"With the rise of the modern corporation, the emergence of the organization required by modern technology and planning and the divorce of the owner of capital from control of the enterprise, the entrepreneur no longer exists in the mature industrial enterprise."
-- John Kenneth Galbraith, The New Industrial State, chapter vi
The role of entrepreneurs is one of those issues that divides people politically. If you value entrepreneurship, then it is difficult to be a statist. If you are a statist, then it is difficult to value entrepreneurship.
John Kenneth Galbraith represents the quintessential statist. If we were literally stuck on 1968, then Galbraith's The New Industrial State would still be on the best-seller list. In that work, Galbraith correctly pointed out that bureaucratic organizations are averse to risk and uncertainty. However, nearly every other major thesis in his book was wrong. Yet his view of the economy, like much of the conventional wisdom of 1968, has remained embedded in the folk beliefs of the Left.
For Galbraith, the concept of an entrepreneur was a quaint myth. As he saw it, all of the important economic activity takes place within giant corporations. Their challenge is to manage large capital investments in complex projects, like a nuclear power plant or a new passenger jet. This in turn requires a thick bureaucracy, which Galbraith dubbed the "technostructure."
Propositions that followed from this thesis include:
-- The United States is not really a market economy, but a planned economy.
-- Wages and prices are artificial, so that the government is right to intervene to control them.
-- Because we are a planned economy, the ideology of free enterprise serves only to "starve" the public sector, which could invest resources more wisely.
-- Consumers are passively manipulated by the "technostructure" into serving the needs of big corporations, rather than the other way around.
-- The classical economic concept of competitive struggle is an anachronism, because firms control their environment and are immune to competitive pressure.
The Internet Revival
The death of the entrepreneur was greatly exaggerated. Over the past two decades, the strength of entrepreneurialism has been unmistakable. The economy has been much more dynamic than Galbraith would have predicted. Many of the industrial giants, which in Galbraith's view were self-perpetuating, have fallen. The steel companies, chemical firms, and aerospace firms of yesteryear have shrunk, with most of them merged out of existence. On the other hand, companies like Microsoft, Intel, and Wal-Mart, which were not part of the economic landscape in 1968, are now more important than the old industrial base.
More important, the Internet has brought about the revival of the entrepreneur. Mixing metaphors with abandon, the Net has fostered a Free Agent Nation, in which an Army of Davids representing The Long Tail is operating Under the Radar.
The world of Galbraith has been turned upside-down. Large capital projects are not the driving force in the economy. Thick bureaucracy loses to trial-and-error innovation. Prices are competitive. Old firms go out of business. New firms come out of nowhere.
The Lagging Sectors
Not all sectors of the economy are open to the forces of competition. In higher education, colleges and universities maintain their grip on the accreditation process. Exit never takes place, and entry only occurs at the margins of the industry.
Health care, too, is relatively immune to competition. Limits on entry into key health care fields are strictly maintained. I suspect that a one-year trade school could train a pretty decent physical therapist. But at the rate things are going, soon you will need a doctorate to practice legally.
Today's Mainstream Left
Most of the economics profession has lapsed into a mysterious silence concerning the role of entrepreneurs in the economy. Visit the web site of Berkeley economist Brad DeLong, and you can see how the economy looks to someone on today's mainstream Left.
You will find yourself in a world where innovation "diffuses" (like molecules of gas put into a larger container). In 2002, DeLong saw this "diffusion" taking place in Europe any day now, as if it did not require any of the entrepreneurial activity that Euroregulation so effectively thwarts.
In DeLong's world, income is distributed (very unequally), not created or earned. With more entrepreneurs, I would expect to see more variation in income. As Paul Graham put it, "Economically, you can think of a startup as a way to compress your whole working life into a few years." For DeLong, this is an outrage.
Above all, DeLong looks to expand government's role, in order to protect ordinary wage-earners from the "risks" that people will suddenly be able to create a lot more wealth, leading to inequality. Of course, as Graham points out, the only way to "even out" the inequality is to stifle the upside for the entrepreneur.
I cannot imagine DeLong or other contemporary economists explicitly endorsing Galbraith's view that "the entrepreneur no longer exists." However, they appear to be a long way from being able to acknowledge the role that entrepreneurial activity plays in the innovation process. With its statist philosophy and lack of appreciation for entrepreneurs, today's Left is still very much stuck on Galbraith.
Arnold Kling is author of Learning Economics.