Wednesday, June 16, 2010

Entrepreneurship and self-employment

Göran Greider is the most important intellectual for the old Social Democratic movement in Sweden. He writes an article (in Swedish) claiming that Sweden's problem is that it has "too many" entrepreneurs.

His example (which is true) is that Greece has one of the highest self-employment shares in the OECD.

The first problem with the article is that Göran Greider does not understand the difference between self-employment and entrepreneurship.

Entrepreneurship is, according to the dominant Schumpeterian delineation, defined by innovation and growth by individuals who create new organizations. Entrepreneurship is an economic function, and an important one.

Self-employment on the other hand is simply an contractual form, you work for yourself.

Most self-employment is non-entrepreneurial.

You get lots of self-employment when transaction costs are too high and the institutional quality low, such as in Greece. However, you have to be pretty ideologically blind to claim that Greece has many entrepreneurial firms.

Indeed, self-employment varies negatively with per capita income. But does entrepreneurship? This graph tells us nothing about those, much fewer individuals.

Greece has some shipping (Panayotides, Economou) and Intracom. That's basically it. Of the largest public Greek firms in my data, 0% were founded before 1945 by an entrepreneur. In contrast about 31% of the 100 largest American firms are founded by entrepreneurs (due to data constrains I can only value publicly noted firms, but of course most important firms in developed economies are public).

Aside from his bewilderment about what entrepreneurship is, Greider constantly and quite painfully confuses causality with correlation. He thinks that because countries have high self-employment are poor, self-employment causes poverty. This lack of training in stringent logic is typical of the Swedish left (and, to be frank, of Swedish social-liberals).

A contractual form can be motivated for different reasons in different contexts. Iran has a almost 40% self-employment rate (according to the ILO) because its economy works bad. Sillicon Valley has high self-employment rates because they engage in activities where controlling your firms directly is an advantage.

I don't feel like expanding this point: everyone should understand that the motivation for self-employment and the alternative matters for the policy evaluation. Sillicon Valley would be harmed by forcing the tech-people to all work for large firms. Iran would be even poorer if the self-employed were forced out by Greider-style policies: the reduction in the self-employment rate as a nation develops has to come about organically as the economy reorganizes, not ordered above by a leftist journalist who knows almost nothing about the subject. Even in highly developed countries important roles for self-employment as a contractual solution remains, otherwise so many would not engage in it rather than taking secure jobs in large organizations.

Greider claims that most of innovation takes place in non-entrepreneurial firms. He should start by reading William Baumol, who explains the division of labor in terms of radical innovations (entrepreneurial firms) and incremental improvements (large public firms).

Moreover, we simply have no idea to compare innovation in non-entrepreneurial firms with entrepreneurial ones because it is currently impossible to measure innovation. A commonly used measure, patents, is not the same as entrepreneurial innovation for at least two reasons: first because most patents are granted for small, incremental improvements and second because dramatic new ideas are rarely patented.

Nor is all innovation purely technological. Wall-Mart, Starbucks, Trader-Joes, H&M and IKEA are examples of market entrepreneurship, rather than technological entrepreneurship. All of them greatly added to the standard of living but how many patents did they produce?

Furthermore, while innovation does not take place in small self-employed firms, much of the most important innovation the last few years has taken place in large entrepreneurial firms, such as Intel, Apple and Google.

Those firms are large. Why? Because if you make a important innovation, in a functioning economy, you tend to grow.

Does Greiders and his Social-Democratic fans want to deny that these firms are innovative? Or that they are entrepreneurial?

In this mess of an article, Greider has exactly one important point. The prestige and gratitude that we grant entrepreneurship when they create well paying jobs and improve the standard of living should not be automatically bestowed upon non-entrepreneurial self-employed firms.

However, the non-entrepreneurial self-employed have other extremely important and different role in the economy. They reduce the cost of services. They provide jobs for groups who large established organizations discriminate against, such as immigrants in Sweden. They give people who don't like to work for a boss personal freedom (the self-employed often have higher self-reported happiness than workers). Marx was concerned with the alienation that large organizations causes, has Greider forgotten that?

And most importantly, self-employment mitigates transaction costs, because of tight personal control (which Alfred Marshal already noted). It is silly to evaluate taxi-drivers and pizza-bakers by how innovative they are. That is not their economic function.

Attacking self-employment because it is associated with a problem (high transaction costs and under-development) is like attacking head-ache pills because taking pills is correlated with having headaches. It is quite a primitive analysis Greider is engaging in.

I will also do Greider a favor and link to a better critique of self-employment promoting policies by David Blanchflower.


  1. I think you hit it dead-on on one aspect of self employment that doesn't get talked about much: the aspect of not working for someone else. Often people like the economist writing the article are used to the idea of working a nice secure job, so they can't imagine why anyone would chose to do otherwise unless they're forced by bad circumstances. Hence, self-employment must mean there's a problem.

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  2. A very sensible post. I cited some of it here, where I discuss Australia's high rates of self-employment and the virtue of self-employment as an economic shock absorber.

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  4. A very sensible and point-full post. Yes , Self-employment is freedom from payroll tax services and doing the every mathematics. It is like a self small business. Payroll service just for your self, and for the benefit of your self. It has critical parts but it will push you to handle your time and by seeing it, you are capable of doing things all by yourself without even hindering others. It is well said that self-employment is also self-outsourcing. Payroll is rolling inside your own economics that will later impose to the larger economics, which is the country's.

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