Entrepreneurialism != “The Economy”

Conservatives love to harp on the (mainly imaginary) regulatory excesses of Barack Hussein Obama, which have apparently made it impossible to start a small business in this country.  Which, living in San Francisco, is news to me.  However, there are actually countries in which the crushing weight of government regulation make it impossible to start a successful small business, and not just North Korea.  France has a thriving economy, but it has such a mass of red tape, and such inflexible labor practices, that it is actually extremely difficult to start a thriving startup in the Silicon Valley mode.  Go read the Times piece – it’s an interesting look at what the imaginary “Obamanomics” would look like in terms of the consequences for entrepreneurship.  Here’s my question – does this materially affect economic growth?

While this sounds crazy, I think we ought to consider France as a component of the global economy, and even just of the regional European economy.  France has many large corporations and highly skilled managers and engineers, and its economy is doing just fine.  It makes perfect sense if you consider that entrepreneurship, like all other economic activity, is governed by comparative advantage.  As the article mentions, French culture is actually pretty hostile to entrepreneurship and aspiring entrepreneurs are likely to flee to London (and probably Berlin, startup hub of Europe).  It sure seems like France’s comparative advantage lies in Areva (the gigantic state-run nuclear company) rather than letting a thousand flowers bloom.  And the aspiring French entrepreneurs in turn go to the startup hubs which perform better due to the influx of French entrepreneurs.

It’s clear that having a startup hub is great for the local economy.  But no one knows how to start one from scratch, which suggests it is difficult.  Furthermore, the network effects thought to drive the prosperity of these hubs have positive returns to scale…which suggests that with a fixed number of entrepreneurs divided among a greater number of hubs, the total level of value creation drops.  A greater number of startups in Paris would bring some incremental activity…but does it outweigh the reduced productivity of London’s startup scene?  Zuckerberg moved out West because it was the only place Facebook could become Facebook – and while the money flowed to Menlo Park, the consumer surplus flowed to the whole world and everyone became better off.

Plus, there are of course good reasons for France’s restrictive labor laws – they greatly enhance the quality of life for the non-entrepreneur in France.  So this article is illuminating of the choice between economic comfort and economic dynamism, but it’s not at all clear that France is making the wrong tradeoff here.

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One response to “Entrepreneurialism != “The Economy””

  1. krazyx says :

    Reblogged this on EKtopus.

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