Progressive Entrepreneurship: A Work in Progress

A few years ago, the noted economist Benjamin Friedman laid out the moral case for a progressive commitment to robust economic growth. Growth, he argued, increases opportunity and mobility, makes fairness more likely, and strengthens support for tolerance and democracy. At the same time, he offered two caveats. First, to achieve these results, growth must be widely shared. If those at the top commandeer its fruits, opportunity and mobility will stagnate, and social tensions will rise. Second, if the right kind of growth is valuable in part because it provides public goods, then a basic tenet of public-choice theory holds that the market by itself will undersupply those goods. The right kind of collective action can improve on pure market outcomes.

Friedman might well have added a third caveat: Growth in output loses much of its luster if it doesn’t increase the supply of good jobs. Between its pre-recession peak in 2000 and the next cyclical peak in 2007, for example, real manufacturing value-added increased by more than 20 percent—while manufacturing employment declined by 19 percent, from 17.3 million to 13.9 million. Standard economic theory tells us that as productivity gains reduce the demand for labor in established sectors, new opportunities will emerge to absorb the excess. That is what happened during our transition from an agricultural to an industrial economy, as sustained gains in agricultural productivity freed up labor for mass production. But as we have learned during our latest great transformation—still ongoing—to an information-based economy, the process can be painfully slow and unfair. What is a displaced 55-year-old factory worker in Michigan supposed to do?

After World War II, when the U.S. economy bestrode the world like a colossus, American businesses could absorb or pass on increased production costs. Consumers’ real incomes were rising robustly, and American steel, auto, and textile manufacturers faced little pressure from lower-priced imports. Today, global competition makes that all but impossible. So sectors of our economy that seek to export or are challenged by imports have no alternative; they must relentlessly increase productivity. That can be good for consumers: Compared to a generation ago, cars from the (shrunken) Big Three are of significantly higher quality and are made far more efficiently. The flip side is that it takes fewer workers to produce each car. A compelling case can be made that the twenty-first century U.S. economy needs a robust, globally competitive manufacturing sector. It’s much harder to make the case that this sector will ever again generate the number of jobs we need.

If we care about opportunity and mobility for all, then we must do what we can to accelerate the emergence of new sectors. Progressives must bet on innovation. Research by the Kauffman Foundation has uncovered a startling fact: During the past generation, the lion’s share of net new job generation occurred in firms less than five years old. In 2007, the last year before the Great Recession, these firms provided fully two-thirds of net new jobs. So pro-growth progressives should be disposed to favor measures that facilitate the formation of new firms and increase their odds of succeeding. And because the research also suggests that periods of recession and high unemployment provide opportunities for new business formation, we should do what we can to wring advantages out of today’s less-than-robust economy.

Far from being spontaneously self-organizing, markets are structures of laws and rules that create incentives and disincentives for different kinds of behavior. Markets are human creations subject to reflective revision based on the outcomes they generate. That is what the proponents of the innovation agenda argue, and that is also what progressives believe. There is thus a solid basis for evidence-based analysis and dialogue.

And there is a shared point of departure as well: the centrality of information and the importance of maximum feasible transparency. For example, we all saw what happened when firms were allowed to keep derivatives and “special purpose entities” off their regular balance sheets. Progressives should find it easy to support proposals requiring companies to report all assets and liabilities on their balance sheets fully and intelligibly so that investors and regulators can assess their real financial condition. In the same vein, it makes good sense to maximize public access to all government-supported research. After all, these grants and contracts are funded by public tax dollars in furtherance of public purposes. And all other things being equal, innovation is likely to accelerate if those who can push the research further or move toward its commercial application have access to it.

There are other promising points of convergence. Most people who have spent substantial time in university settings agree that the three-decade-old Bayh-Dole Act, which established the framework for the commercialization of university-based research, has had some unanticipated consequences and needs revision. It serves no one’s interest if university bureaucracies impede the pace of technological innovation, and the Commerce Department has the power to issue new rules that would break the logjam. Progressives will cheerfully agree that developers should bear the costs of their activities that would otherwise be off-loaded onto taxpayers. (The principle that agents should internalize the externalities for which they are causally responsible is attractive in many spheres.) Using the Internet to speed new firm formation is just common sense, and it’s hard to imagine anyone objecting to its sensible implementation. The Obama Administration has repeatedly endorsed expanding the research-and-development tax credit and making it permanent. And it is intriguing that some pro-innovation scholars even have a good word for “private enforcement” (aka tort lawyers) as an adjunct to public regulators whose efforts are often misdirected and ineffectual.

A Long-Running Debate

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