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Kauffman Foundation: Messy Capitalism Drives Innovation -- And Economic Growth

Economists often boil the mechanics of economic growth down to sterile-sounding categories such as capital, labor, and "the residual" -- essentially, technological change.
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Since the earliest days of the American republic, entrepreneurs have been essential to the economic growth and social dynamism of the United States.

From Nathan Appleton, textile merchant and entrepreneur in the late 1700s, to the founding of Apple by Steve Jobs and Steve Wozniak in the 1970s, entrepreneurs and the new companies they create account not only for most new jobs in this country but also a disproportionate share of the innovations that boost human welfare.

Welcome to the Kauffman Foundation's new column on entrepreneurship. The Kauffman Foundation is a private, nonprofit foundation dedicated to promoting entrepreneurship and improving education. Like most other American philanthropists, our founder, Ewing Kauffman, was a successful entrepreneur -- in his case, starting and growing a pharmaceutical company that created thousands of jobs and innovations.

Unlike many other philanthropists, however, Mr. Kauffman chose to dedicate his fortune to helping others to follow their entrepreneurial dream. He spoke of himself as a "common man who did an uncommon thing," but wanted his philanthropic dollars spent in making that phenomenon, entrepreneurship, a more common and achievable prospect. Toward those ends, the Kauffman Foundation funds and performs a wide range of research on entrepreneurship and also operates a number of programs aimed at helping entrepreneurs and better preparing students at all levels for success in an entrepreneurial economy.

In this space over the coming months, you will hear from a variety of Kauffman scholars and researchers about our work on the importance of entrepreneurship. While the link between entrepreneurship and economic growth has been well-established by a number of economists and is well understood by the average citizen, this insight has not yet penetrated the minds of legislators and policymakers. When officials and commentators in Washington and state capitals discuss "business" and "commerce," they almost universally mean big business, companies such as those on the Fortune 500. Make no mistake: big business is highly important to our economic health. But such companies are not the source of the innovations that make our economy grow.

Economists often boil the mechanics of economic growth down to sterile-sounding categories such as capital, labor, and "the residual" -- essentially, technological change.

But if you think about economic growth in a common-sense manner, what does it mean? It doesn't just involve more products and services, more "stuff." It also means better and cheaper products and services and an overall improved quality of life. Consider pharmaceuticals: economists attribute the lion's share of the increase in life expectancy over the past forty years not to public programs but to new drug discoveries. And, increasingly, large, established companies find it difficult to introduce new pharmaceuticals.

The key point is that behind these innovations are entrepreneurs who start new companies -- that, as Northwestern scholar Dan Spulber has found, is the essential function of entrepreneurs. They found new companies as the vehicles for propagating innovations. If successful, those companies will grow and, accordingly, so will the overall economy. When firms grow, the economy grows -- and entrepreneurs are the drivers of firm growth.

Only a tiny fraction of new and young companies, of course, will successfully create jobs and grow into larger firms. (An enduring dilemma for any economy is that once entrepreneurial companies successfully turn into larger firms, they often become the enemies of innovation and the next generation of firms. This is a problem that economists and policymakers and corporate leaders have wrestled with for a century with no resolution, and will be the subject of the some of the columns in this series.)

What legislators and policymakers must remember is that the messy process of firms starting, competing, failing, and growing (and, potentially, shrinking) is absolutely essential to achieving economic growth. This is what we call "messy capitalism" -- economic growth and dynamism do not emerge from a neat process nor are they borne, like Athena from Zeus' head, fully-formed in the shape of successful firms out of university laboratories.

Scale and growth, and their underlying corollaries of failure and shrinkage, can only be achieved through this messy process. Our institutions -- government, large corporations, universities, and others -- need to be willing to let this process proceed and accept that it cannot be dictated or controlled. It can be supported and promoted, of course, and in forthcoming columns you will read about the efforts of the Kauffman Foundation and others to do exactly that: make messy capitalism even messier.