Arnold Kling  

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Reflections on Rod Long's "Lib... The Bizarro Blitzer Interview...

Tyler Cowen quotes from a paper by Erik Hurst and Benjamin Wild Pugsley:

most small businesses have little desire to grow big or to innovate in any observable way. We show that such behavior is consistent with the industry characteristics of the majority of small businesses, which are concentrated among skilled craftsmen, lawyers, real estate agents, doctors, small shopkeepers, and restaurateurs. Lastly, we show non pecuniary benefits (being one's own boss, having flexibility of hours, etc.) play a first-order role in the business formation decision.

In my very first video for my econ class, I describe this phenomenon. I distinguish three types of entrepreneurs: the lifestyle entrepreneur, who wants the non-pecuniary benefits; the strip-mall entrepreneur, who wants to build wealth but does not seek to innovate; and the rock-star entrepreneur, who does want to innovate.

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CATEGORIES: Business Economics

COMMENTS (7 to date)
David N. Welton writes:

Interesting, but a bit slow paced. Perhaps using something like PowerPoint would let you get something up on the screen quicker and perhaps a bit more legibly?

Or maybe I should just stick to reading things, where I can go at my own pace.

Becky Hargrove writes:

I experienced the same reaction recently upon reading Good Capitalism, Bad Capitalism which I purchased because William Baumol was a co-author...only an entire textlike version of the argument. Whatever happened to Baumol's argument about inefficiencies of the service economy in terms of growth?

However there is an important reason this territory is being revisited, if not yet looked at with new eyes: the need to recreate growth. Any real growth of the future is going to have to be generated by individuals in ways that utilize different efficiencies of scale in some instances. True, doesn't quite make sense in monetary terms but that is an argument for another day.

Bob Knaus writes:

Dog bites man indeed, except the authors think their findings should have policy consequences... which are not small business friendly. How did that work for the country whose leader ridiculed England as "a nation of shopkeepers"?

Jonathan Bechtel writes:

I'd make a point similar to yours, except I'd say the distinction he doesn't make is the difference between self-employed people and business owners.

The biggest similarities between the two are the ways they file their taxes, but their roles in the economy are very different.

infopratical writes:

This is all true, but it can be misleading. The majority of small businesses have zero employees. Most of the rest have just one. And in some sense, the non-pecuniary benefits can be likened to unionization. But instead of unionizing, many (for instance) CPAs just handle their own practices. Problems arise when the large CPA firms push policies that favor them over individual practicing CPAs, and these are regulations that hurt small businesses, regardless of whether or not they are the innovative type.

Medical device companies face great challenges from constantly evolving regulations, though they are the competitive arms of other more innovative companies, even if they are distinct entities.

The boundaries between these types of businesses gets blurry very quickly. And it's not clear if we should "count" [much of anything] on a per business basis when talking about small businesses.

Hugh writes:

Necessity is the Mother of Invention and small businesses may need to innovate to survive.

When we think of innovation we typically think of technology, but these small firms could also innovate in marketing, organisation and pricing. As long as these innovations result in added value to customers they are to be welcomed.

kyle8 writes:

It is an interesting discussion and my guess is that most business people move back and forth among those three archetypes as age, financial outlook, and other factors change.

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