It is a frequently made mistake. When the Bank of England recently announced that one of the most striking features of the economic recovery has been the record 4.5 million Britons who are now self-employed, Iain Duncan Smith claimed that this was evidence that the Coalition was “reviving Britain’s entrepreneurial spirit”.
Just as many other politicians, academics and analysts do, the Work and Pensions Secretary was conflating self-employment with entrepreneurship. In reality, the two are quite different – and policies to encourage one do not necessarily foster the other.
Consider the following: in the world’s developed economies, the countries with the highest rates of self-employment include Greece, Turkey, Spain, Portugal and Italy. The same countries have low rates of innovative entrepreneurship. The United States and Canada are, in contrast, two economies with high rates of entrepreneurship and lower levels of self-employment. Within the US, the entrepreneurial hotbed Silicon Valley has half the self-employment rate of the Californian average.
The reason for the politicians’ confusion is that self-employment is easily measured, while entrepreneurship is not. Indeed, entrepreneurialism is difficult to quantify. In some ways it is like an elephant: hard to define exactly, but easy to recognise once you see it. So, starting a company does not qualify as entrepreneurship if the business is, for example, a one-man taxi firm. Nor is it enough to innovate. Much innovation is carried out by large companies without any input from an individual entrepreneur. Even highly talented, creative individuals cannot be described as entrepreneurs if they lack the skills required to convert a brilliant idea into a successful business.
The Austrian economist Joseph Schumpeter defined the entrepreneur as an innovator and an agent of change. He coined the phrase “creative destruction” to describe this transformative process. Through creative destruction, established businesses are destroyed and replaced by new and typically improved methods of doing things.
Of the 100 largest public companies in the US, 31 were founded by an entrepreneur during the post-war era, creating more than four million jobs, compared to just seven firms in Europe creating about one million jobs. On a per capita basis, the United States has four times as many self-made billionaires as Europe yet has significantly lower rates of self-employment than virtually every other industrialised country.
We should recognise that most of the self-employed do not have the ambition to build such companies. Yes, they have some characteristics in common with entrepreneurs and play an extraordinarily important role in the economy. They create employment, reduce transaction costs, act as a safety valve with regards to crippling taxes and regulations, and lower the cost of goods and services. However, they do not generally seek to shoulder the role of an entrepreneur, driving innovation, challenging the status quo and going for strong business growth.
So, assuming that we see innovation and economic progress as a good thing, what can be done to encourage entrepreneurialism? To answer this question, we looked at the backgrounds of the 996 self-made men and women who have earned at least $1 billion and who have appeared in the Forbes list of the world’s richest people between 1996 and 2010 – the “Super-Entrepreneurs”.
Our data show striking differences in the proportion of Super-Entrepreneurs in different parts of the world. The highest rate is found in Hong Kong, which has 2.8 Super-Entrepreneurs per million citizens. Israel is in second place with a rate of 1.8 per million, with the U.S third place with 1.3 per million.
The UK is in 11th place, lower than both Canada and Australia, but with nearly twice as high a rate as the average of the eurozone countries. Richard Branson, Philip Green and James Dyson are typical of the entrepreneurial spirit – building their fortunes on that combination of innovation and creative destruction – that is still flourishing in Britain today.
Indeed, entrepreneurialism is strongest in countries that share the English common law tradition – five times higher than those with a French legal origin. There is also a strong correlation between high rates of entrepreneurship in a country and low taxes. Equally, a low regulatory burden correlates strongly with high rates of entrepreneurship. On the other hand, those government and supranational programmes that politicians love to announce to encourage entrepreneurship – such as the EU’s Lisbon Strategy – tend to fail.
The lesson is clear: to encourage innovation and entrepreneurialism, governments should do as little as possible, beyond cutting taxes and regulations.
Entrepreneurship is a risky process, in which success often depends on having exceptional skills and unique knowledge – and a fair share of good luck. But it is not the same as self-employment, nor should politicians of any party assume that policies that encourage self-employment necessarily promote entrepreneurship.