The Decline Of The American Entrepreneur

The United States continues to suffer from a historically weak economic recovery. Monthly GDP and employment numbers remain near anemic. From a historical perspective the economy should be roaring by now given the pronounced contraction in 2008. Many explanations have been offered but the core reason for the U.S.’s slow recovery, and one that will continue to impede prosperity, is the decline in economic freedom and its impact on entrepreneurship, both of which began prior to the recession.

The fact is that America is no longer the home of the free—at least not economically. As measured by Canada’s Fraser Institute, during the course of this millennium the U.S. has fallen from being the world’s second most economically free nation to today being only the 12th. Countries now more economically free than the U.S. include Canada, Chile and Mauritius.

Among the industrialized countries of the OECD, the U.S. went from being the most economically free in 2000 to today (2012, the latest data available) being only the ninth freest.

This trend would be less worrisome if freedom were spreading across the globe so thoroughly that America’s declining freedom is only relative to the growing freedom of other countries. Ominously, however, America’s decline in economic freedom is absolute. On the 10-point scale that scholars use to measure economic freedom, America’s score was 0.8 points lower in 2012 than in 2000. This drop in America’s economic freedom score might seem slight but as SMU economist Robert Lawson notes, “scholarly work on this topic indicates that a one-point decline in the Economic Freedom of the World ranking is associated with a reduction in the long-term growth of GDP of between 1.0 and 1.5 percentage points annually.”

The consequences—in real dollar terms

The consequences of this apparently small reduction in economic growth multiply over time. If this decline in economic freedom isn’t reversed, American families could have real incomes in 2040 that are 25% lower than they would be if the U.S. were to remain as economically free for the next quarter century as it was in 2000.

In real dollar terms, this slowing of economic growth means that the accumulated reductions in annual per-capita income over the next 25 years—from what this income would be each year were economic freedom to remain at its 2000 level—could be as high as $200,000. That is, over the full course of the next 25 years, each man, woman and child in American could have, on average, as much as a fifth of a million dollars less to spend or save than they would have if America were now to again become as free as it was in 2000.

Government actions that reduce economic freedom are not costless. The recently released book, What America’s Decline in Economic Freedom Means for Entrepreneurship and Prosperity (which Boudreaux edited), explains the connection between economic freedom, entrepreneurship and economic growth.  The authors of all five essays agree that the freer the economy, the greater the amount of entrepreneurship (including small-business start-ups), and that the greater the amount of entrepreneurship, the faster and more widespread is economic growth.

Economic freedom, entrepreneurship and prosperity are connected

As economic freedom has declined so too has entrepreneurship as measured by business start-ups. Since peaking in 2002, the rate of business start-ups in the U.S. has declined by 25% (as of 2011). A rebound has been observed in 2012 data though there is speculation that it is artificial and based on regulatory avoidance rather than actual business creation. Even assuming the rebound in 2012 is legitimate, the decline in business start-ups is still a worrying 8% since 2002.

Understanding the connection between economic freedom, entrepreneurship and prosperity isn’t difficult. In a free market, entrepreneurs devise new products, as well as new methods of production and distribution. If consumers find entrepreneur Jones’s new product valuable enough to buy it a price that covers its cost, Jones reaps profits. If consumers find entrepreneur Smith’s new product to not be worth the price necessary to cover its costs, Smith suffers loses that are his to bear. This simple market test—one in which each consumer and entrepreneur spends his or her own money, and in which almost all economic transactions are consensual—is by far the best means yet devised for ensuring not only that scarce resources are used as productively as possible, but also that creative human effort is continually called forth to discover ever-newer and better ways to use resources.

Innovation isn’t fueled by government intervention

Although never perfect, America has long been the gold standard of a free society that encourages innovative entrepreneurship. From John Jacob Astor’s improvements in fur trading through J.D. Rockefeller’s drive to slash the cost of refining petroleum to Bill Gates’ and Steve Jobs’ innovations in making personal computing accessible and mobile, the American entrepreneur has been the key driver in creating high-paying jobs and a spectacular standard of living for the masses. Yet contrary to mantras fashionable on the political left, the evidence is strong that entrepreneurial innovation is fueled far more by economic freedom and an accompanying rule of law than by government infrastructure projects, government-juiced stimulation of aggregate demand, or subsidies, tariffs and other interventions.

Despite the recent decline in economic freedom, this is no time to despair. Economic freedom worldwide, including in America, grew impressively during the final quarter of the 20th century, liberating hundreds of millions of the world’s poorest people from crushing poverty and further raising the standard of living of all Americans. If public attitudes back then successfully demanded more freedom and less government regulation, there is every reason to believe that the same spirit of economic openness and entrepreneurial dynamism can be rekindled today. Our prosperity depends upon it.