Three Ways Entrepreneurship Can Save the Economy
by Gerri Detweiler
May 04, 2016
Depending on whom you ask, the U.S. economy is “stuck in second gear,” already in another massive recession or—according to Warren Buffett—doing just fine. For those not feeling as optimistic as the Oracle of Omaha, there may be a sense of despair. Our dysfunctional, gridlocked Congress isn’t likely to implement solutions to kick the economy into high gear anytime soon. So who can jump-start the economy?
Whether it’s a small problem (How can I put something healthy on the table tonight?) or large one (How do we feed a growing world population—Farm the oceans? Use more insects in foods?)—entrepreneurs are often the first to rise to the challenge and offer innovative solutions.
“The entrepreneur is the artist of business, responding to the needs of the economy, organizing resources into a sellable product,” says Steve Mariotti, social entrepreneur and educator, and author of “An Entrepreneur’s Manifesto.” He adds, “They create jobs, patents. They find new markets. When they fail, it has little impact. They do pioneering work.”
Here are three ways boosting entrepreneurship can save our economy.
Provide a Healthy Dose of Competition
“The American economy is too cosy for incumbents,” according to an article in The Economist, which warns that many American companies have become too large, and too insulated from competition. Profits are being hoarded by large firms, instead of being plowed back into investments (including those in human capital).
In addition, with fewer choices, consumers often pay more. Just look at your cable bill if you need proof. Breaking up monopolies or oligopolies is one way to restore competition, but the power these large firms wield politically and financially often make that battle a long and difficult one.
Small businesses may be in a better position to shake things up. Smaller and scrappier, they may come at a problem from a new angle (think Uber, Lyft, Zipcar), bring down prices (think Redbox, Netflix, or Hulu) or simply do a better job (think Nest, Sonos).
Expanding small business opportunity will stimulate competition, which in turn can result in better products and services and/or lower prices for consumers.
In fact, just the threat of these upstarts has forced some companies to find ways to do better. A recent survey of 250 business leaders by BPI Networks found that virtually all those surveyed believe “start ups and new category contenders are disrupting traditional markets,” and over a third believe the “disruption is severe.” It notes:
“The survey demonstrates that entrepreneur-driven market disruption is now a recognized fact of life in virtually every industry and market sector. Ninety-eight percent of all survey participants believe traditional markets are being disrupted by new category contenders. Respondents also indicate that these new start-up innovators, and the faster pace of innovation they inspire, is bringing significant new value to customers, such as direct-to-customer business models that are data-driven, convenient, efficient and more personal.”
However, small firms that want to challenge the status quo often complain that burdensome regulations make it difficult to compete with firms that have teams of lawyers and lobbyists at their disposal. If we want to encourage startups, we need to make sure that unnecessary or duplicative regulations aren’t crushing innovation.
“Keep their taxes, regulations, and so on, simple,” says Mariotti. “Give them time to solve problems. When the law is not clear, you burden the entrepreneur, wasting their time, creativity, and psyche. Too much time spent trying to be legal lowers productivity.”
Most jobs in America are created by new and young companies, says the Kauffman Foundation which has found that “new businesses account for nearly all net new job creation and almost 20 percent of gross job creation.” In fact, they note that companies less than a year old “created an average of 1.5 million jobs per year over the past three decades.”
And SBA Administrator Maria Contreras-Sweet recently pointed out that “more than 7 million of the 11 million jobs created during the recovery (since 2008) have been generated by startups and small enterprises.”
Granted, most small businesses in America are very small. These “microbusinesses” represent more than 80% of U.S. businesses, according to the Association for Enterprise Opportunity (AEO). Yet they should not be underestimated.
“If just one in three microenterprises hired a single employee, the U.S. would be at full employment,” according to a report, The Power of One In Three, by AEO.
Even if those who are self-employed continue to go it alone, the economic impact of their business can be significant. The “indirect impact on the economy is huge because they contract with others,” says Tammy Halevy, senior vice president for new initiatives at AEO.
And when they do create jobs, even for themselves, they may provide the flexibility a traditional employer cannot offer, or opportunity where few jobs exist. In particular, these jobs can stimulate very local economies by providing opportunity for people who may have a hard time finding employment in their local communities. “Small businesses tend to hire people in their neighborhood,” says Halevy.
One of the most important things that we can do to ensure that small enterprises continue to create jobs is to ensure access to capital for deserving businesses. Those may include alternative loans and microlending. For example, Chicago Mayor Rahm Emanuel recently announced that 1,000 jobs have been created or preserved due to funding from the Chicago Microlending Institute (CMI), an initiative that helps to support small businesses that would otherwise have difficulty accessing necessary capital.
Help Alleviate Poverty
“The median net worth of business owners is almost 2.5 times higher than non-business owners,” according to the AEO report. “For a black woman, the difference is more than 10x. For a Latino man, the difference is 5x.”
Entrepreneurship is no guarantee of an escape from poverty. It can be an arduous and uncertain journey even for those with ample resources, financial and otherwise. We know there is a high failure rate for small businesses. But for those in poverty, for whom a good paying traditional job is not available or feasible, starting a business may not only be their only option, it may be their best option.
According to the National Center for Policy Analysis, “higher average rates of entrepreneurship in a state correspond to bigger declines in poverty; in fact, every 1 percentage point increase in entrepreneurship corresponds to a 2 percent decrease in the poverty rate.”
Forget the trickle-down economy; entrepreneurs can help the economic tides swell.
There is a significant controversy over whether public policy should encourage the often rocky road of entrepreneurship in general, or primarily support firms with high growth potential (“gazelles”). But as Steve Crawford, senior fellow at CFED points out, “When ‘done right,’ promoting self-employment expands opportunity for those left behind by an innovative economy’s ‘creative destruction,’ and thus serves the goal of shared prosperity. It also broadens the pool of entrepreneurs in a world where there is no magic formula for pre-identifying gazelles.”
The social safety net is vital for millions of poor Americans. But we should also make sure there is adequate support, in the form of services, education, and capital, for those who want to pull themselves up economically by starting a business. We can’t guarantee they will succeed, but we can make sure they aren’t alone as they try.
“We must care for the entrepreneur, we must encourage the entrepreneur,” says Mariotti. “It is a lonely and hard profession and they often lack support groups.”