I have a feeling that this sort of paper is the kind of thing the people who insist to me that "Economics is not a science" are pointing at. In this case, it's hard to have too much of a problem with that statement.
1. Did you time this to come out the same day as Yglesias post on innovation?
2. My dad's an entrepreneur, who somehow made it through 2008 only to recently wind down his operations. I gotta say I’m partial to the Scandinavian model. I think knowing his family would be taken care of (education, healthcare, etc.) were he to fail probably would’ve allowed him to take more calculated risk, not to mention unburdened him from an immense amount of psychological pressure.
I started a business and got it funded this year. There is tremendous upside if it works. Did I risk anything?
- I have substantial savings from my 30 year career in software engineering and engineering leadership roles
- My wife works in a big tech company as an executive, has been there over a decade
- My kids are grown, college is already paid for
- In tech, usually the worst case scenario is you run out of money and you get a company to acquihire you at a nice premium
- If none of that works out, I have a massive network in the off chance I'd even want a job later
- My overhead is low because my ego doesn't demand I own a private plane or a big house
What risk am I really taking?
Almost everyone I know in tech who created a company in the last 15 years has some version of that going on.
We are doing innovation because we want better software for people management, because we care about good people management. Don't tell our investors, but we would do this whether the payout was 10B or 10M. Our only motivation to go for the former is that it would allow us to allocate capital towards things that are good for the world.
Sampling bias -> "Almost everyone I know in tech" is not a representative sample.
Survivorship bias -> "What risk am I really taking?" Noah's point was precisely that only people who can afford to weather the financial risks, do so. You yourself admit that you were able to leverage "substantial savings".
Tech companies may be atypical. If you are the kind of person with the technical chops to found a tech company, odds are you have the technical chops to get a fairly well paying job working for a tech company. This is true in other fields. advertising executive Jerry Della Femina, discussing the risk of founding his own agency, explained that the MTA had lots of signs telling you how to get back to Brooklyn. (This was back when living in Brooklyn was a lot cheaper than now.)
The folks with less marketable skills might be taking a bigger risk, but think about it. If you work as a cook, you have a marketable skill. You can take a chance at founding a restaurant or catering service. If you fail, you may lose your savings, but you still know how to cook. If you really have no marketable skills whatever, not even some naked salesmanship or a good network, founding a successful company is a long shot.
Now, I'm trying to think of a tech company that was founded by someone who really had no other options. There's an obvious survivorship bias in this, but I'd expect to come up with at least one such example. (OK, I remember reading an article about a woman, divorced and in dire straits, who founded a multi-million dollar company selling little stuffed mice made from old pantyhose and dryer lint. I've forgotten her name, and Google turns up nada. There have to be others. I'll note that she may have had other marketable skills, but the article didn't discuss them.)
It's much easier to quit your job and take a flyer on a business idea if you know that you (and more importantly your kids) won't starve in the street. The reason American tech is dominated by dudebros is because women who plan to have kids, and men who already have them, don't like taking that kind of risk.
It's true that "the bigger the risk from losing, the more people will try hard not to end up being losers". This is why people who didn't grow up rich are often too scared to quit their stable jobs to try building something new with no guarantee of success. How will we pay for rent? Or healthcare? Even in tech, it takes at least a few months to get funding, and that's by no means guaranteed. I know people who spent more than a year trying different things before they found something that investors would fund. And in all other fields, raising money is much more difficult. Having a strong safety net would allow more types of people to try.
If what we are talking about is innovation, there are better ways to measure it than just patents, and more factors to take into account are important as a cause or as a means of measuring innovation (in no specific order):
- The effects of a large domestic market and a strong economy that allows the creation of larger companies that can dedicate more investment to R&D per year.
- Effects of owning the world reserve currency.
-A high military spending.
-The effects of having the dominant language in the world, especially in scientific language.
- A position of prior scientific and technical mastery.
Patents sometimes work against innovation. In the 19th century, the US was considered extremely innovative despite a general regard for patent laws. In the 20th century, the extremely broad Wright Brothers patent kept the US behind in aircraft for decades. This inspired Marconi to develop a patent pool for radio patents lest patents quash AM radio. Eckert and Mauchly tried to get Von Neumann to patent the stored program computer, but he refused.
> Demonstrating that, though, requires a model whose assumptions are bound not to be very pleasing to liberals...although again, that's not necessarily the only reason that liberal bloggers criticized the paper.
You are one of a very small handful of liberal bloggers who have ever gone against the orthodoxy. So it is pretty valid for people to be skeptical of anyone else criticizing an idea on the basis that they're knee-jerking.
W.r.t this particular article, I absolutely think you're right that Acemoglu et al did not properly establish their case. That said, the alternative argument is exactly opposite, and you haven't given any sense of where the correct position really is for the dial. Which countries do it best? What is the correct amount of social safety net to encourage innovation?
Without some hint of a start of a way to answer those questions with data we're just arguing philosophy, and that's obviously useless.
I'm skeptical of the "welfare state encourages entrepreneurship" story because for the people who have the skills to start successful businesses, the fallback option in case of business failure is not welfare benefits, but gainful employment. What you actually risk losing is not your ability to earn a living, but your savings.
Promoters of tax-funded health care also overemphasize the role health care expenses play in barriers to entrepreneurship. Yes, if you start your own business, you should buy health insurance. But you absolutely need to keep up rent and mortgage payments, buy food, and pay a bunch of other living expenses that collectively cost much more than health insurance, not to mention paying your employees.
I doubt that the total tax level has much impact on whether people choose to work as employees or entrepreneurs. A highly progressive tax structure may increase risk aversion by limiting the upside, but flat and high taxes distort the trade-off between work and leisure, not the trade-off between employment and entrepreneurship.
On the other hand, it is hard to argue that the welfare state inhibits entrepreneurship.
Redistribution policies can encourage entrepreneurship by creating markets. The US 19th century policy of redistributing land from its original owners to anyone who would farm it created a class of agriculturally based consumers for a growing industrial base. By providing a baseline income, a welfare state provides entrepreneurial opportunities.
I have a feeling that this sort of paper is the kind of thing the people who insist to me that "Economics is not a science" are pointing at. In this case, it's hard to have too much of a problem with that statement.
Please note it's a "working paper", they have been working on it since 2012 and this is the best they got? I mean if it was me I would be embarrassed.
It was published in a 2nd-tier journal...
Two Things:
1. Did you time this to come out the same day as Yglesias post on innovation?
2. My dad's an entrepreneur, who somehow made it through 2008 only to recently wind down his operations. I gotta say I’m partial to the Scandinavian model. I think knowing his family would be taken care of (education, healthcare, etc.) were he to fail probably would’ve allowed him to take more calculated risk, not to mention unburdened him from an immense amount of psychological pressure.
Haha I wish Matt and I synced our posts but actually we just probably read the same tweets and think similar thoughts in response!
Was just kidding about wishing we synced our posts btw, that would be silly and cringe :-)
I started a business and got it funded this year. There is tremendous upside if it works. Did I risk anything?
- I have substantial savings from my 30 year career in software engineering and engineering leadership roles
- My wife works in a big tech company as an executive, has been there over a decade
- My kids are grown, college is already paid for
- In tech, usually the worst case scenario is you run out of money and you get a company to acquihire you at a nice premium
- If none of that works out, I have a massive network in the off chance I'd even want a job later
- My overhead is low because my ego doesn't demand I own a private plane or a big house
What risk am I really taking?
Almost everyone I know in tech who created a company in the last 15 years has some version of that going on.
We are doing innovation because we want better software for people management, because we care about good people management. Don't tell our investors, but we would do this whether the payout was 10B or 10M. Our only motivation to go for the former is that it would allow us to allocate capital towards things that are good for the world.
Sampling and survivorship bias.
Sampling bias -> "Almost everyone I know in tech" is not a representative sample.
Survivorship bias -> "What risk am I really taking?" Noah's point was precisely that only people who can afford to weather the financial risks, do so. You yourself admit that you were able to leverage "substantial savings".
I think you are reading the opposite point of what he was going for.
Namely that he had substantial economic reserves and a wife with a fulltime job who could still earn a living wage for both of them.
Those are the factors that ensured he faced no real risk because he had a private safety net to fall back on and could fail as many times as he tried.
He then further clarifies that most of the people in IT who are in his position similarly take no real risk.
Yup, my mis-take. I need to read with a more open mind. I've gotten into bad internet habits.
Tech companies may be atypical. If you are the kind of person with the technical chops to found a tech company, odds are you have the technical chops to get a fairly well paying job working for a tech company. This is true in other fields. advertising executive Jerry Della Femina, discussing the risk of founding his own agency, explained that the MTA had lots of signs telling you how to get back to Brooklyn. (This was back when living in Brooklyn was a lot cheaper than now.)
The folks with less marketable skills might be taking a bigger risk, but think about it. If you work as a cook, you have a marketable skill. You can take a chance at founding a restaurant or catering service. If you fail, you may lose your savings, but you still know how to cook. If you really have no marketable skills whatever, not even some naked salesmanship or a good network, founding a successful company is a long shot.
Now, I'm trying to think of a tech company that was founded by someone who really had no other options. There's an obvious survivorship bias in this, but I'd expect to come up with at least one such example. (OK, I remember reading an article about a woman, divorced and in dire straits, who founded a multi-million dollar company selling little stuffed mice made from old pantyhose and dryer lint. I've forgotten her name, and Google turns up nada. There have to be others. I'll note that she may have had other marketable skills, but the article didn't discuss them.)
One of my favorite articles from the last decade:
https://www.inc.com/magazine/20110201/in-norway-start-ups-say-ja-to-socialism.html
It's much easier to quit your job and take a flyer on a business idea if you know that you (and more importantly your kids) won't starve in the street. The reason American tech is dominated by dudebros is because women who plan to have kids, and men who already have them, don't like taking that kind of risk.
It's true that "the bigger the risk from losing, the more people will try hard not to end up being losers". This is why people who didn't grow up rich are often too scared to quit their stable jobs to try building something new with no guarantee of success. How will we pay for rent? Or healthcare? Even in tech, it takes at least a few months to get funding, and that's by no means guaranteed. I know people who spent more than a year trying different things before they found something that investors would fund. And in all other fields, raising money is much more difficult. Having a strong safety net would allow more types of people to try.
If what we are talking about is innovation, there are better ways to measure it than just patents, and more factors to take into account are important as a cause or as a means of measuring innovation (in no specific order):
- The effects of a large domestic market and a strong economy that allows the creation of larger companies that can dedicate more investment to R&D per year.
- Effects of owning the world reserve currency.
-A high military spending.
-The effects of having the dominant language in the world, especially in scientific language.
- A position of prior scientific and technical mastery.
- Number of scientific publications per year.
Patents sometimes work against innovation. In the 19th century, the US was considered extremely innovative despite a general regard for patent laws. In the 20th century, the extremely broad Wright Brothers patent kept the US behind in aircraft for decades. This inspired Marconi to develop a patent pool for radio patents lest patents quash AM radio. Eckert and Mauchly tried to get Von Neumann to patent the stored program computer, but he refused.
It's kind of telling that there isn't even an agreed definition established for how to measure things like innovation.
> Demonstrating that, though, requires a model whose assumptions are bound not to be very pleasing to liberals...although again, that's not necessarily the only reason that liberal bloggers criticized the paper.
You are one of a very small handful of liberal bloggers who have ever gone against the orthodoxy. So it is pretty valid for people to be skeptical of anyone else criticizing an idea on the basis that they're knee-jerking.
W.r.t this particular article, I absolutely think you're right that Acemoglu et al did not properly establish their case. That said, the alternative argument is exactly opposite, and you haven't given any sense of where the correct position really is for the dial. Which countries do it best? What is the correct amount of social safety net to encourage innovation?
Without some hint of a start of a way to answer those questions with data we're just arguing philosophy, and that's obviously useless.
I'm skeptical of the "welfare state encourages entrepreneurship" story because for the people who have the skills to start successful businesses, the fallback option in case of business failure is not welfare benefits, but gainful employment. What you actually risk losing is not your ability to earn a living, but your savings.
Promoters of tax-funded health care also overemphasize the role health care expenses play in barriers to entrepreneurship. Yes, if you start your own business, you should buy health insurance. But you absolutely need to keep up rent and mortgage payments, buy food, and pay a bunch of other living expenses that collectively cost much more than health insurance, not to mention paying your employees.
I doubt that the total tax level has much impact on whether people choose to work as employees or entrepreneurs. A highly progressive tax structure may increase risk aversion by limiting the upside, but flat and high taxes distort the trade-off between work and leisure, not the trade-off between employment and entrepreneurship.
On the other hand, it is hard to argue that the welfare state inhibits entrepreneurship.
Redistribution policies can encourage entrepreneurship by creating markets. The US 19th century policy of redistributing land from its original owners to anyone who would farm it created a class of agriculturally based consumers for a growing industrial base. By providing a baseline income, a welfare state provides entrepreneurial opportunities.