find that limited government political institutions spur more entrepreneurial activity.

    Simply put: Lobbying slows economic growth by enticing political institutions to restrict – or in the extreme — destroy competition.

    As government grows, more lobbyists come to Washington, This, in turn results in more government regulation and greater growth loss. And Washington, unfortunately, has not seen a shortage of lobbyists of late.

    For example, in the first two graphs above, OpenSecrets.org reports that from 1998 to 2008, the number of lobbyists increased by over 4,000 and spending on lobbying grew from $1.44 billion to $3.27 billion. That is a 127 percent increase in money flowing from special interests to politicians.

    Not so coincidentally, the third graph indicates that the number of pages in the Federal Register has steadily risen (with the exception of the Reagan Administration) concomitantly with the increase in the number of lobbyists. The Federal Register is a list of all regulations and red tape that businesses have to deal with, making it harder and harder for them to succeed.

    Big government goes hand-in-hand with more lobbying, which in turn, goes club-in-fist with more restrictive regulations. And that in turn assures the evanescence of America’s future Franklins, Fords, and Edisons.

    Justin Williams is the Senior Commentary Editor of ALG News Bureau. He always welcomes questions and comments about the Barstool Economist at [email protected]

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