In his piece, That Which is Seen and That Which Is Not Seen, Frederic Bastiat introduces us to the broken window fallacy.
Here’s the simple version of the story. A shopkeeper has his window broken. From one perspective this appears to be good for the economy; without the broken window, the window maker can’t do business. Bastiat refers to this as that which is seen. What is not seen, however, are all of the goods and services the shop owner cannot purchase because of the cost of the broken window.
For Bastiat the moral is that destruction does not create prosperity because the real costs are not seen.
While we can see recent entrepreneurial success stories all over pop culture, there is another story that is not seen.
Using just about any metric, we find a falling rate of entrepreneurship. What is not seen are the innovations that were never created by a generation of entrepreneurs that do not exist.
There are lots of possible factors that have contributed to the falling rate of entrepreneurship. Three potential contributing factors in particular come to mind:
I’ll spend a lot of time in future posts discussing more about these potential causes and others, but today I want to focus on two consequences of the lower rates we’ve seen:
1. Missing generation of firms that were not created
Compared to historical rates, we have a whole group of firms that doesn’t exist. In his paper on this topic, Michael Siemer refers to this as the missing generation of firms.
Perhaps the missing generation of entrepreneurs is being replaced by a new type of would-be employment model. Those who go down the early paths of starting a business, but stop because of internal (personal finances, time, family, personal life, etc.) or external (bureaucracy, funding, industry barriers, etc.) factors.
We know that most employees are not engaged with their jobs. How many of them are dreaming of being entrepreneurs? How many of them actually go beyond that and try to make it happen? How far do they get when they give up? What is it about the current economy that is making it so that fewer and fewer businesses are actually being created each year?
2. The struggles of firms that did start during the recession
If the number of new firms is decreasing, the hope would be that we are merely missing out on firms on the margin that would have provided the least value.
However, Sedlacek and Sterk find that even the firms that were created during the Great Recession haven’t grown as robustly as firms born during better economic times.
We have fewer new firms taking risks and trying out new products, services and business models. Plus, the young firms born during the recession are struggling by historical standards.
Altogether, we’re missing out on a lot of innovation and discovery that never took place because these new firms were never created. And, we’ll never know exactly what we’re missing out on because we can’t see innovation that does not exist.
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Derek Ozkal is a program officer in Research and Policy for the Ewing Marion Kauffman Foundation, where he assists with writing and analysis of various Research & Policy initiatives and administers grants, which includes managing and overseeing assigned grant portfolios, monitoring grantee performance, and reviewing grant proposals.
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