Entrepreneurship favors the wealthy

Mar 20, 2016 by

Entrepreneurship favors the wealthy

Entrepreneurship is often hailed as a cornerstone of American society. From Mom & Pop stores to Silicon Valley start-ups, it has been held up as the key to self-reliance and social mobility. Unfortunately, as American society has become more stratified and social mobility has stalled, these narratives have taken on an increasingly mythological character.

For instance, today only 21 percent of America’s wealthiest families earned their income through entrepreneurship–about half the worldwide average. As compared to the rest of the world, Americans are far more likely to have achieved success by rising to the top of a large and established enterprise than by starting their own. In fact, entrepreneurship is actually on the decline in America.

In a similar manner, politicians frequently assert that small businesses are responsible for most new jobs in America. While technically true, the claim is misleading: Businesses with less than 50 employees only employ about a third of the labor force. And not only is the quantity of small business jobs overstated, so is the quality of these jobs. As compared to their large corporate competitors, jobs created by small businesses tend to be relatively low-paying, have smaller benefits packages and little room for advancement. Moreover, they often prove temporary as only 1 out of every 3 business ventures survives for five years or more, and even fewer manage to “scale up” into large, expansive enterprises (which is how new businesses really add energy to the economy).

Perhaps most troubling is that rather than being a ladder for social mobility, it turns out most successful entrepreneurial enterprises are headed up by people who hail from wealthy families. In other words, entrepreneurship is generally not a means by which low or middle-income earners can improve their station in life—it is primarily a path for the next generation of social elites to maintain or grow their wealth. However, by exploring why it is that the already-wealthy are so much better at launching viable business concepts, it may be possible to glean insight into how to extend these advantages to a broader swath of American society.

Social Networks

It is hard to over-emphasize the advantages provided to the wealthy as a result of elite social networks. For instance, the most common type of entrepreneurial success in today’s economy is not establishing an enduring independent brand that overtakes larger competitors and disrupts long-standing institutions or practices. Instead, most are content to have their idea bought out by larger, established enterprises–netting massive return on the initial investment, and perhaps a cushy position at the new parent company in the process. Those with connections are far more likely to be bought out in this fashion, often before even establishing the viability or profitability of their concept. Moreover, access to reliable legal and financial counsel ensures that they get the best deal they can in the event of a buyout.

Absent these resources, would-be entrepreneurs from more humble backgrounds are often steamrolled into disadvantageous agreements by larger competitors, or simply driven out of business altogether. Often their unique ideas are more-or-less plagiarized in the process without much compensation or even credit for their contributions, and with little recourse to attain these. In other words, social networks are pivotal to the success of an enterprise at every phase—from its initial conception, to raising start-up capital, to expanding, selling or even closing the business.

Start-up Capital

Wealthy people can readily start their own businesses–not only by means of their own money, but also because their elite connections grant them far greater access to angel investors, venture capitalists and private equity firms. Those from upper classes also tend to have access to more credit (and on better terms), as needed.

This access to start-up capital enables aspiring entrepreneurs to more easily acquire critical equipment, develop essential infrastructure, secure ample and well-located property, and hire qualified contractors and employees to help establish and run their enterprise.

Most from the lower and middle classes are not so lucky. They typically have to rely on loans, often leveraging the few assets they have (generally their homes). The amounts they are able to raise by these means is often insufficient to fully realize their vision—certainly as compared to their more-privileged counterparts. As a result, these proprietors are often forced to manage all aspects of the business more or less on their own, often lacking sufficient experience or training to be effective in many essential tasks. This is one reason why their businesses are more likely to fail.

Risk Tolerance

Underlying the ambition of wealthy entrepreneurs are socio-economic safety nets that enable elites to take more risks in pursuit of their goals. For instance, in the event of failure, wealthy business owners can utilize their legal resources to protect their personal assets–declaring the business bankrupt and wiping out most of its debts and obligations in the process, but without going bankrupt themselves. In some cases, elites can even profit from their enterprise going under in virtue of having made financial bets against its success. In virtually all cases, the wealthy are insulated from catastrophe regardless of how their business fares; and having invested or lost very little of their own money in the enterprise, they are free to learn from any mistakes to pursue their next venture. More broadly, they are empowered to be future-oriented in virtue of having little concern about immediate and pedestrian needs, such as keeping the lights on or putting food on the table.

The calculus is very different if one’s own assets are tied up in the business: If it fails, as most start-ups do, the proprietor faces unending debt and possible forfeiture of leveraged assets (to include one’s home), even as their access to credit rapidly dries up. And so rather than being a vehicle for social mobility, entrepreneurial attempts often prove financially ruinous for people from lower classes—they cannot simply learn from their failures and try again. Instead, they often enjoy a greatly reduced standard of living while being forced into an unsatisfying job to make ends meet when their business goes under.

Expanding Access

American eschatology holds that entrepreneurs attain success through ambition, perseverance and ingenuity. However, even the cultivation of these critical personality traits among successful entrepreneurs is in many ways a product of their elite upbringing rather than resulting from some intrinsically superior constitution. And in any case, access to start-up capital, elite social networks, and bulwarks against risk seem to be far more important to the success of a venture than hard work or good ideas.

But here’s the rub: Austerity, regressive taxation, privatization or deregulation cannot plausibly extend these benefits of wealth to most middle- and lower-class citizens. Therefore, to the extent that entrepreneurship is integral to America’s national interests and national identity, the government cannot just “get out of the way” of the private sector (which is what the aforementioned policies entail). Indeed, a laissez-faire approach is likely to entrench and exacerbate economic polarization and contribute to the continued decline of entrepreneurship in the U.S.: Holding down wages and benefits, minimizing taxes, and softening regulations is an economic paradigm that tends to attract companies to developing nations to exploit so-called unskilled laborers—it is not a model Americans should be striving to emulate.

The world’s most competitive economies suggest a better way forward: investing in human capital (i.e., livable wages/benefits, robust social safety nets, strong education and vocational programs) and ensuring efficient, reliable infrastructure and institutions.

In other words, the state can play an active, constructive role in fostering a diverse and dynamic economy—one that enables citizens to exert greater control over their own fates rather than condemning them to cycles of dependency. Achieving this outcome in the U.S. would require more distance separating America’s public and private sectors, but less antagonism between them.

Musa al-Gharbi is a political philosopher affiliated with the Southwest Initiative for the Study of Middle East Conflict (SISMEC). Readers can connect to his work and social media via his website: www.fiatsophia.org
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