Why celebrate entrepreneurship?

Luke Johnson celebrates entrepreneurial culture:

My sense is that the present cohort of graduates and twentysomethings is far braver than I was. The entrepreneurial culture has never been more lively, and I am confident that in the coming years there will be hundreds of brilliant new enterprises led by this generation of risk-takers, who opt to control their own destiny.

This runs into Rick's objection, that self-employment is nothing to celebrate, as it is a symptom of economic failure.

So, who's right - Rick or Luke? Four things make me side with Rick:

- Entrepreneurs are often jacks-of-all-trades. An entrepreneurial society thus doesn't make best use of the division of labour.

- Self-employment, especially now, is a form of under-employment; people sitting around waiting for the phone to ring.

- Micro-businesses suffer from financing constraints to a greater extent than large firms do. This can prevent them reaching optimal size.

- Many of the self-employed actually want to be relatively unproductive. They see self-employment as a better way of combining work with their commitments to children or the golf course.

There are good reasons, then, why economies of entrepreneurs are often low-productivity ones. Small businesses are very often not tomorrow's giants or job creators, but rather just mediocre plodders - if they survive at all. 

So, is anything to be said for Luke's view? Two things:

1.Entrepreneurship is a way of escaping the "pinheaded weasels" - middle managers who stifle creativity and job satisfaction and who divert energy away from production and towards rent-seeking and productivity. Granted, good middle-managers are valuable (pdf), not least because they can channel corporate bullshit into useful work. But good managers are not necessarily the majority (pdf).

2.It could be that the costs of organizing production through market contracting has fallen relative to the costs of organizing internally. To this extent, it makes sense for the numbers of freelancers and subcontractors to rise relative to the numbers of employed. Now, this varies from business to business so generalizations are tricky. But one factor here is the decline of mass production. When firms needed routine workers to ensure that assembly lines kept running, it made sense to employ them directly and order them about; there's a reason why assembly line workers were rarely freelancers. But if firms now comprise bundles of discrete projects, market contracting - the hiring of specialists for occasional work - makes sense. This is especially true if their output can be easily measured, thus avoiding haggles over whether contracts have been fulfilled.

Sadly, though, it's not clear to me whether the drive towards subcontracting and freelancing, where it exists, is driven by pure Coasean (pdf) reasoning, or whether it is instead motivated by a desire to shift risk from firms to workers and suppliers.

However, the justification for entrepreneurial culture might not lie in narrow economics, but in other things. For example, the self-employed tend to be happier. And a society of independent(ish) entrepreneurs rather than corporate drones will be one of different values. As someone said, "The mode of production of material life conditions the general process of social, political and intellectual life."

Comments

[Tim Worstall]

"It could be that the costs of organizing production through market contracting has fallen relative to the costs of organizing internally. "

I think that argument could be made, at least in part. Telecoms now cost, essentially, nothing, something that certainly wasn't true 30-40 years ago.

[Anonymous]

Oh if only life were black and white!

Sometimes the reasons cited by Rick are right, other times Luke is correct. It all depends on the individual and their circumstances.

From a corporate point of view, the decision to employ or to contract (hierarchy v market) is a variant of the "make or buy" decision.

If the market option is selected then (non-trivial) search costs may be incurred. Transaction costs in the form of contract specification, monitoring and invoice processing will also be incurred.

I suspect Rick, who is in HR, would prefer the hierarchy option. His status, power and salary depend on the existence of a large and employed workforce. HR managers are diminished in firms which adopt the market option. It is not in Rick's interests to favour the latter so I would expect him to favour hierarchies over markets.

[Hayek was right]

Self-employment and entrepreneurship are not the same. The latter is unlikely to happen without a spell, perhaps only briefly, of the former, but the majority lack the latter but seek the former as the end result.

[FromArseToElbow]

Re Tim's point, the major technological change of the last 40 years has been containerisation, which facilitates offshoring rather than onshore sub-contracting. The growth in developed economy entrepreneurs (whether self-employed contractors or micro-businesses) is negligible compared to the growth of developing economy industrial labour.

The current orthodoxy of buy over build rests on the corporate management fashion for "core competency" and lean production, which came to the fore in the 70s/80s. Both are dependent primarily on supply chain and process efficiencies rather than a thriving ecosystem of Internet startups.

[Neil]

The main guiding impulse of any sensible small-to-medium enterprise is to tart itself up sufficiently that it'll they can be bought by one of the big players as soon as possible. It's called your exit strategy and it's first thing you write.

The ones that don't do that mainly spend their time down the bank, begging for a bridging loan so they can meet the payroll.

Either way: So much for "control their own destiny".

[Jackart]

My father, having run an SME bashing metal in the East Midlands once advised me to find a business with no customers, stock or employees. Wise words.

I am self-employed. I have agency. The right to tell corporate drones to fuck off, or remind the compliance department who pays the fucking bills, is worth any loss of earnings.

I am therefore happier.

And I am not sure I am earning less, as I capture more of my productivity.

[Luis Enrique]

Entrepreneurs are a subset of the self employed, very different from freelancers and such like. It doesnt make sense to conlate the two. Plus I think he's talking about people trying to found large companies, not sole traders. He talks of hundreds of new enterprises, not tens of thousands, which suggests to me larger firms.

[chris]

@ Luis etc - I don't think the distinction between entrepreneurs and the self-employed is as sharp as you might think:
1. V. few tiny firms/one-man businesses actually do become large ones.
2. The skills of the self-employed - spotting the best markets for their skills, bearing risk etc - are the skills of entrepreneurs.
3. It is possible that an entrepreneur can raise enough capital to start up a big firm, but this isn't likely for the new graduates Luke is talking about. These will often be one-man firms, at least initially.
4. A big source of demand for new firms and for self-employed freelancers is the same - firms' desires to outsource.

[Cityunslicker]

You just can't ignore the dominance of the service economy in all of this and the move to technology and away from manufacturing.

This will go hand in hand with the points made above by all to a bias towards buy rather than make and also to small services co's rather than big production lines.

But it will lead to underemployment as society is heading that way anyway with technology and robotisation reducing the need for labour to deliver increases in productivity.