Bob Litan, Ph.D.
Vice President, Ewing Marion Kauffman Foundation
The U.S. economy has enjoyed remarkable success during the past decade.
Annual productivity growth has surged to a post-World War II high of nearly 3
percent, unemployment hovers near or below 5 percent, and inflation remains
strikingly stable in the 2 to 3 percent range. Notwithstanding the terrorist
attacks of 9/11, the bursting of the dot-com bubble, concerns about the growing
competitive threat from China and India, and escalating prices for oil and other
commodities, most Americans enjoy higher wages and better lives than economists
would have predicted just a few short years ago.
What accounts for this recent good fortune? Conventional economic wisdom
credits the information-technology (IT) revolution. It is no coincidence,
however, that the IT revolution that statistically has accounted for the
significant acceleration in U.S. productivity growth over the last decade was
largely sparked by entrepreneurial companies. While large, long-established
firms dominated many industries during the post-World War II period, today new
firms are playing a more vital role in energizing the economy. The relatively
flat management structures of many of these entrepreneurial firms allow them to
change direction rapidly in response to market demands and to develop the
radical innovations that lead to faster economic growth overall. In short, there
is a growing body of evidence that innovation-driven productivity growth has
been made possible by a deep change in the structure of the American economy
itself—a decades-long transition from what we term the era of managerial
capitalism to today's era of entrepreneurial capitalism.
This new, entrepreneurial economy is one that provides fertile ground both
for "innovative" entrepreneurs and for "replicative" entrepreneurs. The former
comprise the relatively few but vital pioneers who introduce and develop markets
for cutting edge innovations, such as the automobile, the airplane, the air
conditioner, and the personal computer. Replicative entrepreneurs, by contrast,
are the vastly greater population of entrepreneurs who start and operate
businesses similar or identical to others that already exist. Both kinds of
entrepreneurs are important. Innovative entrepreneurs generate improvements in
productivity and living standards for everyone; replicative entrepreneurs
provide needed goods and services, while reminding us that the doors of economic
opportunity are open to those who make the effort to walk through them.
While it is difficult to pinpoint the specific conditions that led to this
deep change in the American economy, it is certain that new public policies that
restructured incentives for entrepreneurship played an important role. Like all
other economic actors, entrepreneurs reorient their activities in response to
changes in the structure of payoffs. This shift to an entrepreneurial economy
was accelerated by a range of measures implemented in the United States that
lowered obstacles to innovation and increased the potential rewards of
entrepreneurship. These included:
- Removal of legal barriers to entry and price controls in a number of key
industries—in particular transportation and telecommunications;
- Successive presidential Executive Orders that required federal agencies to
study the costs and benefits of proposed regulations;
- Tax reforms that enhanced rewards for entrepreneurial activity and
employment by lowering both the capital gains tax rate and the individual
marginal rate;
- Legal changes that permitted pension funds to finance the formation and
growth of new firms by investing in venture-capital partnerships; and
- Legislation that accelerated (although not to its full potential) the
commercialization of university research.
Each of these changes altered the cost-benefit calculation for potential
entrepreneurs, making the inherently risky endeavor of starting a new business
more attractive. To build on these reforms and sustain this steady stream of
entrepreneurial innovation, the rewards for starting a business must continue to
be high enough to compensate for the risks involved. As the policy environment
in the United States changes, attention to the impact of decisions on
entrepreneurship will be critical to ongoing radical innovation and economic
growth.
At the Kauffman Foundation, we see it as our role to promote a deeper
understanding of the impact of various policy decisions on entrepreneurship. We
continue to support research from a wide range of viewpoints on policies—at both
domestic and international levels—that are most conducive to the formation and
growth of high-impact firms. The essays on the following pages by Pamela
Samuelson and Catherine Mann serve as prime examples of this work. We also see
it as our responsibility to stimulate a rich dialogue around entrepreneurship
and policy. We seek input from a variety of perspectives in order to achieve a
more robust understanding of this vital phenomenon throughout the nation.
This essay is an excerpt from the
Kauffman Thoughtbook 2007. To view a table of contents for the 2009 edition, or to order a printed copy of the publication,
please visit our 2009 Thoughtbook page 
