The Role of Government in Fostering Entrepreneurship in a Mixed Economy
By Dr. Arch Barnes – Feb 1, 2011
One of the great divides between people of competing political persuasions is in what role government should play in encouraging economic activity in general and in fostering entrepreneurship in particular. On one side of the political argument (the side usually labeled “conservative”) there is the conviction that government must simply stay out of the way, not punish success with high taxes or unnecessary constraints, and creative people will naturally find a way to innovate, to invent, to fill needs in ways that are productive and beneficial for themselves and for the rest of society. This is the direct application of Adam Smith’s famous “Invisible Hand,” of course.
Then there’s the Progressive viewpoint that identifies and frets over the inequities that develop among people, for all sorts of reasons, and also the vagaries that accompany unfettered economic freedom. There is emphasis, in this view, on negative tendencies that emerge, predatory people taking advantage of others in their inevitable greed for “unreasonable” profits. Progressives favor taxing high profits aggressively so that they can use the funds for wide social programs designed to bring about greater equality, but they also favor government rewards and preferential treatments for those products and services they see as most widely beneficial, least noxious.
There has never really been a true “free” marketplace for anything, as constraints always exist in one form or another. Governments in all the First World economies have bounced around and see-sawed back and forth on all aspects of taxation and regulation, and political parties rise and fall as the pendulum of public sentiment swings back and forth. The great experiment of Hong Kong was close to the true free market, but that now seems to have faded into the past. The general trend world wide seems leftward, however, as governments become progressive and more intrusive in all respects. Virtually all levels of government in most countries dabble with enterprise zones, small business support programs and the like, sometimes with mixed outcomes. China has experienced massive growth in selected areas (SEZ’s – Special Economic Zones) that benefited from such protections and supportive policies, but it is not clear that this can be equally successful elsewhere, or that it is fair to areas not treated equally favorably. Preferences bestowed by governments are not automatically more equitable than those bestowed by nature or by serendipity.
The truth is that genuinely creative and motivated individuals will find ways to make money in any system of government. Another truth… or at least a conviction I hold, personally, is that one cannot teach people to be entrepreneurial or stir the instinct into existence. It is innate in some folks, not in others, rather like risk aversion and other similar traits (perhaps based on excess dopamine, or other brain chemicals?).
As for taxation as a disincentive, arguments abound as to what level of taxation suppresses economic activity significantly. Remember the famous Laffer Curve? Art Laffer is an economist and devotee of the Austrian School (so named after several famous Austrians who held conservative views: Ludwig Von Mises, Frederich Hayak and others). Nobel prize-winner Milton Friedman followed this same school and preached fervently on its merits. Art Laffer was a student of Friedman and a disciple, and he posited the existence of an invisible curve of taxation realities. The Laffer Curve simply predicts mathematically that if the income tax rate were 100% there would be zero incentive to work, and so tax revenues would actually be zero. Conversely, if the tax rate were zero, then there would also be zero tax revenues (to the government). So tax revenue maximization occurs somewhere between these two extremes. The problem is in determining the point or range at which such maximization occurs. The same uncertainties pertain to encouragement efforts and the attendant incentive outcomes.
There’s a separate argument, of course, about the efficacy with which governments use the taxes collected, but that must be left on the shelf for this article.
The Austrian School’s dominance early in the twentieth century actually led (ultimately) to the focus by British economist John Maynard Keynes on the role of government, and the Keynesian School evolved to heavily influence all Western governments during the late 1930’s and for several decades. Progressives, in fact, still hold to Keynesian tenets ferociously, and probably always will, and there has come to be an entrenched role for federal governments in all economic activity, even in the USA, where the Constitution explicitly prohibits such involvement (see the Tenth Amendment).
My own view is that while many, perhaps most, entrepreneurial endeavors would spring forth regardless of the milieu, there are corners of society (the intellectually impoverished and the disadvantaged) from which creative individuals can be drawn in larger numbers by direct encouragement from governments at all levels. If these could be indirect, rather than direct, I’d be far happier with the notion. By indirect, I mean a system of rewarding philanthropic organizations, societal agencies and individuals who, in the private sector, develop programs that encourage and support the disadvantaged in their entrepreneurial endeavors. That would be preferable to having the government itself developing such programs… but that’s just me. I was a young engineer in England in the 1950’s when Clement Atlee’s leftist government nationalized all major industries, with disastrous outcomes. Total freedom has never been tried, but I suspect that it would result in many unacceptable inequities too; every system does. This debate, and similar foment, is always current, always relevant; especially since small businesses create most new jobs.
By Dr. Arch Barnes – Feb 1, 2011
One of the great divides between people of competing political persuasions is in what role government should play in encouraging economic activity in general and in fostering entrepreneurship in particular. On one side of the political argument (the side usually labeled “conservative”) there is the conviction that government must simply stay out of the way, not punish success with high taxes or unnecessary constraints, and creative people will naturally find a way to innovate, to invent, to fill needs in ways that are productive and beneficial for themselves and for the rest of society. This is the direct application of Adam Smith’s famous “Invisible Hand,” of course.
Then there’s the Progressive viewpoint that identifies and frets over the inequities that develop among people, for all sorts of reasons, and also the vagaries that accompany unfettered economic freedom. There is emphasis, in this view, on negative tendencies that emerge, predatory people taking advantage of others in their inevitable greed for “unreasonable” profits. Progressives favor taxing high profits aggressively so that they can use the funds for wide social programs designed to bring about greater equality, but they also favor government rewards and preferential treatments for those products and services they see as most widely beneficial, least noxious.
There has never really been a true “free” marketplace for anything, as constraints always exist in one form or another. Governments in all the First World economies have bounced around and see-sawed back and forth on all aspects of taxation and regulation, and political parties rise and fall as the pendulum of public sentiment swings back and forth. The great experiment of Hong Kong was close to the true free market, but that now seems to have faded into the past. The general trend world wide seems leftward, however, as governments become progressive and more intrusive in all respects. Virtually all levels of government in most countries dabble with enterprise zones, small business support programs and the like, sometimes with mixed outcomes. China has experienced massive growth in selected areas (SEZ’s – Special Economic Zones) that benefited from such protections and supportive policies, but it is not clear that this can be equally successful elsewhere, or that it is fair to areas not treated equally favorably. Preferences bestowed by governments are not automatically more equitable than those bestowed by nature or by serendipity.
The truth is that genuinely creative and motivated individuals will find ways to make money in any system of government. Another truth… or at least a conviction I hold, personally, is that one cannot teach people to be entrepreneurial or stir the instinct into existence. It is innate in some folks, not in others, rather like risk aversion and other similar traits (perhaps based on excess dopamine, or other brain chemicals?).
As for taxation as a disincentive, arguments abound as to what level of taxation suppresses economic activity significantly. Remember the famous Laffer Curve? Art Laffer is an economist and devotee of the Austrian School (so named after several famous Austrians who held conservative views: Ludwig Von Mises, Frederich Hayak and others). Nobel prize-winner Milton Friedman followed this same school and preached fervently on its merits. Art Laffer was a student of Friedman and a disciple, and he posited the existence of an invisible curve of taxation realities. The Laffer Curve simply predicts mathematically that if the income tax rate were 100% there would be zero incentive to work, and so tax revenues would actually be zero. Conversely, if the tax rate were zero, then there would also be zero tax revenues (to the government). So tax revenue maximization occurs somewhere between these two extremes. The problem is in determining the point or range at which such maximization occurs. The same uncertainties pertain to encouragement efforts and the attendant incentive outcomes.
There’s a separate argument, of course, about the efficacy with which governments use the taxes collected, but that must be left on the shelf for this article.
The Austrian School’s dominance early in the twentieth century actually led (ultimately) to the focus by British economist John Maynard Keynes on the role of government, and the Keynesian School evolved to heavily influence all Western governments during the late 1930’s and for several decades. Progressives, in fact, still hold to Keynesian tenets ferociously, and probably always will, and there has come to be an entrenched role for federal governments in all economic activity, even in the USA, where the Constitution explicitly prohibits such involvement (see the Tenth Amendment).
My own view is that while many, perhaps most, entrepreneurial endeavors would spring forth regardless of the milieu, there are corners of society (the intellectually impoverished and the disadvantaged) from which creative individuals can be drawn in larger numbers by direct encouragement from governments at all levels. If these could be indirect, rather than direct, I’d be far happier with the notion. By indirect, I mean a system of rewarding philanthropic organizations, societal agencies and individuals who, in the private sector, develop programs that encourage and support the disadvantaged in their entrepreneurial endeavors. That would be preferable to having the government itself developing such programs… but that’s just me. I was a young engineer in England in the 1950’s when Clement Atlee’s leftist government nationalized all major industries, with disastrous outcomes. Total freedom has never been tried, but I suspect that it would result in many unacceptable inequities too; every system does. This debate, and similar foment, is always current, always relevant; especially since small businesses create most new jobs.