Monday, October 8, 2012


Noah Smith has a dynamite post on a recent economics paper.  It puts forth the idea that "cuddly" countries (i.e. Sweden) are parasitizing off of "cut-throat" countries (i.e. the United States).  The problem is the modeling assumptions.  In one especially problematic passage of the Daron Acemoglu and James Robinson paper is:
We assume that workers can simultaneously work as entrepreneurs (so that there is no occupational choice). This implies that each individual receives wage income in addition to income from entrepreneurship[.]
This basically, all by itself, destroys the link between their model and real world experience.  How many people do you know are able to do these two things at the same time?  How can the time spent in your garage inventing Apple computers not reduce your ability to work at a demanding corporate job?  How many people can draw a full wage and benefits while working for themselves on a small start-up?  Can we really believe that there is no financial sacrifice at all? 

Then I think about things like Health Insurance.  When reading about a small retail businesses (see this comment thread), one thing that was clear was how useful it is to have a spouse with a good job (i.e. one that gives out health insurance).  How can the need to construct these elaborate safety net plans possible improve the success rate of small business? 

Another assumption that seems implausible:

Also, the authors assume that entrepreneurs do not put up any of their own wealth as startup capital for their ventures, and they assume no heterogeneity between worker/entrepreneurs. This means that it is just as easy - and no more risky - for a poor person to start a successful company as for a rich person to do so.

I am reminded of the founder of Jimmy Johns who started a business with a $25,000 loan from his father (in 1982 dollars).  It's an inspirational story, but what about people who did not have parents with that level of capital to just give to their children?  Would he have been as successful if he stopped by a bank and asked for a loan?

Instead I want to think about whether you see the reverse in terms of entrepreneurship.  Look at Sweden versus the United States -- why do they have more entrepreneurs? 

Which brings us to the final problem -- innovation being measured by patents.  Are we really excited to see Apple and Google spending more on patents than research?  After all, patents prevent emulation of good ideas and slow innovation.  In theory the patent process is intended to reward innovators, but are we positive its real effect isn't to enrich lawyers? 


  1. The use of patents as a metric is particularly troublesome given stories like this

  2. The Atlantic article on entrepreneurship is very interesting.