NCPA - National Center for Policy Analysis

Freedom and Entrepreneurship

April 27, 2012

Entrepreneurship is important for at least two reasons.  At the individual level, the opportunity to pursue one's dreams has value, regardless of how others in the marketplace might value what is produced.  In the aggregate, entrepreneurship is valuable because it leads to economic growth and progress, say Joshua C. Hall, John Pulito and Benjamin VanMetre of the Mercatus Center.

Crucial in promoting the entrepreneurial spirit is a foundational understanding of what compels individuals to innovate, start businesses and create jobs.  Repeatedly, studies have found a positive relationship between business start-ups and individual freedoms on the national level.

Hall, Pulito and VanMetre, however, have found this conclusion far too vague for the creation of effective policies to promote enterprise.  To this end, they constructed an econometric model that disambiguates components of individual freedom to understand which factors are most important.

Factors of economic freedom were found to be overwhelmingly statistically significant.

  • Controlling for other relevant factors, it was found that an increase of one standard deviation in economic freedom is associated with an increase of over one standard deviation in entrepreneurship.
  • That is to say, if the average state increased its economic freedom score by 0.22 points (as calculated by the researchers) this would translate to 106 additional new businesses started per month.

This result is consistent with previous studies.  The study's parsing of economic and personal freedoms does yield interesting results for the latter type: it was found that the level of personal freedom was not correlated with entrepreneurial metrics.

Source: Joshua C. Hall, John Pulito and Benjamin VanMetre, "Freedom and Entrepreneurship: New Evidence from the 50 States," Mercatus Center, April 2012.

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