When I was close to finishing a degree in economics, I was still a bit unclear about what actually causes economic growth after 4 years of study. Economists have a complicated and sophisticated set of models to understand how economies work, on both a theoretical and empirical level.
When it came to the topic of growth, if I remember correctly, the key factor underlying economic growth was productivity. And the primary driver of productivity were external technology shocks. Which can’t be modelled. They’re just assumed to happen. So basically, the economics department at PENN pulled an intellectual bait-and-switch on me. And I ended up going into software anyway.
Ultimately improvements in technology drove productivity and economic growth of countries. This was true of both developed and emerging economies, with the latter often benefiting from imported technologies, rather than creating their own.
Is entrepreneurship a job growth engine?
This blog doesn’t cover politics. That said, I thought it might be worth drawing your attention to a half-truth that often comes up among politicians (and that’s often repeated as conventional wisdom):
Entrepreneurship is an engine of growth.
Unfortunately, it’s not really true if you look at the data. It is true the primary engine of growth are…high growth startups. These tend to be high technology startups or highly innovative ones. These are most likely to be hitting growth rankings like the INC 5000. In the US, these consistently make up a whopping 3% of all new businesses, according to Scott Shane in The Illusions of Entrepreneurship:
“In fact, only about 7 percent of new companies in the United States are started in industries that the government defines as high technology, and only about 3% of business founders consider their new businesses to be technologically sophisticated.”
Industry breakdowns of high growth companies also reflect this insight. For example, on the INC 5000 for 2019, there are:
The 3% of technologically sophisticated startups made up around 30% of the INC 5000 in 2019. Thus as the startups grew, they are likely to be hiring rapidly. And creating jobs.
Conversely, 97% of new businesses fall into the category of a new hairdresser’s, convenience store, or a new pizza joint around the corner. Necessary everywhere. But not particularly likely to grow rapidly. And hire rapidly. And that’s totally fine. Most of these are sole proprietorships; the founder created his or her own job.
To be clear, growth is not an end to itself. Not every business should be designed to be high growth business. If this is the ambition of the founding team, then great. But just because it’s a convenient soundbite for a handful of tech VCs and politicians, it doesn’t mean it’s the right choice for entrepreneurs. There are many potential measures of success and self-accountability. Growth, including job growth, is only one of them.
Keep your ears peeled during the upcoming elections, as this convenient half-truth is repeated by politicians all over the spectrum. It is, however, more in the category of “what voters want to hear”, rather than actually being true.