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Digital Startups in Transition Economies: Challenges for Management, Entrepreneurship and Education Agnieszka Skala
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To Hannah, Lynne, and Ryan
Contents
Preface
Introduction
1. Something Is Happening, but We Don’t Know What It Is
2. The Good News: Most Measures of Entrepreneurship Have Improved
3. Entrepreneurial Earnings Are on the Rise
4. Riding High
5. The Implications of Fewer Employer Startups
6. It’s Not a Lack of Capital
7. Don’t Blame the Regulators
8. High Taxes Are Not the Cause
9. It’s Not a Lack of Immigration
10. An Aging Population Isn’t the Reason
11. Slowing Population Growth Isn’t the Explanation
12. Rising Student Debt Is Not the Cause
13. Don’t Blame a Loss of Moxie
14. Employees Have Become Too Expensive
15. Chains Have Replaced Independent Employers
16. The Story the Data Are Telling
Notes
Index
Preface
This is not the book I intended to write. About two years ago, I sent a proposal to William Frucht at Yale University Press for a book explaining why entrepreneurship in the United States was in longterm decline. After concluding a series of conversations with entrepreneurs, academics, government officials, media pundits, and representatives of major foundations that support economic development, I had become convinced that something was seriously wrong. The experts showed me evidence of a long-term decline in business formation and gave me earnest explanations of what had gone wrong. Each one encouraged me to investigate the problem and then write a book explaining the causes and offering his or her solution.
It took me longer than expected to write this book because my initial premise was wrong. American entrepreneurship isn’t in decline. But it has changed. The entrepreneurs, academics, government officials, media pundits, and economic development professionals I had spoken to were incorrect because they had looked at only a small part of the total picture. Because they often sought to advocate a particular set of policies, they had drawn conclusions from small bits of data.
Examination of all of the data tells a far more complex story. The Twitter-length summary of my two and a half years of investigation is this: “Entrepreneurship up, but new employers down. Existing small biz doing OK. Labor costs and chain growth to blame.”
If you think you can understand complex economic phenomena from tweets, save your money. Put the book back on the shelf. You have the answer.
But for those of you who want to understand what has happened to entrepreneurship in America, read on. It’s an interesting and complex story, and one that few people in government, the media,
or academia know. As someone whose job is to follow statistics on entrepreneurship intensively, I was surprised at where the data took me.
I looked at statistics from the Internal Revenue Service, the Federal Reserve, the U.S. Census, the Bureau of Labor Statistics, and many other sources. At first they were a jumble of conflicting numbers, but eventually they began to tell a story. It wasn’t the story I set out to tell.
Once I had all the data patterns, I went back to all the theories the policy makers, academics, and media folks were proposing, and I compared the data to their explanations to see whether they could possibly be correct. In a few cases, they could. In most cases, they could not. The data were simply inconsistent with the explanation on offer.
I ended up looking through many more data sources, articles, and books than I had intended. From that process, I discovered the work of several obscure researchers who had figured out what was happening when the rest of us were largely clueless.
I am indebted to the authors of the surveys, research projects, books, and articles who gathered and summarized these answers. Their work was crucial to my effort to describe the reality of entrepreneurship and how it has changed.
I had the great fortune of working with Mark Schweitzer at the Federal Reserve Bank of Cleveland and Ian Hathaway of Ennsyte Economics, both of whom helped this book immensely. While an astute reader will see that I do not necessarily agree with everything these authors have written about entrepreneurship in recent years, their analysis of the topic has forced me to sharpen my own analysis and to look harder at what the data showed.
Over the years, many colleagues have taught me a great deal about the topics discussed in this book. Howard Aldrich, Per Davids son, Frederic Delmar, Jon Eckhardt, Bill Gartner, Dave Hsu, and Nicos Nicolaou stand out as particularly important. This book would not have been possible without their help.
My editor, William Frucht, believed in this project when many others did not. He did not flinch when the book took a completely
different turn from what I had initially proposed. For his willingness to take a chance on it and stick with it through the turns, I am truly grateful.
Lastly, I would like to thank my wife, Lynne, daughter, Hannah, and son, Ryan. They have all helped me in their own ways: Hannah and Ryan by being excellent playmates when I needed breaks from writing, Lynne by encouraging and supporting my efforts, including the creation of this book.
Introduction
We Americans love entrepreneurs. As Malcolm Gladwell wrote, we see company founders like Sergey Brin, Bill Gates, Steve Jobs, and Mark Zuckerberg as “our new prophets.”1
Gladwell aside, however, this attitude is not new. Entrepreneurship has been central to our nation since its inception. Entrepreneurs have played an important role in the development of new technology, the generation of wealth, and the creation of jobs and have been a major reason other nations have looked to the United States as an example. As Alexis de Tocqueville wrote (not entirely approvingly) nearly 200 years ago, “As one digs deeper into the national character of the Americans, one sees that they have sought the value of everything in this world only in the answer to this single question: how much money will it bring in?”2
The importance of entrepreneurship to America means that those in Washington take very seriously any indication of weakness in its performance. Lately, many policy makers and pundits have become worried. They have seen evidence of stagnation, even a downturn, in American entrepreneurialism. As David Burton, senior fellow in economic policy at the Heritage Foundation, told a congressional committee in 2015, “Entrepreneurship is in decline.”
Americans, it appears, are not starting new businesses with paid employees at the rate they once did—at least according to several data sources. For instance, the formation of “new employers”—the term the Census Bureau has given to companies with paid workers— has fallen below its replacement rate. Since 2008, according to Census Bureau records, the number of employer businesses shutting down each year has exceeded the number formed.3
If entrepreneurship were in decline, the implications could be enormous. Shrinking entrepreneurship could mean a more rigid
economy, one less able to respond to shocks. Older firms are less flexible than new firms. They cannot hire and fire as quickly or shift direction as easily. A reduction in entrepreneurial activity could thus make it more difficult for the economy to respond to changes. New technology might spread through the economy more slowly; labor markets might adapt less well to recessions and recover more slowly during expansions.
New employers are a key source of job creation. If American entrepreneurs are founding fewer new companies, then the economy might be producing fewer jobs, leading to less employment in the long run.
The opportunity to start companies plays an important social and economic role. Starting a business has historically been a key avenue for getting ahead for those not born wealthy. A big decline in employer firm formation might mean a dramatic cut in class mobility.
Janet Yellen, the chair of the Federal Reserve, does not say very much about entrepreneurship and how it affects economic mobility, but occasionally she addresses the topic. In October 2014 at the Conference on Economic Opportunity and Inequality in Boston, Yellen highlighted the adverse effects a decline in entrepreneurship could have on economic mobility: “The ownership of private businesses is a significant source of wealth and can be a vital source of opportunity for many households to improve their economic circumstances and position in the wealth distribution. . . . It appears that it has become harder to start and build businesses. The pace of new business creation has gradually declined over the past couple of decades.”4
One of the hallmarks of entrepreneurship is its ability to create many Horatio Algers. Only a small fraction of new employers grow and generate wealth for their founders. If that fraction remains roughly constant yet the number of companies formed declines, it could mean less economic mobility. Fewer successful new businesses could mean fewer people riding them up the economic ladder.
Moreover, economic mobility does not just come from high-growth companies. Entrepreneurship offers a tax-favored way to earn a
living and lets people boost their incomes by increasing the amount they work. Even founders of small businesses that never grow often move from poor to middle class.
Another reason policy makers should be concerned about a potential decline in entrepreneurship is that new business creation is important to economic productivity. Productivity—the ability to generate more output from a given amount of inputs—is a key way for an economy to improve living standards, and investing in machinery and equipment boosts productivity. New technologies and equipment allow businesses to produce more output for each hour of worker labor.
Entrepreneurship plays an important role in generating capital investment. New businesses tend to make larger investments in capital equipment and structures than comparably sized companies already in operation because these investments are necessary to get businesses going. If entrepreneurship were to decline, businesses might engage in less capital investment, which in turn would reduce productivity growth. New businesses also tend to be created with current technology, which generally yields higher productivity than older technology.
A decline in new businesses could also mean a decline in innovation. Not all new technologies are developed by new and small companies, of course, but many are. Small firms produce more new product innovations per dollar of research and development expenditure and per employee than large firms.5 These innovations are, of course, a key to productivity growth. When a small company comes up with a new product or service—the personal computer or the electronic spreadsheet—that advancement contributes to productivity.
In contrast, businesses that die are generally the least productive. Companies that make efficient use of resources are more likely to stick around than less efficient ones. And this efficiency increases with turnover: new businesses often start because they have a better—more productive—way to accomplish the same goals as existing businesses. Constant formation of new, more productive
businesses to push aside older, less productive businesses is one way that productivity increases across an economy. If this process were to slow down, the rate of productivity increase could slow as well.
Many people have seen the data on new employer firm formation rates and are sounding an alarm. White papers, columns, and blog posts decry the problem. “American Entrepreneurship Is in Decline,” the headlines blare, and something needs to be done to stimulate it. Editorials assure us that policy makers must intervene to protect the country’s business founders from economic ruin. The suggestions range from issuing startup visas and boosting entrepreneurial education, to fixing the tax code, subsidizing credit, changing our culture, cutting regulation, and investing in broadband.6 The list goes on and on. In 2015, David Burton of the Heritage Foundation offered ninety-seven separate recommendations to Congress, relating to “tax policy, securities regulation and capital access, health care, energy and environmental regulation, administrative law and regulation, employment and labor law, immigration and the legal system.”7
There are several issues with this rush to offer up solutions. The first is identifying whether there really is a problem. One indicator of entrepreneurship—the rate at which new employers are being created versus the rate at which existing ones shut down—doesn’t look good these days. But it is not the only measure of entrepreneurship; we need to look at other measures before we conclude that entrepreneurship per se is in decline. Also, these data are from the U.S. Census, and different data, like those from the Federal Reserve and the Bureau of Labor Statistics and the Internal Revenue Service, do not always agree with the Census. We should look at those sources before we rush to conclude that American entrepreneurship is in decline.
The second is the problem that the rate of creation of highpotential businesses (as measured by angel- and venture-capitalbacked companies) has gone up over the same period that the rate for formation of more typical employers has gone down. We need to
know if the rise in the rate of creation of those kinds of businesses makes up for the decline in the rate of formation of more typical employers before we conclude that something is wrong. But no one is weighing the value of the types of new businesses that are being created at a faster pace against the value of the companies that are being started at a slower pace. If we are creating more venture capital- and angel-backed companies, but fewer mom-and-pop retail shops, that might be OK for job creation and GDP growth. A few extra Facebooks and Googles are probably worth a lot of clothing shops on Main Street because they produce a lot more jobs and economic output.
Third, the decline in the rate of formation of new employers might not in itself be a problem. Unless the decline has adversely affected a key aspect of the economy, like productivity, employment, or GDP growth, it does not matter. People often think of new employers like motherhood, baseball, and apple pie. Somehow, they think, a high rate of business creation is important in its own right. But employer firm formation is not an end in itself.
When people are creating new companies, they are allocating resources—their time and money—to the formation of those entities. If their time and money would be better spent on other things, for example, working for big companies or on leisure activities, then a high rate of new employer creation is not a good thing; it is a misallocation of resources.
What we really need to know is whether the decline in the rate of employer creation has adversely affected our economy or society. The data on that question are not really convincing, as I will show. No one has linked the decline in the rate of employer creation to a fall in overall employment, a slowdown in productivity, or deceleration of GDP growth. In fact, it is possible that the decline in the rate of employer creation has kept employment, productivity, and GDP growth from being worse than it otherwise would have been.
Fourth, it’s not clear that any of the proposed solutions to the decline in the rate of new employer firm formation will work. Editorial writers and elected officials tend to think that complex
problems have easy solutions. Seeking to justify a position on one side or another and advocate pet policy positions, many observers look only at the numbers that fit their world views—then propose solutions that don’t fit the problem.
Whatever has happened with entrepreneurship in this country will not be fixed simply by deregulating, cutting taxes, or issuing immigrant visas. The patterns may result from factors that government does not control. And every proposed solution—to anything—has unintended consequences. Bearing that risk makes sense only if the proposed solution addresses the actual cause of the problem. To figure that out, we need to examine the data and trace out what the decline in entrepreneurship actually consists of and whether the cause we have proposed is plausible or not.
This book offers a careful look at the data—all of it—to see what has happened to entrepreneurship in America over the past thirtyplus years. I look closely at the indicators from the Federal Reserve, the Bureau of Labor Statistics (BLS), the Census Bureau, the Internal Revenue Service (IRS), and the rest of the alphabet soup of federal agencies that have collected good data on American entrepreneurship over the past several decades. I look at the private sources as well—the data from top academic institutions, like the University of Chicago, and trade associations, like the National Federation of Independent Business, that have been gathering the numbers for a long time.
Those sounding the alarm are not completely wrong. Some measures are clear and should concern policy makers. Americans have cut back dramatically on starting new businesses with employees. In 2013, according to Census Bureau data, the per capita rate at which Americans started new employers was only half of its 1977 level. That is a big decline and one worthy of scrutiny.
Other figures are also alarming. The BLS tells us that unincorporated self-employment—the fraction of the labor force that works for themselves in unincorporated businesses—has sunk to record lows, hitting 6.4 percent in 2015, down from 8.7 percent in 1975. The share of American households owning a business has fallen from 14.2 percent in the mid-1980s to 11.7 percent in 2013,
the Federal Reserve estimates. And Americans today are less likely to start companies when they lose their jobs. The fraction of laid-off job seekers looking to start companies is well below 1980s levels, according to data from the outplacement firm Challenger, Gray and Christmas. And employment in new companies is down substantially. The Census Bureau finds that American companies less than one year old accounted for only 2.0 percent of American employment in 2013, down from 5.7 percent in 1977.
Yet understanding what has happened to entrepreneurship in America over the past thirty years requires more than taking a casual glance at a couple of numbers. Because no one statistic measures entrepreneurship writ large, figuring out what is going on requires looking at all of the numbers and piecing together the story they collectively tell.
What has happened to entrepreneurship in America is complicated. It’s not that the data lie. The measures of entrepreneurship described above have shown long-term declines. The catch is that other data tell a different story. Put together, the evidence doesn’t warrant the conclusions that many pundits and policy makers have drawn, and it doesn’t support the solutions they are offering.
The first key fact is that entrepreneurship per se is not in decline. But a particular kind of activity has been dropping over the past three-plus decades. The rate at which Americans are starting and running employer firms has fallen. However, businesses with employees are actually a small fraction (around one-fifth) of all U.S. companies.
Americans haven’t stopped creating companies. Far from it. As I will show in more detail in chapter 2, IRS data indicate that the number of businesses has been growing on a per capita basis.
Americans, it turns out, are creating and running businesses at a higher rate than they used to—but they are mainly starting and running businesses without employees. That nuance suggests that the problem with American entrepreneurship and the effective solutions to that problem are different from what many are
suggesting. Boosting startups in general probably isn’t the answer, because a fall in startup creation isn’t the problem.
Other patterns also cast doubt on the simple “entrepreneurs are in trouble” argument. High-potential startups backed by external equity investors are doing very well indeed. As I will show in detail in chapter 4, data from a variety of sources, including the National Venture Capital Association (the trade association of the venture finance industry) and the Center for Venture Research at the University of New Hampshire, indicate that more startups are getting angel and venture capital financing than a decade or two or three ago. And the outcomes of investments in those businesses are better than they were in the mid-1980s.
America might be generating fewer typical startups—the ones that don’t grow and quickly die—but more high-potential companies that add workers, grow substantially, and soon go public or get acquired. If the rate of creation of new employers is down but the rate of creation of high-potential companies is up, then the decline has to be specific to factors that affect Main Street and not Sand Hill Road.
It turns out, however, that it is not just a handful of new companies backed by left coast financiers that are doing better than several decades ago. A wider range of small business owners are doing well. Older small companies—the ones that entrepreneurs have been running for many years—have greatly improved. Business failure rates are down and real (inflation-adjusted) earnings are up compared to the 1980s. For several decades, households led by people who own their own businesses have been doing better than those led by people who work for others.
Finally, even if the decline in the rate of employer creation was adversely affecting our economic well-being, the “solutions” being offered aren’t answers at all. As I will show, there is no compelling evidence that barriers to immigration, excessive regulation, too high taxes, student loans, or any of the myriad other so-called causes of the decline in rates of new business creation are actually responsible for the decline in the pace of employer firm formation. If these factors are not the causes of the decline, then changing them will do nothing to boost the rate at which Americans form businesses with
employees. Combating the decline in new employer firm formation, if it is even a genuine problem, requires addressing the factors that are really responsible, rather than the many irrelevant factors that are often put forward as solutions, generally to further someone’s pet policy.
Consider, for example, the call for more visas for immigrants seeking to start companies in the United States. There is little reason to think this policy would do anything to stem the decline in employer businesses. For startup visas to reverse this trend, two patterns would need to be present in the data. First, the decline in new employer firm formation that has occurred over the past thirtyplus years would need to have resulted from a decline in immigration. But the data show the opposite. Over the past thirty years, immigration has skyrocketed while the rate at which Americans start businesses with employees has plummeted.
Second, immigrants would need to be more likely than nonimmigrants to start and run businesses with employees. But there is nothing in the data to suggest that the fraction with employer businesses is different between immigrants and non-immigrants, or that the incentives that lead American entrepreneurs to avoid employing others do not apply equally to immigrants.
Another common “solution” to the decline in new employer business creation is tax cuts. Again, it is difficult to see how tax increases account for a nearly four-decade fall in new employer business formation. Income tax rates have tended to decline, not increase, over this period. If high taxes were the problem, then falling taxes should not be associated with a decline in employer firm formation.
Or consider access to credit. American entrepreneurs are in trouble, the argument goes, because they cannot get the credit that they need. Banks cannot make money lending to small companies and are exiting the market, starving new companies of needed financing. Yet while it is true that many banks have cut back on making these loans, small business owners appear to be borrowing more now than they did in the late 1970s. If so, a lack of access to credit hardly seems to be a cause of their problems.
In addition, the average small businesses seems to be doing fine. Small company failure rates are down and earnings are up. If credit access were really a problem, then all small businesses would need to be affected, not just new ones.
The message echoing through the blogosphere is too simplistic. American entrepreneurship is not in decline. But it has changed in many ways. What can we learn from trying to put together the different pieces of data into a coherent story?
If the overall startup rate has not declined over the past thirty-six years, but the startup rate of businesses with employees has gone down, then we cannot say that all entrepreneurship is declining. And if high-potential businesses and existing small businesses are not adversely affected by the trends that have discouraged typical new employers, then the cause of the reduction is specific to the kind of run-of-the-mill new employer businesses—dry cleaners, restaurants, retail stores, and insurance brokers—that make up the bulk of startups in America. Moreover, if older businesses, run by entrepreneurs who started them many years earlier, are living longer and making more money than they once did, we can’t really argue that they are in dire straits.
This book provides a more precise and nuanced explanation for the change in American entrepreneurship than the story told in the policy white papers and blog posts. Ironically, the story that emerges is no less interesting than the bold headlines.
In a nutshell, the story is this: entrepreneurship per se is not in decline in the United States, but American entrepreneurs are not starting businesses with employees at the pace they did a generation ago. That decline may have consequences—for employment, innovation, investment, and the overall state of the American economy. But we don’t know for sure that that is the case.
We need to understand why the rate at which people start businesses with employees is down—way down—from what it was in the late 1970s and why, instead, Americans are starting and running businesses without employees. And we need to know why these changes haven’t adversely affected the rate of formation of high-
potential businesses and why their impact on the stock of existing businesses with employees is much more muted.
It could be that there is no problem at all. Technology simply has made it possible for more people to become entrepreneurs without employees. My neighbor Margaret is one of these new-style entrepreneurs, the owner of a non-employer business. A stay-athome mom with school-age kids, she needs some extra income because her husband’s salary has been flat for several years. So while her children are at school, from 9:30 to 3:00, Margaret is an entrepreneur. A decade or two ago, she might have gotten a parttime job at a store in the shopping mall to make ends meet, but instead she sells things on eBay. She makes more than she would in a minimum-wage job, can set her own hours, and can’t be fired or laid off. Her example shows both the opportunities and the incentives that are driving the changes in entrepreneurship.
With the exception of 2008, on a per capita basis, America has had more non-employer businesses like Margaret’s every year since 1997, when records began to be kept on an annual basis. Nonemployer businesses are, in the language of the Census Bureau, which tracks them, “businesses with no paid employment and payroll.” This self-evident definition indicates an important difference between these firms and employer businesses: non-employer businesses don’t create jobs.
Margaret is a fairly successful eBay seller. She has thought about hiring an assistant to post pictures of the goods online and respond to inquiries, but she doesn’t need someone every week, only during busy periods. As for expanding beyond that, she feels employees are too costly, not because of the salary but because of the benefits. She has more flexibility using contractors to do the advertising, fulfillment, and accounting that she doesn’t have time to undertake. A generation ago, Margaret could not have pulled this off. Before eBay existed, the only way to sell secondhand items was in a physical location: she would have had to travel to flea markets or else had a store. Traveling to flea markets would have kept her away from her family on weekends; a store would have meant rent, furnishings, security, and insurance—all of which cost money. And it
would have meant employees: she could not have run such a business part-time, if only because she couldn’t cover her expenses staying open only during school hours, so she would have had to hire someone to sit at the counter when her kids were home. Today she has a going concern with the help of a smartphone, an Internet connection, a few computer programs such as QuickBooks, and frequent visits from UPS and FedEx. And she has no employees.
There is also another trend. Americans are spreading their entrepreneurial activity across more and more businesses. Where one company would have sufficed thirty years ago, they now pursue the same opportunities through two businesses or more.
Another of my neighbors, a fellow named Alex, has moved pretty heavily into the sharing economy, renting vacation homes he owns through online sites like HomeAway and Airbnb. Each of Alex’s three properties—a beachfront condo in Florida, a ski condo in Utah, and a pied-à-terre in Manhattan—is owned by a separate limited liability company. That structure, his lawyer told him, was the best way to minimize his exposure. Alex inherited the properties from his parents. When they owned the apartments, in the pre-Internet era, short-term rentals were too difficult to do; they rented the apartments on yearly leases and reported the income on their personal income taxes. Alex runs three times as many businesses as his parents to engage in the same amount of entrepreneurship.
A third trend is the growing success of existing companies. Small businesses are doing better today than they did thirty years ago. They are living longer and providing more income. The improved performance and longevity of existing small businesses has an important effect on startup rates. If existing companies aren’t going under, fewer entrepreneurs are needed to replace them.
Moreover, the people running successful companies can expand to new locations more easily than new entrepreneurs can start up. Chains, even little two- and three-outlet ones that are limited to a single city, are growing at the expense of new employer businesses. Because the amount of entrepreneurial activity a place can support depends on customer demand, the rate of new business formation is limited by the degree to which existing businesses serve the market.
If existing companies are doing fine and expanding, new companies are not needed to replace them.
This is self-evident in long-established locations. If Ray owns a pizzeria on Flatbush Avenue in Brooklyn, New York, he may satisfy most of the demand for pizza within a five-block radius. Ray has been running his pizza place for twenty years, which is a pretty long time according to the statistics. Before he bought the place, two previous owners had made pizza in the same location, one after another, but neither business made it to age five.
With Ray’s Pizza humming along, there isn’t much opportunity for anyone else to start a traditional pizza place in Ray’s neighborhood. He pretty much meets the demand for pizza in the area. He faces competition from a dozen or so other types of inexpensive restaurants, from nationwide chains to locally owned coffee shops to trendy new offerings, but he can rely on a constant demand for pizza. Every neighborhood needs at least one pizza place. If Ray’s went under, someone else would no doubt open up a pizza shop somewhere nearby. But as long as Ray is successful, that is unlikely to happen.
Now think about a place like Arizona. Over the past forty years, neighborhoods grew up out of the desert as developers built houses and offices farther out from the center of Phoenix. This created a new demand for pizza in places where there had been none. Who provided it? It turns out that the pizza parlor owners in the center of Phoenix had a big advantage over would-be entrepreneurs in starting parlors in the outlying areas. With the development of information and communications technology, they could add outlets and run them better than individual pizza shop owners could start their first restaurants. Much of the pizza outlet growth in greater Phoenix was existing operators. If you aggregate data like this, part of the reason new business formation numbers are down is that existing businesses are meeting the demand better than they once did.
In the chapters that follow, I will challenge the argument that policy makers must intervene in the marketplace with a myriad of policies to reverse a decline in American entrepreneurship. I will
show that American entrepreneurship isn’t in trouble. Far from it. The rate at which Americans create non-employer and high-potential businesses is up, as is business ownership. Earnings of business owners have risen in inflation-adjusted terms and have become a more important source of Americans’ compensation than was the case in the 1980s.
The “entrepreneurship decline,” if such a pattern is real, lies in the decrease in the rate at which Americans form new businesses that employ others, and in the tendency of existing small businesses to not employ as many people as they once did. But even that may not be a true problem. Fewer people may be starting new businesses because existing businesses are doing better, making more money, and surviving longer than ever before. Moreover, the decline in the rate of new employer business formation may simply reflect a more efficient allocation of scarce resources in the economy toward big business and non-employers.
Following the advice of policy makers and opinion leaders to cut regulations, reduce taxes, boost immigration, cut student debt payments, or any of the myriad other recommendations for reducing the decline in entrepreneurship is likely a fool’s errand. There is no evidence that the reduction in the rate of formation of employer businesses has hindered job or wealth creation, reduced productivity, or limited economic mobility. Nor is there evidence of much of a link between these policies and entrepreneurial activity.
As you will see in the coming pages, to those who are concerned about American entrepreneurialism, I say, “Don’t worry. We’re good.”
ONE Something
Is Happening, but We Don’t Know What It Is
We keep reading that Americans are less entrepreneurial than they were a generation ago. “U.S. entrepreneurship is in decline,” Ben Casselman, Fivethirtyeight’s chief economics writer, said in a 2014 article on trends in startup rates.1 “We are behind in starting new firms per capita,” writes Jim Clifton, chairman and CEO of Gallup, calling it “our single most serious economic problem.”2 “Business deaths now outpace business births for the first time since researchers started collecting the data in the late 1970’s,” explains J. D. Harrison in a WashingtonPostarticle.3
This is not a recent development. The decline was exacerbated by the Great Recession of 2008, but it has been going on since at least the late 1970s, when government researchers first began tracking the data. Dane Stangler, the vice president of research and policy at the Ewing Marion Kauffman Foundation, writes that “the overall pace of business creation, which had been falling steadily for many years, decreased precipitously in the 2008–2009 recession.”4
The trends—at least according to pundits and reporters—are grim. As Annie Lowrey puts it in New York magazine, “The country is getting less entrepreneurial.”5 Fewer people are creating new firms and older businesses are living longer. She continues, “In aggregate, firms are aging. People are starting fewer new businesses, and older businesses are doing better than their younger competitors. For all the talk of ‘disruption’ in today’s economy, it is better to be a big, old incumbent dinosaur than it is to be a lean, mean startup.”6
Pundits, reporters, and even policy makers who express concern about a long-term decline in entrepreneurship in America aren’t just
offering their opinions. They are reacting to the data. Statistics on American entrepreneurship since the 1970s tell a tale of changes that disturb many people. To understand the alarm, we need to look at the data these authors are examining.
Unincorporated Self-Employment Is in Decline
One easy measure of entrepreneurship is self-employment, the fraction of people in the U.S. workforce who are in business for themselves. This percentage is readily available, having been collected by the Bureau of Labor Statistics (BLS), our country’s official tracker of the labor force, for decades through regular surveys. While some observers claim that self-employment, as a measure of entrepreneurship, lumps independent contractors in with people running their own companies, it does help capture what has happened over the past few decades. It shows us how many people work for themselves rather than someone else.
Every month, the BLS and the Census Bureau together compile a survey called the Current Population Survey. They interview over 70,000 American households designed to represent the entire population over the age of fifteen that is not institutionalized or in the military. The story told by the Current Population Survey’s selfemployment measure is unmistakable. The fraction of people in the labor force who work for themselves but are not the heads of corporations—something called “unincorporated self-employment”— is in long-term decline. These people represented 8.7 percent of the labor force in 1975 and 6.4 percent in 2015 (figure 1.1).
Figure 1.1. The UnincorporatedSelf-Employment Rate
Source: Created from data from the Bureau of Labor Statistics.
It is easy to get tricked into thinking this decline isn’t that large. Unincorporated self-employment as a fraction of the labor force was never that large. But the decline between 1975 and 2015 amounts to a fall of more than 25 percent.
Buried in the BLS’s numbers are a couple of other indicators of unincorporated self-employment that corroborate what has happened to this primary measure. One of them is part-time selfemployment. Unlike the main measure of unincorporated selfemployment shown above, which captures what people do in their primary job, part-time self-employment indicates what people do in any secondary work they undertake. It’s a valuable measure because many people need to work two jobs to make ends meet.
While the data on secondary self-employment do not cover as long a period as the figures on primary self-employment, and far fewer people engage in self-employment as their secondary occupation than as their primary occupation, the trend is similar. This fraction has declined from 1.55 percent in 1999 to 1.11 percent in 2015 (figure 1.2).
Figure 1.2. The Secondary Self-Employment Rate
Source: Created from data from the Bureau of Labor Statistics.
Again, do not be deceived by the small numbers. The magnitude of the decline is substantial. In just sixteen years, the secondary unincorporated self-employment rate has fallen by 28 percent.
As I mentioned earlier, many observers believe unincorporated self-employment is a poor measure of “entrepreneurship.” Working for oneself is not synonymous with running a business. Many selfemployed people are really independent contractors—people who have chosen (or have been forced by circumstance) to be paid through 1099s as opposed to W-2 forms. Therefore, using selfemployment data to tease out what has happened to entrepreneurship requires an interpretation of what different types of self-employment mean.
To figure out the unincorporated self-employment rate, the BLS surveys Americans to first determine if they are employed. If they are working, it then asks if their employer is a private company, a non-profit organization, the government, or themselves.
Here it gets tricky. Self-employed workers are further separated into those who have incorporated their businesses and those who have not. If you work for yourself and you have not incorporated
your business, your data go into the measure of unincorporated selfemployment. That’s the number we looked at above. But if you have set up an S or C corporation, you will be counted as something called incorporated self-employed.
The incorporated self-employment series is available only from 1989 to 2014, so it can tell us only about patterns over a shorter period than unincorporated self-employment. But incorporated selfemployment represents economic activity that much more closely resembles “entrepreneurship” than unincorporated self-employment. Few people set up a C or S corporation simply because they have been employed as contract workers or receive 1099 income.
Incorporated self-employment tells a very different story from unincorporated self-employment (figure 1.3). Whereas the unincorporated variety has steadily declined since 1989, the incorporated version is higher now than it was in the late 1980s, when the government began to track it. And the increase is substantial. From 1989 to 2015, incorporated self-employment rose from 2.9 percent of the labor force to 3.7 percent. That’s a 28 percent rise in sixteen years.
We now have the first chink in the armor of the “entrepreneurship-is-in-decline” story. Incorporated self-employment tells the opposite story—one of increasing entrepreneurial activity.
Explaining the trends in self-employment thus requires two separate explanations, one for incorporated self-employment and one for unincorporated self-employment. In fact, if we add the two rates, we find that there has been essentially no trend in selfemployment. Researchers at the Pew Foundation analyzed the BLS data and concluded that the combined rate of 10 percent in 2014 is the same as it was in 1976.7
Figure 1.3. IncorporatedSelf-Employment Rate
Source: Created from data from the Bureau of Labor Statistics.
What’s happened is that the split between incorporated and unincorporated self-employment has changed, with incorporated self-employment taking an increasing share of the total. It may be that the factors that have driven unincorporated self-employment down are specific to working for yourself but not to running an S or C corporation. Or it may be that more people have the sophistication, and access to advice, that leads them to incorporate, or that changing tax laws or regulations make it more advantageous to incorporate. It could be both.
The Pew Foundation analysts have an interesting explanation for why unincorporated self-employment has fallen while incorporated self-employment has risen. Most important, this explanation doesn’t suggest that entrepreneurship per se is in decline. The researchers argue that unincorporated self-employment has fallen because the share of self-employment in agriculture, forestry, and fishing has been decreasing. These fields tend to have large numbers of unincorporated self-employed workers. Those unincorporated selfemployed workers, many of them seasonal workers, are more like independent contractors than true entrepreneurs. So, in reality, the Pew Foundation folks claim, incorporated self-employment is a better
marker of entrepreneurship than unincorporated self-employment. And that measure has risen.
But which measure is better doesn’t really matter. Nor do the specific causes of the changes in the rates of incorporated and unincorporated self-employment. What matters is that entrepreneurship per se is not down, just a particular kind of selfemployment.
Fewer People in Outplacement Services Want to Start Companies
If unincorporated self-employment were the only measure of entrepreneurship that showed a decline, the story would end here, and I would have written a blog post, not a book. But other statistics also show declining entrepreneurial activity. One of the more interesting is a quarterly survey by the outplacement firm Challenger, Gray and Christmas, which works with workers laid off from big companies to find their next gig. The outplacement firm has been surveying job-seeking managers who have used its services since 1986.
The results of the quarterly survey suggest a major transformation in what people seek to do next after they have lost jobs at big firms. In a nutshell, they have become much less interested in starting companies. The percentage of people using outplacement services who wanted to start their own companies dropped from 20.3 percent in 1989 to 5.5 percent in 2014. Even if we take away the big rise in this fraction between 1986 and 1989, the number of people in outplacement who want to go into business for themselves has fallen by half between 1986 and 2014. That’s enough of a decline to make us think something has really changed (figure 1.4).
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The
Project Gutenberg eBook of Christine of the hills
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Title: Christine of the hills
Author: Max Pemberton
Release date: January 11, 2024 [eBook #72678]
Language: English
Original publication: United States: Dodd, Mead and Company, 1897
Credits: Donald Cummings, David E. Brown, Sue Clark, and the Online Distributed Proofreading Team at https://www.pgdp.net
*** START OF THE PROJECT GUTENBERG EBOOK CHRISTINE OF THE HILLS ***
CHRISTINE OF THE HILLS
Books by Max Pemberton.
THE LITTLE HUGUENOT. 16mo. $0.75. THE IMPREGNABLE CITY. 12mo. $1.25.
A PURITAN’S WIFE. Small 12mo. $1.25.
New York: DODD, MEAD & CO.
Max Pemberton
C H
BY MAX PEMBERTON
NEW YORK
DODD, MEAD AND COMPANY
1897
T P I
C C
T Q W
III. A F C
A M M
T W R
X. C P H
A B W
A P Q
“Z ”
XXII. T M
CHRISTINE OF THE HILLS
PROLOGUE
THE PAVILION OF THE ISLAND
W had been sailing for some hours with no word between us, but Barbarossa woke up as the yacht went about under the lee of the promontory, and with a lordly sweep of his brown-burnt arms he indicated the place.
“Olà, excellency,” said he, “yonder is the pavilion of little Christine.”
I had called him Barbarossa, though heaven knows he was neither Suabian nor renegade Greek of Mitylene, but an old sinner of Sebenico who chanced to have a yacht to let and a week to idle through.
“Shew your excellency the islands?” cried he, when I had made him the offer. “Madonna mia, there is no man in all the city that knows them so well! From Trieste to Cattaro I shall lead you with a handkerchief upon my eyes. Hills and woods and cities—they are my children; the Adriatic—she is my daughter. Hasten to step in, excellency. God has been good to you in sending you to me.”
It was all very well for him thus to appropriate the special dispensations of Providence; but, as the fact went, he proved almost an ideal boatman. Silent when he saw that silence was my mood; gay when he read laughter in my voice; well-informed to the point of learning—this sage of Sebenico was a treasure. For days together I let him lead me through the silent islands and the infinitely blue channels of the “spouseless sea;” for days together we pitched our tent in some haven which the foot of man never seemed to tread. No bay or bight was there of which he had not the history; no island people whose story he could not write for you. Now rising in finely chosen heroics to the dead splendours of Venice, now cackling upon the trickeries of some village maiden, the resources of this guide of guides were infinite, beyond praise, above all experience. And I
admitted the spell of mastership quickly, and avowed that Barbarossa was a miracle in a land where miracles were rare and to be prized.
“Yonder is the pavilion of little Christine.”
It was early in the afternoon of the seventh day when the words were spoken. We were cruising upon the eastern side of an island whose name I did not then know. When the little yacht was put about she came suddenly into a bay, beautiful beyond any of the bays to which the sage had yet conducted me. Here the water was in colour like the deepest indigo; the hills, rising from a sweep of golden sand, were decked out with vines and orange-trees and rare shrubs, and beyond those, again, with shade-giving woods of chestnuts and of oaks. So powerful was the sunshine, though the month was September, that all the splendid foliage was mirrored in the waters; and looking down from the ship’s deck you could see phantom thickets and flowery dells and dark woods wherein the nereids might have loved to play. Yet I turned my eyes rather to the shore, for thereon was the house I had come to see, and there, if luck willed it, was the woman in whom my guide had interested me so deeply
We had held a slow course for many minutes in this haven of woods and flowers before Barbarossa was moved to a second outburst. Until that came I had observed little of the pavilion which he had spoken of, though its shape was plain, standing out white and prominent in a clearing of the woods. I saw at once that it was a new building, for the flowering creepers had scarce climbed above its lower windows, and gardeners were even then engaged in laying out formal terraces and in setting up fountains. But the house was no way remarkable, either for size or beauty, resembling nothing so much as the bungalows now common upon the banks of the Thames; and my first impression was one of disappointment, as the excellent Barbarossa did not fail to observe.
“Diamine,” said he; “it is necessary to wait. To-day they build; tomorrow we praise. There will be no finer house in Dalmatia when the sirocco comes again. God grant that she is not alone then!”
He was stroking his fine beard as he spoke, and there was a troubled look upon his face; but at the very moment when it was on my lips to protest against his riddles he gripped me by the arm and pointed quickly to the shore.
“Accidente!” cried he; “there is little Christine herself.”
At the word, we had come quite close into the woods upon the northern side of the bay. Here was a great tangle of flowering bush and generous creeper rising up above a bank which sloped steeply to the water’s edge. Through the tracery of tree and thicket I could see the glades of the island, unsurpassably green, and rich in the finest grasses. Countless roses gave colour to the dark places of the woods, rare orchids, blossoms ripe in the deepest tones of violet and of purple, contrived the perfection of that natural garden. And conspicuous in it, nay—first to be observed—was the girl who had called the exclamation from Barbarossa.
She was standing, as then I saw her, in a gap of the bank, in a tiny creek where the sea lapped gently and the bushes bent down their heads to the cool of the water. She had red stockings upon her feet, and a short skirt of dark blue stuff shewed her shapely limbs in all their perfection. I observed that the sun had burnt her naked arms to a tint of the deepest brown, and that the dress she wore hung upon her loosely and without affording protection even to her shoulders. Nor was there any token elsewhere in her attire of that state and condition to which rumour had elevated her. A tawdry Greek cap, such as skilled impostors sell to tourists for a gulden, scarce hid anything of the beauty of her gold-brown hair. Her hands, small to the point of absurdity, were without rings; her wrists without bracelets. She might have been a little vagrant of the hills, run out of school to let the waves lap about her feet, to gather roses from the banks above the sea.
This, I say, she might have been; yet I knew well that she was not. Though I had led Barbarossa to believe me profoundly ignorant even of the existence of his “little Christine,” I had seen her once before— at Vienna, in the first week of the January of that year. She was driving a sleigh in the Prater then, and all the city pointed the finger
and cried: “That is she.” I remember the look of girlish triumph upon her face as she drove through the throngs which were so eager to anticipate a victory for her; I could recollect even the splendour of her furs and the excellence of her horses; the muttered exclamations to which her coming gave birth. Yet here she was, become the peasant again, on the island of Zlarin.
We had come upon the girl suddenly, as I have written, and the drift of our boat towards the shore was without wash of water, so that minutes passed and she did not see us. So close, for a truth, did the stream carry us to the bank that I could have put out my hand and clutched the roses as we passed. From this near point of view the child’s face was very plain to me. In many ways it was the face of the Mademoiselle Zlarin I had seen in Vienna; yet it lacked the feverish colour which then had been the subject of my remark, and there were lines now where no lines had been eight months before. Whatever had been her story, the fact that she had suffered much was plain to all the world. Yet suffering had but deepened that indescribable charm of feature and of expression which set Vienna running wild after her in the January of the year. She was of an age when a face loses nothing by repose. Her youth dominated all. She could yet reap of the years, and glean beauty from their harvest. Neither dress nor jewels were needed to round off that picture. I said to myself that she was the prettier a hundred times for her tawdry Greek cap and her skirt of common stuff. I declared that the rôle of peasant girl became her beyond any part that she had played in the life of the city And with this thought there came the engrossing question—how was it that she, who had disappeared like a ray of sunlight from her haunts and her triumphs in the capital, should be here upon an island of the Adriatic, the mistress of a home which made the people about her raise their hands in wonder, the subject of a story of which no man was able to tell more than a chapter? And this was the question I now set myself to answer.
All this passed through my mind quickly as our felucca lay flapping her sails in the wind, and we drifted slowly under the shadow of the bushes. I was still speculating upon it when the girl saw us, and awoke, as it were, from a reverie, to spring back and hide herself
behind the bushes. But Barbarossa called out loudly at the action, and when she heard his voice she returned again to the water’s edge and kissed her hand to him most prettily. Then she ran away swiftly towards her house, and was instantly hidden from our sight by the foliage.
“Barbarossa,” said I, when she was gone, “does your wife permit you often to come to these islands?”
The old rogue feigned astonishment for a moment, but pluming himself upon the compliment, he leered presently like some old man of the sea, and his body danced with his laughter
“Ho, ho, that is very good. Does my wife permit? Per Baccho, that I should have a woman at my heels—I, who am the father of the city and can kiss where I please! Ho, ho, excellency, what a fine wit you have!”
“But,” said I, with some indignation, “the lady had the bad taste to mean that salute for you and not for me.”
He became grave instantly, stroking his long beard and carrying his mind back in thought.
“Securo!” cried he, after a pause; “it was meant for me, and why not? Have I not been a father to her? Was it not to me that she came for bread when all the world cried out upon her for a vagrant and worthless? Did I not shelter her from her brother’s blows and the curses of the priest? Nay, she is my daughter—the little Christine that I love.”
I heard him out, silent in astonishment.
“You know the story of her life, then?” I exclaimed.
“Santa Maria! The story of her life! Who should know it if I do not?”
“Then you shall tell it to me to-night, when we have dined, my friend.”
He nodded his head gravely at the words, repeating them after me.
“To-night, when we have dined, the story of Christine. Benissimo! There are few that have my tongue, excellency. God was good to you in sending you to me.”
CHAPTER I
CHRISTINE
THE CHILD
W dined upon a little grass bank of the island named Incoronata, in a clearing of the woods, where the soft night wind breathed cool upon our faces, and the rustle of the leaves was like a harmony of sleep. It was not until the boat had been moored for the night, and new logs had been thrown upon the fire, that Barbarossa bethought him of his pledge, and consented to begin his narrative. Squatting upon his haunches, with his cigar held deftly as a bâton, when the need of emphasis was, this strange old man unfolded a history no less strange. So clear was his sense of proportion, so simple were his words, that I would give much to tell the story of Christine as then —and again on other nights—he told it to me. But his narrative remains a memory—a memory often inaccurate, always lacking those pleasing touches of colour with which he graced his picture. Nor, I think, could any pen set down the charm of his rich voice or the wonders of his manner
“Excellency,” said he, “the story of Christine is a story of one who, five years ago, had learnt to call me father that she in turn might be called daughter by me. To-day she is the mistress of riches and of a great house; I am still the beggar of the city, who has no right to raise my eyes to her. Yet you have seen that she remembers, as I, on my part, still love.
“I remember Christine—aye, God witness, I remember the day she came, the day she went. Her father was an Italian merchant of Zara; her mother was the daughter of a musician of Marseilles. They brought her to my city when she was a babe; she was seven years old when the fever struck them down and left her to the care of her half-brother, Nicolò Boldù. You have heard of Nicolò—nay, how should you have heard? He was one to be forgotten in his shame, a drunkard, and a lover of women. Well was it for Sebenico that a
brawl sent him trembling for his life to that very island where the pavilion of Christine stands to-day. Three days the soldiers hunted for him; three days he lay in the cellar of my house, wailing for mercy with the tongue of a woman. Then I took him in my boat to Zlarin, and within a month he had sent to me for Christine.
“She was twelve years old then, a pretty child that strangers marked in our streets and the priests spoke of for example in the schools. I say nothing of that part which I played both in attending to her education and making it my care that she did not want for bread. God knows, she would have fared ill if no other hand than Nicolò’s had ministered to her necessities. Rare was the day when he had food even for himself. What money he got from his wretched inn out beyond the city walls scarce served for his own pleasures. When the child hungered, he beat her with his belt; when she was hurt with the cold, he turned her into the road to sleep. I alone in all the city opened my door to her; I alone saw her weep, for she had the courage of a woman, and there is no courage like to that.
“Nicolò went to Zlarin, and within a month he had sent for Christine. The trouble which had banished him from the city was a trouble no more. The police had forgotten him, or cared to remember him no longer. He had a right to such help in the hut which he had built upon the island; and the law gave me no claim upon his sister. Yet I parted from her as from one of my own, for she had been the light of my house, and oh, excellency! it is good to give bread to a little child.
“‘Andrea, dear Andrea,’ she cried to me when I put her into the boat —for Andrea is my true name, signor—‘you love me, Andrea; then why do you send me to Nicolò?’
“‘Child,’ I answered, ‘God knows that I love you. But he is your brother, and it is right that you should be with him.’
“‘He will beat me, Andrea.’
“‘As he does to you, so will I do to him a hundredfold.’
“‘I have no one to help me in Zlarin, Andrea.’
“‘Nay, but you shall make friends, little one.’
“‘You will come and see me often—if you love me, Andrea?’
“‘Before the seventh day passes I shall be at Nicolò’s door, Christine. Oh, have no fear; am I not your father, child? Nay, but I will write to the priest at Zlarin, and you shall be his charge.’
“So I comforted her, excellency; yet was my heart heavy for her as she put her arms about my neck, and laid her pretty face upon my shoulder, bidding me ‘Good-bye,’ and again ‘Good-bye,’ until my hands were wet with her tears and my tongue clave to the roof of my mouth. Her brother had sent a neighbour to carry her in his fishingboat to the island; and it was noon of the day when at last she left me. I watched the sails of the ship until they were hidden by the headland of the gulf, and then returned with heavy foot to my own labour. Nor did I know that God had willed it that I should not see little Christine again until four years had made a woman of her, and of me an old and time-worn man.”
