For the main part of the 20th century, the entrepreneur was regarded as a quaint leftover from a previous era that would soon be overtaken by the efficient rationality of large corporations, major organization and big government working in unison. One of the few schools that still put emphasis on understanding the role of the entrepreneur in the economy was the Austrian.
When the number of small businesses started to grow in the 70's it came as a shock to conventional economists, and quite a few of them spent the 80's in denial of the statistics. It is therefore good news that mainstream researchers now give a renewed attention to the most important agent in the economy. One of the more interesting books studying this phenomenon was Richard Florida's The Rise of the Creative Class in 2002.
In his book he pointed out that an increasing number of people work and live much as creative types like artists, researchers and entrepreneurs, leaving the organizational ethos behind. Florida created a creativity index measuring talent, tolerance and technology, noting that cities in the US with high growth (particularly in the high tech sectors) had high degrees of immigrants, expenditures on research and development, submitted patents and tolerance of minorities and alternative lifestyles. Hence his well-known gay- and bohemian-index, that shows that a market works better if people are not automatically excluded from business because of their outer characteristics.
In Europe the book was very well received. With the European countries mired in high taxation, cumbersome regulations of the labour market, high unemployment, protectionism and low growth, Florida's book provided the notion that the EU was doing OK versus the US.
Seeing themselves as more tolerant towards alternative lifestyles than the US, many European intellectuals thought that soon this tolerance would find its way to higher economic growth without having to bother with reforms of the welfare state.
This curious notion will no doubt be strengthened by Florida's recent book The Flight of the Creative Class. It reveals a surprising notion at it puts Sweden as the most creative country in the world, giving further ammunition to those in the US that see Sweden as a viable middle-way between capitalism and socialism.
As a Swede I felt confused by Florida's claim. Sweden is the promised land of fordism, the opposite of the free-wheeling creative class he describes. Things have changed lately, but our corporations, our organisations and our welfare systems are still built after a corporativist model, and institutions still favour static careers, strong unions and large scale. That Sweden has a low number of entrepreneurs is not a surprise when you pay on average 60.3% of your income in taxes. Unemployment is often concealed by government programs, but said to reach 10-20% of the workforce. Even worse are the figures for unemployment among immigrants, where Sweden is in the bottom of the OECD. In later years Sweden has seen some growth (still on the generally low European level) but this has been due to steps taken away from the welfare state.
Florida claims that the US is seeing a brain drain, since student and researcher visas are being restricted after 911. Corporations move away and the US is wilfully destroying is main competitive advantage: that the best and brightest researchers, inventors and entrepreneurs want to move to land of opportunities.
The administration of President Bush cannot certainly be called laissez-faire, entrepreneur friendly or as promoting creativity. The administration has thoroughly supported branches in the old economy like oil, steel production, agriculture and the arms industry through subsidies, quotas, bailouts, tariffs and spending tax payers' money on their products.
Despite this the US economy is in good shape compared to Sweden's. Visas may have become more difficult to obtain, but still the US still gains brains. There is more venture capital available in California and Massachusetts than the whole of the EU put together. The US economy creates 200.000 new jobs every month, in Sweden the employment figures are falling.
Why did Florida reach his conclusions? First of all, he lacked many of the statistics he was able to use for the US in Rise of the Creative Class, so he had to rely on questionnaires about attitudes towards gays, female participation in the workplace, individualism, religion etc. when doing the indexes on a global scale. But attitudes are not always consistent with human action.
Entrepreneurship is the ability of individuals to learn from market participation and spontaneously discover means of satisfying their wants. This alertness to opportunities sets the market process in action. Entrepreneurial alertness is sensitive not so much to information in itself as to information that can be deployed to one’s advantage. Thus tolerance and creativity are necessary, but not sufficient, conditions for economic success.
Florida studies the inputs instead of the outputs of system. For instance, when he defines talent just as the percentage of the population that has an academic degree, he does not consider the quality of such education. That the Swedish government uses the universities as a way to keep people out of the unemployment statistics is lost to him.
This discrepancy between creativity and economic growth creates problems for Florida. How could it be that the two most creative nations according to his world index, Sweden and Japan, show such lower growth than two so uncreative nations such as the US and the Republic of Ireland? The US and Ireland may score low on tolerance but still people move there, not to Sweden.
I think that Sweden has the potential for creativity, and it is important to discuss the transition of society from an industrial into an informational economy. But in order to unleash this potential we are back at discussing the disincentives raised by high taxes, strict labour laws and other market distortions.
The Flight of the Creative Class gives valid warnings for the US. The global economy is not static, and you are never guaranteed your previous success if you fail to keep the economy open and free. Regions and nations must make themselves attractive to creative people, but Sweden is not the example to follow.
August 23, 2005