Entrepreneurship & ideology

Tyler Cowen interprets this paper (pdf) as demonstrating that "entrepreneurship is predicted by family characteristics, most of all having other entrepreneurs in the family and coming from a large family."
However, what stands out for me is this:

In the entrepreneur sample 54% of fathers and 27% of mothers were directors or senior managers compared respectively to 18% and 3% for non-entreprenuers. Entrepreneurs come more often from wealthier families than non-entrepreneurs.

In other words, what makes an entrepreneur is access to capital - the sort of access that comes from having a wealthy background. This is consistent with two other papers. David Blanchflower suggests here that lack of access to credit explains  African-Americans low rate of entrepreneurship, whilst he and Andrew Oswald say here (pdf) that: 

The probability of self-employment depends markedly upon whether the individual ever received an inheritance or gift.

Now, why do I stress this whilst Tyler picks out "family characteristics"? The difference between us, I suspect, reflects a widespread difference between supporters and critics of capitalism. Whereas supporters of capitalism look for personality-based explanations of differences in people's behaviour, critics look instead for more impersonal, structural factors - though of course these influence (determine?) personality.   
And funnily enough, we can both easily find what we're looking for.

Comments

[reason]

Well it is obvious, risk aversion is the key. People from rich backgrounds can start a business knowing that daddy will bail them out if it doesn't work.

[Tim Worstall]

"The probability of self-employment depends markedly upon whether the individual ever received an inheritance or gift."

Just another reason to abolish inheritance tax then.

[Paulie]

"Just another reason to abolish inheritance tax then."

Yes - that will make the problem even narrower and deeper.

But if you want to highlight the reason that Co-ops are such a tiny part of the economy, you have it there in a nutshell: Access to capital.

Co-ops can't access capital very easily. If at all.

It also points to the solution: If the state - when privatising parts of it's function - were to offer credit to the employees (that banks won't offer) they will probably find that the function gets privatised to people who can do it and give a toss about how the work should be done, and know how to do it.

Result: More co-ops, better public services, smaller state sector, and happy lefties.

Win win win win.

[Tim Worstall]

"happy lefties."

Doesn't look like a win to me.

[Luis Enrique]

I was going to write that even controlling for access to capital, the offspring of directors etc. may be more inclined to be entrepreneurs because they've picked up an expectation that they ought to be able to succeed in business, or however you'd put it. But then I remembered all the layabouts with rich parents.

A fine example of a supporter of capitalism emphasizing personality-based (or rather, cultural) based explanations is to be found in the recent work of Ed Phelps on culture and dynamism. If you allowed html comments, I might provide some links!

Mind you, I don't think access to capital is the whole story, because there are plenty of examples of people failing to adopt new production processes etc. even when access to capital per se is not the problem. See numerous field experiments in agriculture.

Tim, I do not see why your response to the finding that access to capital constrains entrepreneurial behavior is to suggest that we ought to increase the extent to which access to capital runs in families. When it comes to inheritance give me Buffett and Carnegie over Worstall any day.

[ad]

I could run the argument the other way: if access to capital constrains entrepreneurial behaviour then removing a source of capital will further constrain entrepreneurial behaviour, limiting it to those with rich parents, instead of merely wealthy ones.

"Whereas supporters of capitalism look for personality-based explanations of differences in people's behaviour, critics look instead for more impersonal, structural factors"

Personally I think that people are simply looking for explanations that seem to confirm their existing beliefs about capitalism.

[BGC]

Within-country and between-country differences may have different explanations.

But differences in IQ and personality type between individuals and between groups may be a significant factor (obviously not the whole explanation), since they would have both national and within-country effects.

This is one of those debates that may be effectively settled within the next few years, if/ when it is discovered how different human behaviours are associated with different genes.

[Tim Worstall]

"When it comes to inheritance give me Buffett"

I too would like to leave $7 billion to my children in a family trust. He isn't putting it all into the Gates Foundation you know....

[P]

Didn't read the papers, but what do they define as "entrepreneur"? I would argue that many old-fashioned trades (plumbing, building, carpentry, electrical, etc.) are full of self-employed entrepreneurs. Some aren't more than single practitioner, but then size or success shouldn't get in the way of that. And few of them have any kind of wealth behind them - otherwise they wouldn't have been a plumber in the first place, probably.

Or are the entrepreneurs writing the papers just looking for people that look like they do?