Organizations and Markets

I Do “Simplistic” and “Comical” Work

9 February 2007 at 12:00 pm Nicolai Foss 2 comments

| Nicolai Foss |

Of course, all of you knew already — but I confess that it came as a bit of a surprise to myself to have my work (rather than my blog posts) with Christian Bjoernskov, “Economic Freedom and Entrepreneurship: Some Cross-country Evidence” (here is an early version and here is a revised Danish version), characterized as “simplistic” and “comical” by the Danish deputy prime minister and the chief economist of the Danish labour unions, respectively. Here is the context.

The paper was presented at a conference on entrepreneurship in the Danish economy in Copenhagen on January 22, organized by the Center for Political Studies.  One of its conclusions is that a large public sector and unsound monetary policy are destructive of entrepreneurship. The deputy prime minister, Bent Bendtsen was a discussant of the paper, and characterized it in the above way. Assuredly, a cross-country analysis is bound to be simplistic if one only cares about a single country. Moreover, it may have played a role that the allegedly conservative Danish government is in the process of launching a major entrepreneurship initiative (which of course means more bureaucrats to serve would-be entrepreneurs).

The paper/report was rather extensively covered in the media. The major Danish newspaper Berlingske Tidende asked the chief economist of the Danish labour unions (Arbejderbevægelsens Erhvervsråd), Lars Andersen, about his opinion of the report. He considered the analysis to be comical because it allegedly revealed that poor countries have more entrepreneurial activity than richer countries. He concluded that we recommend that Denmark drastically cut its GNP to obtain a higher level of entrepreneurial activity. Comical, indeed. 

Of course, the poor fellow had completely misread the paper. The Global Entrepreneurship Monitor dataset makes a distinction between entrepreneurship based on “need” and that based on “opportunity.” Indeed, poorer countries have more “need entrepreurship” and the size of the public sector negatively impacts this kind of entrepreneurship. However, the size of the public sector also negatively impacts “opportunity entrepreneurship” — and much more than it impacts need entrepreneurship.

Here is the abstract of the paper:

While much attention has been devoted to analyzing how the institutional framework and entrepreneurship impact growth, how economic policy and institutional design affect entrepreneurship appears to be much less analyzed. We try to explain cross-country differences in the level of entrepreneurship by differences in economic policy and institutional design. Specifically, we use the Economic Freedom Index from the Fraser Institute to ask which elements of economic policy making and the institutional framework are conducive to the supply of entrepreneurship (our data on entrepreneurship are derived from the Global Entrepreneurship Monitor). The combination of these two datasets is unique in the literature. We find that the size of government is negatively correlated with entrepreneurial activity and that sound money is positively correlated with entrepreneurial activity. Other measures of economic freedom are not significantly correlated with entrepreneurship.

Entry filed under: - Foss -, Ephemera, Myths and Realities.