January 31, 2013
The High Cost of Entrepreneurship
Posted by Christine Hurt

I've been chatting with my co-blogger Gordon, who is now next door thanks to this great visiting gig at BYU, about laws and entrepreneurship in advance of next week's Cornell law review symposium on the topic.  One of the memes in the literature is how law can facilitate entrepreneurship.  However, one thing that has struck me in researching microfinance is that laws in the United States do more to hinder entrepreneurship than assist it.  One group of laws intentionally tamp down on entrepreneurship and the other group unintentionally raises opportunity costs, which make the concept of microfinance a hard sell here.

1.    Regulation.  In the U.S., we have a lot of laws that are meant to protect citizens, promote health and sanitation, and generally promote safety in various industries.  That's great.  This is why I would much rather live here than in most counties.  However, some of the laws are used mostly to keep folks out of "professions" such as taxi driver, hair stylist, shoe shiner, etc.  The myriad occupations that require licensure strain logic.  Farmer's markets are filled with regulations about what sorts of things can be sold there.  So, in developing countries, if a microborrower gets a loan for $100, the microborrower can buy a goat and sell milk or baby goats, buy chickens and sell eggs, buy ingredients and sell pastries, or various other things that will support borrowing $100 even at a fairly high rate of interest.  However, in the U.S., that $100 would quickly go to license applications and wouldn't even begin to cover the cost of a certified commercial kitchen or a taxicab license.  So, in the U.S. "microloans" tend to be in the thousands of dollars through the Small Business Administration loan program or community development loan program to be used for small to medium enterprises, not microbusiness.  We have regulated out microbusiness.

2.    Opportunity Cost.  Because entrepreneurship in the U.S. takes the form of small to medium enterprises with large start-up costs, the cost is often more than the opportunity cost of being an employee.  In developing countries, there aren't many opportunities to be an employee, but in the U.S. there are.  Of course, in tough economic times, these opportunities dwindle, but even the prospect of a minimum-wage job may outweigh the risks of borrowing money for a small business.  This may be preferable -- many of the microborrowers I meet in developed countries would much prefer the stability of steady employment in a subsistence economy, but there are obviously deeper satsifactions that can be had by being a successful entrepreneur.  I think it's interesting that many of the successful start ups that we are familiar with are started by young, single men in college.  There opportunity costs are low.  It would be an interesting study to see what the opportunity costs were of most successful enterpreneurs. 

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