Entrepreneurs and Washing Each Other’s Laundry

I was reading this post on Megan McArdle’s blog at The Atlantic online yesterday.  It’s one of several places of late where I’ve heard what seems to be the current mantra for dealing with stubbornly intractable unemployment rates:  entrepreneurship.  The idea is that jobs that are well-defined and routine–those that have traditionally been stable, well-paying jobs that, while not exciting, could make for long-term employment and careers–are either being automated or outsourced.  Thus, the solution to this problem is said to be an increase in and encouragement of entrepreneurship, freelancing, and flexibility in the workforce.  McArdle quotes Arnold Kling, at the Library of Economics and Liberty site:

The paradox is this. A job seeker is looking for something for a well-defined job. But the trend seems to be that if a job can be defined, it can be automated or outsourced.  The marginal product of people who need well-defined jobs is declining. The marginal product of people who can thrive in less structured environments is increasing. That was what I was trying to say in my jobs speech.

The money quote from the end of the article, by McArdle herself,  is  “I don’t think it’s unfortunate that progress is being made, and a lot of fairly boring jobs are being eliminated.  I do think it’s unfortunate that people don’t like it.”

This is food for thought.

Back in the early 90’s there was a lot of talk about the so-called “service economy”.  As the US de-industrialized at an increasingly rapid pace, especially following the passage of NAFTA, and as the information revolution continued apace, the idea was that domestically we no longer had to “make stuff”.  All that nasty industrial production, or at least most of it, would be moved abroad, whereas Americans would increasingly work in fields that would mainly produces services, not actually physical products.  The areas most cited for this were information technology, web design, and related tech professions.  Everyone would benefit–developing nations would gradually improve the lot of their citizens by employing them in industry, thus heading down the road on which we began a century and more ago; and we would be freed from boring blue-collar industrial jobs so that we could do fast-paced, exciting things that had never been done before.  Utopia, here we come!

Of course, it didn’t quite work out that way.  Not least was that, as we see in retrospect, most of the economic booming of the Roaring 90’s was actually driven by looser financial regulations (e.g. the repeal of the Glass-Steagall Act) and various bubbles, beginning with tech (remember the mantra “growth over profits”?) and ending with the real estate bubble of recent years.  As unemployment refuses to budge much, it seems like making stuff might not  have been a bad idea after all.

It shames me a bit to admit that at the time, I bought in to the “service economy” hype, for a while, at least.  I remember a conversation I had with my father at the time.  He was (correctly, as it turned out) skeptical of the service economy.  He said the whole thing sounded to him like the old joke about a town with dozens of Chinese laundries.  An outsider asks one of the laundry owners how all the laundries manage to get enough business in the small town; to which the  manager replies that they all wash each other’s laundry!  Silly, perhaps, but a perfect example of how circular thinking never works.  If a purely service economy were sufficient, after all, there are many towns in the West that would not now be abandoned ghost towns, but would have continued to prosper long after the mines ran out.  All shifting of resources and all modern technology aside, the fact remains that any economy ultimately has to be producing things (raw materials or natural resources) or making things (manufacturing).  Everything else is dependent on these, and without them tends to spiral downward–as we’ve seen over the past decades.

It’s the same with entrepreneurship.  Forget for the minute what should be obvious problems with the idea of “more entrepreneurship to jump-start the economy and reduce unemployment”.  That is, not everyone has the temperament or skill set to be an entrepreneur in the first place.  To say that legions of people now unemployed should become entrepreneurs and start their own businesses is not unlike saying that they should become brain surgeons, race car drivers, or radio announcers.  The requirements for being a brain surgeon are more rigorous, perhaps, than those for being an entrepreneur, and the requisite skills rarer; but to say that most or even many have the appropriate skills to be entrepreneurs is no more logical–or true–than saying that most or many could be brain surgeons.  In any case, while this is, in my view, a strong argument against the more-entrepreneurship fad, it’s not what I’m most interested in looking at.

Rather, I see it as more of the Chinese laundry syndrome.  If everyone–or a large segment of the population, at any rate–does open his or her own business, then to whom do they sell?  Another way to put it is this:  what is the ultimate basis of a greater number of small businesses?

Consider:  A business is either A. producing a good directly, or B. providing a service, or C. selling something retail after buying it wholesale.  In the current economic climate, A seems to be out.  Farming, mineral extraction, and manufacturing are all increasingly in the control of large corporate entities, and all have prohibitive entry costs for most individuals.  B–well, we’ve seen that you can’t have a circle of people providing services to each other without some kind of underlying economic base.  C seems to be the only large-scale option left, but how does one implement it?  Is the idea that the legions of  unemployed should start setting up stores and selling goods–when there are stores already existing that are being shuttered every day, when the expenses and difficulty of setting up small businesses are great enough for those who aren’t unemployed already, and when consumer spending is down?  Can anyone take this seriously?

Now, I’m not condemning entrepreneurship as such.  I freely admit that I am not of an entrepreneurial temperament, and I can hardly imagine making a lemonade stand succeed, let alone a small business.  We do need entrepreneurs; they certainly aren’t going to be bad for the economy; and to the extent that entrepreneurship can help create jobs, boost the economy, etc., I’m all for it and for supporting it.  I just don’t see it as being some kind of panacea, even in principle.  The fact remains that historically the majority of the population has worked in agriculture or various types of industry.  The service and business sectors have always been dependent, ultimately, on those two areas, and to think that they can function separately from them in not only unhistorical but altogether fatuous. 

So, what to do?  I wish I had the answer to that–heck, I wish that someone out there had the answer to it.  All evidence, alas, indicates otherwise.  In any case, I’m sure we’ll hear plenty more about entrepreneurship as the savior of our economy before it fails to pan out and the next fad comes along. 

Posted on 23/09/2011, in econmics, politics, social commentary, Uncategorized and tagged , , , . Bookmark the permalink. Leave a comment.

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