Why Entrepreneurs Flourish More in Welfare States (and Not so Much in U.S.)

Mike Kimel, co-author of Presimetrics, has a good blog post over at Angry Bear. He looks at evidence that entrepreneurial risk-taking is enhanced in societies that backstop such risks with a basic high-level of social support (“welfare states”). This is completely contrary to the laissez-faire myth of rugged individualism. It may also help explain why things haven’t been going too well here for the last several decades (ever since the advent of “Reaganomics,” an economic philosophy named after a B-movie actor).

The US is not, for many, the land of opportunity it is touted to be, and is now being beaten out by countries like Denmark and Canada. Big government countries, countries where Americans seem to believe people aren’t motivated to get off their duff, are actually quite entrepreneurial and offer offer their citizens a lot of opportunity.

Meanwhile, one other thing to note… growth, real economic growth, has been slowing for decades in the US. George W Bush’s term, even prior to the start of the Great Recession, compares unfavorably with the 1970s. The highly touted Reagan years, for instance, saw much slower growth than, say, the big government LBJ administration or the even bigger government New Deal years.

What is going on here? Is it really the catch-up effect, whereby wealthy countries like the US necessarily grow more slowly than other countries? Or is there a Great Stagnation going on? And if so, why?

I think one explanation for this is the Peltzman effect. Sam Peltzman once noted that, in response to some types of regulation, people can have a tendency to change their behavior in ways that counteracts the intended purpose of the regulation. For instance, some bicycle and motorcycle riders will take greater risks when forced to wear helmets, assuming that the helmets make them safer and more impervious to accidents.

Now, economic advance depends on creative destruction, and creative destruction requires people to take risks. Come up with a great idea for a super duper new widget and it has zero effect on anything if you don’t go out and try to market the thing.

But take two people, both of whom independently came up with the same idea for that super duper new widget. One lives in the US, the other in Denmark. Which one gives up his/her job to start a new company? The American or the Dane? My guess is the Dane will, precisely because the Dane, unlike the American, retains a safety net.

Read Kimel’s full post here.

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