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How Focusing on Economics is Killing the American Economy

The American economist, William Baumol, categorizes entrepreneurs into three types. Defined broadly, all entrepreneurs are “ingenious and creative in finding ways that add to their own wealth, power, and prestige”. Productive entrepreneurs are the stereotypical entrepreneurs, innovators that push the economy forward. They grow the economic pie by starting new businesses or creating new products. Destructive entrepreneurs focus on stealing the pie for themselves; these entrepreneurs participate in illegal trade and scamming. And in between the Steve Jobs and Pablo Escobars of the world are unproductive entrepreneurs: those who strive to divide the pie in their favor.

These different types of entrepreneurs arise from different economic systems. Entrepreneurs adapt according to the economic system they’re in. They can either play by the rules or change them. In the United States, corporations are consolidating through $10 trillion worth of mergers, monopolizing markets. Recently, the share of profits for the top four firms in every industry have skyrocketed. Businesses grease the wheels of fiscal policy with gross campaign contributions and smooth-talking lobbyists to tip the scales in their favor. To keep their monopolistic control, big firms battle new businesses in patent courts to stifle innovation.

In the United States, the economy suffers from businesses taking on moral hazard. Businesses know that the government will bail them out in case of failure, as seen in the 2008 financial crisis. Essentially, the government won’t let them go broke. Thus, unproductive entrepreneurs are endemic to the American economy. Most telling of the presence of unproductive entrepreneurs is that the rate of business death is far greater than the rate of business creation. Essentially, the American economy is being leeched by unproductive entrepreneurs.

This may seem like an economic issue, but, at heart, it’s a political problem. According to Baumol, up until the end of WWII, politics, even economic policy, focused on primarily on its impact on American democracy. Instead of questions like, “how will this promote economic growth?”, politics was dominated by questions like, “how will this impact democracy?”. The economic disaster of the Great Depression changed that. With millions of Americans destitute and in poverty, democracy fell on list of priorities. Protecting citizens from economic ruin became the main goal. By 1960, as asserted by William Baumol, politics focused on economic prosperity.

Baumol asserts that the best way to prioritize the economy is to prioritize democracy. This seems counter-intuitive. To best deal with economic stagnation, economic solutions should be adopted, right? Well, the crux of the problem is both unproductive entrepreneurs and pocketed politicians. Pure economics is not an adequate solution for an inter-sectional problem. If entrepreneurs play by the rules of the game – fiscal policy – then the rules need to cater to the people, not businesses. Baumol suggests campaign finance reform and limiting special interest groups as steps to democratizing public policy. If the people rule, markets will behave accordingly. An effective, stable political system allows for a country to prosper economically, not the other way around.

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