Entrepreneurship and self-employment

Göran Greider is the most important intellectual for the old Social Democratic movement in Sweden. He writes an article (in Swedish) claiming that Sweden's problem is that it has "too many" entrepreneurs.

His example (which is true) is that Greece has one of the highest self-employment shares in the OECD.

The first problem with the article is that Göran Greider does not understand the difference between self-employment and entrepreneurship.

Entrepreneurship is, according to the dominant Schumpeterian delineation, defined by innovation and growth by individuals who create new organizations. Entrepreneurship is an economic function, and an important one.

Self-employment on the other hand is simply an contractual form, you work for yourself.

Most self-employment is non-entrepreneurial.

You get lots of self-employment when transaction costs are too high and the institutional quality low, such as in Greece. However, you have to be pretty ideologically blind to claim that Greece has many entrepreneurial firms.

Indeed, self-employment varies negatively with per capita income. But does entrepreneurship? This graph tells us nothing about those, much fewer individuals.

Greece has some shipping (Panayotides, Economou) and Intracom. That's basically it. Of the largest public Greek firms in my data, 0% were founded before 1945 by an entrepreneur. In contrast about 31% of the 100 largest American firms are founded by entrepreneurs (due to data constrains I can only value publicly noted firms, but of course most important firms in developed economies are public).

Aside from his bewilderment about what entrepreneurship is, Greider constantly and quite painfully confuses causality with correlation. He thinks that because countries have high self-employment are poor, self-employment causes poverty. This lack of training in stringent logic is typical of the Swedish left (and, to be frank, of Swedish social-liberals).

A contractual form can be motivated for different reasons in different contexts. Iran has a almost 40% self-employment rate (according to the ILO) because its economy works bad. Sillicon Valley has high self-employment rates because they engage in activities where controlling your firms directly is an advantage.

I don't feel like expanding this point: everyone should understand that the motivation for self-employment and the alternative matters for the policy evaluation. Sillicon Valley would be harmed by forcing the tech-people to all work for large firms. Iran would be even poorer if the self-employed were forced out by Greider-style policies: the reduction in the self-employment rate as a nation develops has to come about organically as the economy reorganizes, not ordered above by a leftist journalist who knows almost nothing about the subject. Even in highly developed countries important roles for self-employment as a contractual solution remains, otherwise so many would not engage in it rather than taking secure jobs in large organizations.

Greider claims that most of innovation takes place in non-entrepreneurial firms. He should start by reading William Baumol, who explains the division of labor in terms of radical innovations (entrepreneurial firms) and incremental improvements (large public firms).

Moreover, we simply have no idea to compare innovation in non-entrepreneurial firms with entrepreneurial ones because it is currently impossible to measure innovation. A commonly used measure, patents, is not the same as entrepreneurial innovation for at least two reasons: first because most patents are granted for small, incremental improvements and second because dramatic new ideas are rarely patented.

Nor is all innovation purely technological. Wall-Mart, Starbucks, Trader-Joes, H&M and IKEA are examples of market entrepreneurship, rather than technological entrepreneurship. All of them greatly added to the standard of living but how many patents did they produce?

Furthermore, while innovation does not take place in small self-employed firms, much of the most important innovation the last few years has taken place in large entrepreneurial firms, such as Intel, Apple and Google.

Those firms are large. Why? Because if you make a important innovation, in a functioning economy, you tend to grow.

Does Greiders and his Social-Democratic fans want to deny that these firms are innovative? Or that they are entrepreneurial?

In this mess of an article, Greider has exactly one important point. The prestige and gratitude that we grant entrepreneurship when they create well paying jobs and improve the standard of living should not be automatically bestowed upon non-entrepreneurial self-employed firms.

However, the non-entrepreneurial self-employed have other extremely important and different role in the economy. They reduce the cost of services. They provide jobs for groups who large established organizations discriminate against, such as immigrants in Sweden. They give people who don't like to work for a boss personal freedom (the self-employed often have higher self-reported happiness than workers). Marx was concerned with the alienation that large organizations causes, has Greider forgotten that?

And most importantly, self-employment mitigates transaction costs, because of tight personal control (which Alfred Marshal already noted). It is silly to evaluate taxi-drivers and pizza-bakers by how innovative they are. That is not their economic function.

Attacking self-employment because it is associated with a problem (high transaction costs and under-development) is like attacking head-ache pills because taking pills is correlated with having headaches. It is quite a primitive analysis Greider is engaging in.

I will also do Greider a favor and link to a better critique of self-employment promoting policies by David Blanchflower.

Japan's population structure

The population pyramid is inverted: Population growth is zero: Japan's population is projected to shrink by approximately 32 million persons, or 25%, over the next forty years: Source: Statistical Handbook of Japan 2009 Assuming an average household size of two persons, this would mean that about 12.5 million housing units would become excess during this time frame. That would be a

Do the super-rich live longer?

Yes, billionaires seem to live 3.5 years longer than other American men. You are better off being a Mormon than Bill Gates in life expectancy terms.

Of course there is a huge selection problem here. For example these guys may be more stressed than average.

Fredrik Reinfeldt and Anders Borg prove Milton Friedman right

The Swedish working class has very strong historical ties to the Social Democrats. But they also have very strong work ethics, and don’t like the fact that so many people are not working and living more or less permanently of the state. This insight formed the ingenious political strategy of Fredrik Reinfeldt and Anders Borg, who made the lack of jobs and high welfare dependency (rather than per capita income) the central argument in the political debate.

Because of its inability to fix this problem, in 2006 the Social Democrats were voted out of power in Sweden. The new center-right government undertook a quite dramatic range of supply side policies, including large tax cuts, reduced unemployment insurance and tighter rules for sickness insurance. People going on early retirement and sick-leave are particularly big problems in Sweden, despite the fact that Swedes are very healthy.

The goal, and the promise to voters, was to increase labor supply.

But as we all know the crisis hit Sweden in 2008, making unemployment increase dramatically due to reduce demand (both for our exports and internally). Keynesians tell us that when there are demand problems, supply side reforms have no effect.
Once again Sweden is proving this wrong.

According to new data from Statistics Sweden dependency on government welfare program was sizably lower in the first quarter of 2010 than 4 year ago.

In the first quarter of 2006, 11.7% of the Swedish population lived of government transfers in full year equivalence terms. (in this measure if you live of the taxpayers for 6 months you are counted as only 0.5 people).

In the first quarter of 2010 this number was reduced to 9.6%.

In fairness to the Social Democrats, some of this change took place before the new center-right policies had any effect. Nevertheless managing to reduce the dependency rate by one fifth while the world economy was crashing shows us the power of economic incentives, even in the archetypical welfare state.

Some lazy, self-centered blogging

I will be traveling the coming weeks. So instead of doing the analysis needed for a real post, let me write a little about myself, and put up articles I have already written.

I was born in Tehran in 1980. My parents are from the Kurdish town of Sanandaj. At age 9 my younger brother, my mother and I moved to Sweden. Since my mother was ill, after a few years of living in camp we received asylum for humanitarian reasons (about 30% of asylums are given for humanitarian reasons in Sweden, which means the person did not have a real case for asylum, but gets to stay in Sweden anyway because the Swedes feel sorry for them).

From the time we moved to Sweden until I started college and started getting student loans, we lived on welfare. While very grateful to the Swedish people, this experience convinced me that the their system was way too generous and not properly designed to give immigrants incentive to work, integrate and acquire the Sweden-specific human capital that is needed to succeed.

I attended to the Stockholm School of Economics, followed by the University of Chicago. I am currently a third year student at the Harris School of Public Policy. I expect to be done next year, and hope for a job in academia or in a think tank, preferably in California, D.C, or somewhere warm in the South. I will be happy with any job where I get to do research.

I am affiliated with IFN, a Swedish research institute, and with Captus, a small think tank my brother started.

Politically I am fiscally conservative, but socially libertarian. I thus agree with the Democrats on issues such as gay marriage and teaching evolution in schools, and with conservative Republicans on economic policy. Since the modern western democracies have few infringements on private liberty but lots of infringements on economic liberty, I weight the second more heavily.

In Sweden I vote for the Center-right Moderate party, especially under Fredrik Reinfeldt and finance minister and capable economist Anders Borg. My philosophy is that political ideology has to be adapted to the culture and institutions of the particular country. In other words, it has to be compatible with their national ethos.

Anglo-Saxon classical liberalism, which I personally enjoy, is not suited to the Swedish ethos. Unlike Americans, Swedes are not very independence minded, but instead are very inequality averse. A center-right program for Sweden has to be based on Scandinavian values and preferences.

Furthermore, because they still have stronger work ethics and a very homogeneous and productive population, policies such as generous replacement rates in unemployment insurance and high effective minimum wages are less destructive in Sweden than they would be in the U.S. (Needless to say as norms are eroded and as more of the population are non-Scandinavians, the associated problems are likely to increase.)

I thus oppose American economic policies in Sweden as much as I oppose Swedish policies in the U.S (and for many of the same reasons). Sweden should focus on cutting taxes to average European - not American - levels and fixing immigration.

The thinker who have made the strongest impression on me is Milton Friedman (not hard to guess...). Second is Samuel Huntington.

My favorite non-Chicago Economist is currently Raj Chetty, who is transforming public finance. Bryan Caplan has done the most interesting novel work in political science. My favorite Swedish economist is of course Magnus Henrekson.

Here are the list of the papers I have written, often with others, ordered by self-perceived quality. Notice that they can be read in place of blog posts!


Work in English:


1. "A Cross Country Measure of High-Impact Entrepreneurship"

My doctoral thesis. Not online.


2. "Reversion to the Racial Mean and Mortgage Discrimination"

This paper shows that using current year income can lead to somewhat wrong results when trying to capture race and ethnic differences, because of measurement error in income and a process called reversion to the mean. Results of standard discrimination equations can therefore be wrong (although in practice the difference may be only moderately sized).


3. "Taxation and the Quality and Quantity of Entrepreneurial Firms"

This paper shows that marginal taxes can effect entrepreneurship in a unexpected way. By reducing the option value of really good ideas, high taxes can lead to more mediocre quality entrepreneurship, increasing the number but reducing the average quality of entrepreneurs.


4. "Entrepreneurship and the Theory of Taxation"

To analyze taxes we must first understand the process being taxes. Here we argue that Entrepreneurship is different from passive investment in large, public firms and therefore effected differently by taxes. This paper is forthcoming in Small Business Economics.


5. "Fiscal Illusion and Fiscal Obfuscation: An Empirical Study of Tax Perception in Sweden"

We show that the Swedish public systematically underestimates the tax burden, and also is generally misled about the incidence of payroll taxes.


6. "The Interaction of Entrepreneurship and Institutions"

William Baumol showed that institutions can determine the type of entrepreneurship, if it is mostly productive or destructive. We extent the analysis to the opposite relation, the impact institutional/political entrepreneurs have on the rules of society.


7. Book review William Baumol: "The Microtheory of Innovative Entrepreneurship". Forthcoming in the Journal Of Economic Literature.




Work in Swedish. The last 3 are published in Swedish economics journal "Ekonomisk Debatt."

8. "Ägarbeskattningen och företagandet : om skatteteorin och den svenska policydiskussionen"

Book about dividend taxes and taxes on entrepreneurs.


9. "New perspectives on property taxation"

Argue that savings in home equity to a large extent follows behavioral savings models, in which case taxes on home equity may be more distortive than otherwise. Some discussions on the role of social norms for savings and taxation.


10. "Wrong to dissuade private equity buildup in private housing"

Same as above, the tax system should not promote borrowing and low solidity. Equity finance reduces the instability of an economy, whereas large loans and low solidity create volatility. Yet the tax system rewards the later and punished the former.


11. "Flat tax: More efficient taxation could end up costly"

The tax system should be analyzed in a general equilibrium setting, taking into account the effects on the political system. If flat taxes make it easier to expand wasteful spending, we are actually better off with a less efficient tax system (from a pure economic point of view).

Mormons in America live longer than people in Sweden

As everyone knows, West Europeans live longer than Americans. In 1994-1998, the years for the study I am citing, Swedes lived 79.0 years, compared to 76.8 years for Americans. That is a 2.2 year advantage.

Generally, this difference is attributed to the health care policy. As you know, I believe that the public debate over-attribute effects to policy, and under-estimates other factors, including culture, norms and demography.

What fewer people know is that within the U.S, Mormons live far longer than non-Mormons. In Utah, LDS members live 6.5 years longer than non-members. This is a massive difference, indicating that life style, rather than health care system, is dominating the effect.

Overall, Utah (with low per capita income) has the third highest life expectancy in the U.S, after Hawaii and Minnesota (both incidentally states that are demographically unique).

What is even more impressive is that Mormons in the U.S lived 79.75 years, or 0.7 years longer than people in Sweden. (data again for 1994-1998. Sweden is above average in Europe, so the finding from this comparison applies even stronger to most other Europeans countries).

Do all the people who think the U.S should adopt the Swedish health care system to live longer advocate that Americans and Swedes convert to Mormonism to live longer?

I somehow doubt it.

Terrible American life style, combined with high crime and traffic deaths, are more likely explanations for the gap in life expectancy between the U.S and Europe than health care policy. An especially powerful piece of evidence for this is that rich Americans, who have access to all the health care they want, also live shorter than rich Europeans, who do not have access to better health care than the rest of the population.

Another fact that surprises most people is that the gap between the rich and the poor in the U.S in use of health care is not larger than the average of other OECD countries. Equal health is more a political slogan than reality in Europe, where the poor live much shorter than the rich.

A political map of American voters

Using the 2004 National Annenberg Election Survey (a large super-poll of the American public) I can create a political map of self-described political opinion in 2 dimensions: fiscal and social conservatism/liberalism. We also have data on how each group voted. Sample size is 7000.


This is particularly important for europeans to understand.

Social conservatism was a somewhat stronger predictor of voting for Bush in 2004 than Fiscal conservatism.

Here is a nicer picture with all the data:


Unlike what is implied in libertarian political theory, fiscal and social conservatism are strongly correlated. About 60% of voters are located on a one-dimentional axis.


Still the group who like me is fiscally conservative but socially liberal/moderate is significant, at 16.3% of the voters. Libertarian leaning voters are in this group. The segment that is fiscally moderate/liberal but socially conservative is smaller at 11.7%.

Furthermore, the first group is much more common among the elite and opinion leaders than the second group. That is the direction the Republican party should take.

Fiscal Liberal, Social Conservative is the amusing sounding ideology of 30 Rock character Dennis Duffy, and is the smallest segment in the U.S. The joke works because the educated elite accept fiscal conservatism, some even admitting grudgingly that that is the intellectually superior position. Social conservatism on the other hand is (somewhat) unfairly viewed as having no intellectual foundation.

People who are both Fiscally and socially conservative are dominant at 30% of the population. Fiscal and social liberal is only 11%.

However, in the U.S liberal has become a dirty word (because of the failed liberal experience in the 1960s and 1970s). So many don’t admit to being liberal. Moderates are thus more Democrat than Republican. Many of those who call themselves moderate are really liberal or progressive.

Fiscally liberal, socially moderate/conservative voters did not vote for Bush. The reason is that this group is to large extent made up of minorities.