American kids are raised on stories about Henry Ford, Andrew Carnegie, Bill Gates and Steve Jobs. The theme of these stories is that America is a place where people can take risks and reap the rewards. But a growing body of research suggests that America may not be the entrepreneurial powerhouse many think it is.
The U.S. now ranks not first, not second, not third, but 12th among developed nations in terms of business startup activity, wrote Jim Clifton, CEO and president of polling company Gallup Inc., in a recent blog post on the state of entrepreneurship in America. Clifton is referring to an 2014 report from the Organization for Economic Cooperation and Development, which shows that when it comes to business startup rates, the United States is at the back of the pack.
So what happened?
National image not withstanding, American entrepreneurship has actually been on the decline for about 40 years, according to Lina Khan, an Open Markets Fellow with New America, a nonpartisan think tank in Washington, D.C. She uses census data to show that since 1977 the number of entrepreneurs per capita declined 53 percent in the U.S. In 1977, startups accounted for 16.5 percent of companies in the country. By 2010 they accounted for only 8.2 percent. During the same period, Khan also found a 20 percent dropoff in the number of self-employed Americans.
Despite the worrisome decline, the media didnt pay much attention because "business startups always outpaced business failures by about 100,000 per year," said Clifton. But in 2008 the scales finally tipped and the number of companies closing exceeded the number opening. While most economic analysts agree that the economy has recovered from the 2008 recession by many measures, startups are still struggling. In the past six years the net number of U.S. startups versus closures is minus 70,000, Clifton wrote.
Why is entrepreneurship on the decline?
Some experts trace the decline in entrepreneurship to slumping personal savings rates. Those rates went from about 16 percent in 1977 to about 8 percent in 2011, according to data from the United States Bureau of Economic Analysis. Its important to look at personal savings rates, according to Benjamin Ryan, a consultant with Gallup, because they track the availability of the economic resources that prospective entrepreneurs depend on to finance new businesses. Personal savings is the No. 1 source of startup capital for entrepreneurs, Ryan said, citing a 2014 Gallup poll conducted in partnership with Wells Fargo Bank.
Personal savings rates also impact business owners ability to secure bank loans or lines of credit (a source of startup funds for about 40 percent of entrepreneurs, according to Ryan). Owners with little or no personal savings are less likely to convince banks that they can take on extra loan payments or provide collateral, such as a house or other high-value assets, he said. In short: no money, no business.
Khan attributes the decline in entrepreneurship to the consolidation across almost every industry since the 1980s, especially industries that have traditionally been welcoming to individual ownership such as retail, services, farming and small manufacturing. Commerce that was once divided among tens of thousands of families like lines of grocery and general merchandise is now instead largely controlled by a single company, like Wal-Mart, she said.
Consolidation, which may result in lower prices for consumers, has a downside in that it makes it harder for new businesses in these industries to start, Khan said. It also means that we face fewer options when looking to sell our products, our ideas and our work, she said.
On the other hand, consolidation, which may be an outgrowth of a modernizing economy, may lead to innovation. For example, statistics collected by the United States Department of Agriculture show that the number of farms nationally has dropped from around 6 million in 1936 to around 2 million today. During the same period, the number of Americans living in cities has increased from around 56 percent to over 80 percent, according to the Census Bureau. A recent article by MIT researcher Wei Pan argues that urbanization leads to increased innovation and productivity. "If you think about productivity, its all about ideas, information flows, how easily you can access ideas and opportunities," Pan says.
Should we care?
Americans should be deeply concerned about declining rates of entrepreneurship, Khan said. "Owning a business has traditionally been the way people build wealth and upward mobility," she said. A business is an asset the family can pass on to the next generation. Fewer new business owners means fewer opportunities for families to build assets and less socio-economic mobility, said Khan.
Khan is also concerned about the ways economic consolidation and political consolidation dovetail. For example, Wal-Mart extracts wealth from local communities and transfers it into the hands of one family, said Khan. She worries about the implications on democracy. Fewer than 400 families are responsible for more than half of the money that has been raised in the 2016 presidential campaign, she said, citing a New York Times article from Aug. 1, 2015. Just as having a king is antithetical to democracy, concentrated economic power is also a threat.
Another way of looking at things
Not everyone agrees that entrepreneurship is actually on the decline, however. In an article for Reason Magazine, a monthly libertarian publication, staff writer Elizabeth Brown suggested perhaps entrepreneurship isnt declining, rather current measurement tools arent sophisticated enough to capture what is going on. She argues that companies like Etsy, Uber and AirBnB, put self employment within more peoples reach by allowing people to bring their marginal capital and/or labor into productive use.
Traditionally self-employed people have not been thought of as entrepreneurs for the purpose of economic reporting, but given the growing number of people making a living this way, it might be time to re-evaluate this, Brown said. Nearly 60 percent of freelancers, for example, classify themselves as entrepreneurs, according to a 2013 study. Participants said they considered themselves entrepreneurs because they had to deploy creativity, innovation and strategic thinking to make their businesses work.
Khan agrees that although more sophisticated measurement tools would provide a clearer picture of what is going on in the economy, she cautions against buying into what she considers a glorified myth about new ways of running businesses. Lots of people are forced into these jobs because traditional employment forms have broken down, she said. They are forced to cobble together a living, and while that may be ideal for some people, for many more its just the best option they have.
The U.S. now ranks not first, not second, not third, but 12th among developed nations in terms of business startup activity, wrote Jim Clifton, CEO and president of polling company Gallup Inc., in a recent blog post on the state of entrepreneurship in America. Clifton is referring to an 2014 report from the Organization for Economic Cooperation and Development, which shows that when it comes to business startup rates, the United States is at the back of the pack.
So what happened?
National image not withstanding, American entrepreneurship has actually been on the decline for about 40 years, according to Lina Khan, an Open Markets Fellow with New America, a nonpartisan think tank in Washington, D.C. She uses census data to show that since 1977 the number of entrepreneurs per capita declined 53 percent in the U.S. In 1977, startups accounted for 16.5 percent of companies in the country. By 2010 they accounted for only 8.2 percent. During the same period, Khan also found a 20 percent dropoff in the number of self-employed Americans.
Despite the worrisome decline, the media didnt pay much attention because "business startups always outpaced business failures by about 100,000 per year," said Clifton. But in 2008 the scales finally tipped and the number of companies closing exceeded the number opening. While most economic analysts agree that the economy has recovered from the 2008 recession by many measures, startups are still struggling. In the past six years the net number of U.S. startups versus closures is minus 70,000, Clifton wrote.
Why is entrepreneurship on the decline?
Some experts trace the decline in entrepreneurship to slumping personal savings rates. Those rates went from about 16 percent in 1977 to about 8 percent in 2011, according to data from the United States Bureau of Economic Analysis. Its important to look at personal savings rates, according to Benjamin Ryan, a consultant with Gallup, because they track the availability of the economic resources that prospective entrepreneurs depend on to finance new businesses. Personal savings is the No. 1 source of startup capital for entrepreneurs, Ryan said, citing a 2014 Gallup poll conducted in partnership with Wells Fargo Bank.
Personal savings rates also impact business owners ability to secure bank loans or lines of credit (a source of startup funds for about 40 percent of entrepreneurs, according to Ryan). Owners with little or no personal savings are less likely to convince banks that they can take on extra loan payments or provide collateral, such as a house or other high-value assets, he said. In short: no money, no business.
Khan attributes the decline in entrepreneurship to the consolidation across almost every industry since the 1980s, especially industries that have traditionally been welcoming to individual ownership such as retail, services, farming and small manufacturing. Commerce that was once divided among tens of thousands of families like lines of grocery and general merchandise is now instead largely controlled by a single company, like Wal-Mart, she said.
Consolidation, which may result in lower prices for consumers, has a downside in that it makes it harder for new businesses in these industries to start, Khan said. It also means that we face fewer options when looking to sell our products, our ideas and our work, she said.
On the other hand, consolidation, which may be an outgrowth of a modernizing economy, may lead to innovation. For example, statistics collected by the United States Department of Agriculture show that the number of farms nationally has dropped from around 6 million in 1936 to around 2 million today. During the same period, the number of Americans living in cities has increased from around 56 percent to over 80 percent, according to the Census Bureau. A recent article by MIT researcher Wei Pan argues that urbanization leads to increased innovation and productivity. "If you think about productivity, its all about ideas, information flows, how easily you can access ideas and opportunities," Pan says.
Should we care?
Americans should be deeply concerned about declining rates of entrepreneurship, Khan said. "Owning a business has traditionally been the way people build wealth and upward mobility," she said. A business is an asset the family can pass on to the next generation. Fewer new business owners means fewer opportunities for families to build assets and less socio-economic mobility, said Khan.
Khan is also concerned about the ways economic consolidation and political consolidation dovetail. For example, Wal-Mart extracts wealth from local communities and transfers it into the hands of one family, said Khan. She worries about the implications on democracy. Fewer than 400 families are responsible for more than half of the money that has been raised in the 2016 presidential campaign, she said, citing a New York Times article from Aug. 1, 2015. Just as having a king is antithetical to democracy, concentrated economic power is also a threat.
Another way of looking at things
Not everyone agrees that entrepreneurship is actually on the decline, however. In an article for Reason Magazine, a monthly libertarian publication, staff writer Elizabeth Brown suggested perhaps entrepreneurship isnt declining, rather current measurement tools arent sophisticated enough to capture what is going on. She argues that companies like Etsy, Uber and AirBnB, put self employment within more peoples reach by allowing people to bring their marginal capital and/or labor into productive use.
Traditionally self-employed people have not been thought of as entrepreneurs for the purpose of economic reporting, but given the growing number of people making a living this way, it might be time to re-evaluate this, Brown said. Nearly 60 percent of freelancers, for example, classify themselves as entrepreneurs, according to a 2013 study. Participants said they considered themselves entrepreneurs because they had to deploy creativity, innovation and strategic thinking to make their businesses work.
Khan agrees that although more sophisticated measurement tools would provide a clearer picture of what is going on in the economy, she cautions against buying into what she considers a glorified myth about new ways of running businesses. Lots of people are forced into these jobs because traditional employment forms have broken down, she said. They are forced to cobble together a living, and while that may be ideal for some people, for many more its just the best option they have.