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Several of you have sent me the June 20, 2011 cover article from Time magazine on what they consider to bel the five myths about the economy.Skip to next paragraph
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The part of this article most relevant to all of us is this one:
Myth No. 5: Entrepreneurs are the foundation of the economy
Entrepreneurship is still one of America's great strengths, right? Wrong. Rates of new-business creation have been contracting since the 1980s. Funny enough, that's just when the financial sector began to get a lot bigger. The two trends are not disconnected. A study by the Kauffman Foundation found an inverse correlation between the two. The explanation could be tied to the fact that the financial sector has sucked up so much talent that might have otherwise done something useful in Silicon Valley or in other entrepreneurial hubs. The credit crunch has exacerbated the problem. Lending is still constrained, and the old methods of self-funding a business -- maxing out credit cards or taking a home-equity loan -- are no longer as viable.
Let's dissect this paragraph to see what is really going on.
We need to start with the first line -- "Rates of new-business creation have been contracting since the 1980s". I contacted a few people I know who follow such statistics. It seems that there is some truth in the statistics they cite. A couple of long-term studies do show decline in net start-up rates. But the data does not suggest a steady long-term decline as the article in Time suggests. Rates have been in turmoil over this time period, with two periods of significant decline -- one around 2000 when the dot.com bubble created an inflated number of start-ups which was followed by the dot.com bust -- and another decline in start-ups began when the current recession began.
So whose fault is this decline? The evil financial sector's, if believe Time's interpretation. "The explanation could be tied to the fact that the financial sector has sucked up so much talent that might have otherwise done something useful in Silicon Valley or in other entrepreneurial hubs."
However, before we go blaming those evil doers on Wall Street let's remember one thing -- correlation is not causation. The financial sector was riding high -- due to some serious rent seeking behavior on their part I might add. So they had money to spend for talent. But assuming that this is the same talent who would start businesses and create jobs is a bit of a stretch. Having taught in business schools on and off for about thirty years I can tell you that those students who have aptitude for the financial world are very different than those who tend to be drawn into entrepreneurship. It is not the one for one career choice substitution the article suggests.
There is another part of this quote that is even more annoying. It is clear that Time is buying into a myth of their own. The have bought the Scott Shane Myth that the only entrepreneurs who matter are those pursuing high growth, high potential ventures. Thought we had killed that myth off a while ago... . Guess some myths are hard to dispel.
And, oh yes, while we are blaming the financial sector for all that is wrong with the economy, let's not only accuse them of starving babies and elderly, but of starving entrepreneurs of the credit they need. "Lending is still constrained, and the old methods of self-funding a business -- maxing out credit cards or taking a home-equity loan -- are no longer as viable."