Why Entrepreneurial Capitalism Now


It is absolutely astounding how quickly the discussion around the appropriate government response to the economic crisis has morphed -- from one around whether it even makes sense, or is the proper thing to do, for government to bail out ailing financial and manufacturing firms -- to one simply around "how much," "how fast," and "how many."

Most dangerously, the implicit agreement amongst the two major players in the discussion -- Washington and Wall Street -- is revealing via their approach their utter lack of understanding of how capitalism in a modern, global, inter-connected economy really works.

Sadly, they are missing or conveniently forgetting that economic growth and job creation always come from the economy's "gazelles" -- its high impact firms -- and that these firms are always disproportionately found in emerging technology sectors.  In 2009, this means Internet & Software, Digital Media & Entertainment, Healthcare & Biotechnology, and Green & Alternative Energy.  Instead of stimulating these sectors, over 98% of the current governmental stimulus plan is focused on the banking, real estate and automotive sectors.

As distressingly, they have created an enormous moral hazard problem. By bailing out the most foolhardy of borrowers and lenders, they are perverting the basic laws of human incentive -- that with quality results come rewards, and with mistakes and failures come penalties.

These are not esoteric nor scholarly points.  Something extremely precious is being lost with so much attention, so much money, and so much faith being misplaced in the U.S. federal government to intervene in the financial system.  Let's not confuse the government's proper role in the economy -- to provide the appropriate legal and regulatory "frame" within which to do business -- with the kind of massive socialistic intervention we are now witnessing. 

Quite simply, they are making the problem far worse by not letting the capitalistic process work -- by not letting companies fail and go out of business and thereby create room and a climate for both competitors and new entrants to step in and benefit.   And this is to say nothing of the huge distortions inherent to any lobbyist-driven governmental action. It is no accident that that the automakers are heard a lot more from than than the software developers.

So what to do?  Neither I nor my Growthink colleagues are ranters nor end-of-worlders.  Far from it.  Rather, we side with those so eloquently described by President Obama in his inaugural: "[T]he risk-takers, the doers, the makers of things -- some celebrated, but more often men and women obscure in their labor -- who have carried us up the long, rugged path towards prosperity and freedom."

Our phrase for this is "Entrepreneurial Capitalism" -- the idea that what has always made America the greatest country in the history of the world is its freedoms, its celebration of individual rights and responsibilities, and its risk-takers.  Let's incentivize the scientists and the engineers and the operators of successful companies, not their bankers nor Washington. 

Thomas Friedman in his excellent New York Times Op-Ed piece, "Startup the Risk Takers," outlines the simple idea that as opposed to giving government assistance to the automakers, the government should offer it to venture capital firms.

I say go a step further: Offer it directly to the 495,000 Americans that start a new business every month.  Give them tax credits, give them real access to capital, and reward and acknowledge them.  Within this brave group will be the few superstar entrepreneurs of tomorrow that will create the new jobs and the new technologies that will lead to a massive stock market recovery and create the new tax revenue to actually fund all of the government programs proposed by our representatives in Washington.

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Pam Marrone says

Most of the suggestions I hear for helping entrepreneurs are for tax credits. Many startups, like my ag cleantech company, create many jobs, but we are not profitable for several years (we are funded by venture capital groups) and we have heavy R&D costs to get new (government-regulated) products to the market. Also true for healthcare and other biotech companies. Tax credits help in future years but do nothing here and now. How about reforming Sarbanes Oxley for small companies and bringing the IPO market back from London AIM to the US? How about doubling the SBIR funding and including VC-backed companies for eligibility? How about health care reform so our employee and dependent health care premiums don't go up 19% year after year? Low interest loans for lab equipment purchases? Just a few of the things that would help startups form and grow.
Posted at 7:30 pm
Rachel Williamson says

Hear, hear! The current bail out plan is akin to a plan to offer subsidies to the 'buggy whip' industry during the time that automobiles were coming to market. After all, those poor buggy whip workers did not deserve to lose their jobs! After losing a position in real estate to the 'bubble', I am creating not only my own new job, but at least two others in my community, not to mention the purchased services and goods that this business will support. Don't stifle creativity and ambition with 'protectionism'.
Posted at 8:59 pm
Ted says

I was happy to read that part of the new stimulus plan includes substantial funds being made available through the SBA. Here is the perfect experienced agency to channel monies through for start-ups and small businesses who need some capital infushion but the very government who created the agency has let it languish, unused, when a lot of the work-outs and small business assistance that was/is needed could have been channeled through them and a lot of the problems that were allowed to fester by non-governmental action and the theft by misapplication of the origional stimulus' governmental funds could have been avoided. If the perimeters of the SBA are too small then that would seem to only require an adustment. Had the original stimulus monies been channeled through them most of it could be working in the system right now rather then having been horded by the various monetary institutions who misappropriated the funds to bonuses and other costs of doing business as used by the incompentent executives of the very banks and institutions whose failed policies and inaction created this economic crash.
Posted at 11:28 am
Matt West says

I am not sure we are best served by throwing money at entrepreneurs and VCs. There is a reason why 80% of start-ups fail within the first five years. This is the strength of free markets, many try, but only those with the right concept, financing and marketing support are successful. Established enterprises are more likely to grow, particularly in this credit starved environment. The Green Market (http://thegreenmarket.blogspot.com)
Posted at 10:24 am

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