Dear Friends,
It seems to me that the real source of growth in any economy is the small startup company. These companies hire most of the workers in an economy. They drive most of the innovation and they reseed themselves.
Take a forest. When the trees are fully mature we say the forest is old growth. Most of the flora are extremely large trees overshadowing everything else. Unless some disturbance comes along to break up the canopy they will continue to dominate.
When large mature stands of trees flourish they do so at others expense. Old growth forest cannot sustain as much fauna as growing forest. They provide food only in certain seasons. There is necessarily less diversity in the flora. It is dominated by large mature trees. Beautiful to look at and majestic to behold but almost a desert.
Disturb the old growth however and you introduce a plethora of new flora and fauna. Diversity explodes. Fringe animals like deer move in. Everything from berries to apple trees can only exist in disturbed forests.
Lets apply this to the economy…
When government protects old mature companies it does so at cost to small entrepreneurial companies. Since old mature companies tend to have flat hiring curves they are poor generators of jobs. The jobs they do provide are usually well paid jobs. Being mature companies.
Here is one of the rubs. It is counter intuitive for government to allow well paid jobs in mature companies to churn into smaller less well paid jobs. But that “creative destruction” is what allows a fleet footed economy to thrive in any condition.
When the economic landscape is dominated by large mature companies there is little innovation. Less diversity in thought. But the beauty of small companies is that the decision making is spread out among many players. The more decision makers the better. As more people are brought into the decision making process, necessarily, people that would not be looked at if the demand for decision makers was so high will be chosen.
These people are the ones who usually come up with the grand slam ideas. Of course they also strike out much more than they hit homers. But that is another of the advantageous of distributed decision making. Risk is distributed as well. Too big to fail is never in the equation.
How can a nation apply this thought to their economy?
By starting at the top and cleaning government of corruption. Government corruption is the biggest source of friction to an economy there is. Every type of government corruption from simple graft in licensing to bribing Senators has a corrosive effect on an economy. For an economy to work efficiently people must have some level of trust in one another. Government corruption undermines that. See NUMA.
Every impediment to starting a business should be ironed out. Nothing should stand in the way of risk takers in starting a business. Impediments like licensing and regulation should be scrutinized carefully. Eliminated where they can be, without undue risk to public safety, and streamlined at the very least.
People should know about government’s attitude to business and starting one. Give the public an interest in business. Foster an appreciation for businesses in the people. If people see the government promoting business they will be more inclined to start one. If they have no interest they will be disinterested.
International trade should liberalized. Every economic study that has ever been done on the subject shows unambiguously, that increasing trade leads to increasing economic development. To continue to slow trade with tariffs and regulation is like tying your legs together and being outraged that someone else can run faster.
Don’t worry about international aid. Get people working on their own. No one needed international aid until it was invented. Everyone got along. Some better and some worse. But since the invention of international aid the countries that have taken it have seen their GDP per individual go down. Not a good sign that aid bears good fruit…
Protect property rights. The greater the protection of all property rights government provides the faster the economic growth. Why build wealth when some elite will take it if he becomes jealous?
There are many other ways a nation can build an entrepreneurial ethos in it’s people. They all involve lowering impediments to starting a business. There are many that I am far too dull to think of. You on the other hand…
Of course all poor countries do the exact opposite of these things. Of all things to do to drag down the economy it is of the utmost importance not to vilify business and especially small business. Fear in the people crushes entrepreneurial sprite like water quenches flame.
