Chutes and Ladders: the Relationship between Entrepreneurship and Inequality

Over the past 80 years, more Americans have voiced concerns about the role of government in redistribution. This can be a reaction to widening inequality in the United States. President Obama has called income inequality “the defining challenge of our time.” Sixty-three percent of Americans think the distribution of wealth and money is unfair. Movements such as Occupy Wall Street arose from the embers of frustration and dissatisfaction caused by the income and wealth inequality debate.  

This debate has done more than raised concerns of unfairness and unrest. Economic research from the International Monetary Fund posits that relative growth in the incomes of the highest quintile hinders growth, while relative growth in the incomes of the lowest quintile facilitates it. Persistent wealth disparities between races are a significant factor in people of color’s capital disadvantage when it comes to starting businesses. Not only is inequality a factor on the individual level, but cities, states and regions are seeing the very top of the distribution become more productive, more creative, and more prosperous than the majority of the rest. 

Income inequality is not comprehensively bad. Moderate levels of inequality provide incentive for individuals to strive for more, to go beyond ordinary effort to seize extraordinary gains. But economic inequality and the inability of economic actors to develop the kind of epoch-defining technological leaps are bound together, and economic inequality has been a drag on growth and productivity already. 

So what is the role for entrepreneurship to play to combat the negative effects of rising income inequality?  

Entrepreneurship is Open to Everyone

One of the ways the inequality gap has widened is through a concentration of wealth among a small subset of the population. No matter how you look at it, whether it’s through income quintiles or the top 1%, gains have been made by those at the top and a greater percentage of overall wealth is now in their hands than was the case in the immediate post-World War II period. This concentration perpetuates itself, as individuals and families who start out with less wealth to build on often fail to climb the economic ladder.

This is why entrepreneurship can be so powerful a force that breaks through these constructions that concentrate wealth. One of the fundamental characteristics of entrepreneurship is a sense of egalitarianism. In an ideal world, anyone can and does have the ability to strike out on their own and start a business. It doesn’t require a degree, nor a minimum number of hours to become an entrepreneur. Entrepreneurship is supposed to be open, a career where anyone can be successful and financial success is based upon the value the business generates. 

Entrepreneurship Provides Rungs for Economic Mobility and Security

Beyond the access issue, entrepreneurship can be a force for reducing inequality through job creation. New firms are the predominant net job creators, and those jobs provide opportunities locally for individuals to find careers and provide for their families. When labor force participation rates continue to be stuck below pre-Recession averages, an increase in startups and the good jobs they provide could bring more of those reluctant workers back into the labor force. 

Entrepreneurship and Reduced Inequality is a Balancing Act

Now, entrepreneurship is not some unambiguous salve to the pains increased inequality has caused. In fact, entrepreneurship has to in some ways, increase inequality. One of the reason entrepreneurship is something that appeals to people, at its essence, is the desire to achieve something great on your own. The Silicon Valley stories-come-Hollywood material of Jobs, Zuckerberg, Page and Brin, and others capture that feeling of summiting the mountain and realizing dreams of wealth and power. Along with the dizzying highs that wildly successful entrepreneurship brings are the many many more who don’t ever reach success or avoid failure. Dan Isenberg of Babson University neatly describes how entrepreneurship and inequality are inextricably bound:  

“Inequality, in the broadest sense, is precisely, and perhaps paradoxically, what entrepreneurship is all about: entrepreneurs use their wit and grit to burst into new markets and generate extraordinary wealth, sometimes very quickly, more often over decades. Along the way, entrepreneurship rewards smart and risk-tolerant investors (who helped build the success) with wildly above-market (read: unequal) financial returns.”

A More Level Playing Field

This is one of the reasons many of ideas and issues for entrepreneurship policy the Foundation holds dear are about increasing access to entrepreneurship for those who want to take the plunge. The expansion of occupational licensing and non-compete agreements legally erect hurdles to new business formation, concentrates incumbent advantage, and discourages potential entrepreneurs from even trying. Overly broad patent policy dissuades the important welfare-improving follow-on innovation. Restrictive and stale zoning policy enforces a rule-making process by the few that discourages creative new uses of civic space. Along with those that develop a talented and dynamic population, policies that melt away sclerotic legal, economic, and social constructions create an environment where the greatest potential is possible, and in a way that provides opportunities beyond just the original entrepreneur. 

Entrepreneurship as a Force for Good

Entrepreneurship is a powerful phenomenon that provides individuals an avenue to move up the income and wealth ladders, far beyond where traditional employment could take them. But we still need to learn more about how to better make entrepreneurship both an inclusive and powerful force for economic growth. If you know of existing research that explores deeper the relationship between entrepreneurship and inequality (or want to suggest an idea), let me know. Talk to me on Twitter at @chrisjack_son.

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