August 30th Morning After the Party the Night Before: The Recession Diaries

You can pick you friends but not your friends' friends.  Out last night with some former who brought their latter and, of course, their conversation turned to the recession.  And some of the latter were real Euro-jockeys, propounding such thoughtful gems as 'trade unions are sapping our vitals'.  One of them got on to risk-taking, as in 'we need risk-takers' and 'the economy needs more risk-taking'.  We get a lot of that about these days - exuberant phrasing, no thinking.

'Risk-takers' emerges out of that most most amorphous concept, 'entrepreneurship'.  We see this concept embodied in the man or woman who raises themselves up by mere dint of their inspiration and sweat, gambling all to put their ideas into action.  It originated with an Irishman - Richard Cantillon - well before capitalism and the rise of the company.  It was transformed in America with the Horatio Alger stories:  a didactic diet of morality and grit; of heroic individualism where things like the 'state' and the 'social' are obstacles to overcome.  But, as Robert Reich writes in the Harvard Business Review on this concept of individualistic entrepreneurship:

'There is just one fatal problem with this dominant myth:  it is obsolete.  The economy that it describes no longer exists.  By clinging to the myth, we subscribe to an outmoded view of how to win economic success.' (May/June 1987)

Most entrepreneurship is a collective activity, emerging out of corporate teamwork rather than atomised individual effort.  People smirk about 'committees', but in truth ideas come about and are implemented by people talking about them - and the more non-hierarchal structure this occurs in, the better (this is also being understood by business theorists). 

But getting back to my friends' friends, entrepreneurship is, above all, risk-averse.  Think about it - do you really want the senior executive of your company taking the payroll down to the roulette table and staking it all on black?  Or the head of your department making her decisions each morning by rolling dice?  As individuals, with a mortgage, a family, bills to pay, etc. - we are rightly reluctant to push out the envelope if it means risking our sometimes shaky security.  Risk-taking and entrepreneurship, if not mutually exclusive, certainly sit uneasily next to each other.  The latter is more plodding, more planned, more organised - in a word, unsexy.

Yet, the economy is always in flux, is dynamic and is pretty merciless to those who are not on top of their game.  There are many ways to square this economic imperative and our risk-adverse nature.  And one of them is to socialise risk. The following serves as an example:

John is approached by a start-up company that is developing an exciting new product.  He has just the skills to help make that enterprise successful.  Besides, his current job, while stable, is not terrible interesting.  The problem is that the company has only a 50/50 chance of success if that, and John knows that most new ventures fail.  With too many personal commitments he can't take the risk and turns down the offer.

This is rational and understandable - but society might be better off if this new venture succeeds, with the prospect of high-skill job creation, new export markets, etc.  But if John makes the move and the whole thing goes under, he's unemployed with little social support (he'll get about €190 per week in insurance benefits).  He and his family can't live on that, so he'd have to run and grab the first job he can get, no matter how inappropriate it might be to his training.  Society loses out from his mismatch of skills.  How much more so in these recession times?

What might help is if he knew that, if the venture failed and he was without a job, he could be sure of adequate social protection for a considerable time - so that he wouldn't undermine his security and give himself time to find a job consistent with this skills (or even upgrade them through training).  This could be done quite easily:

• Reintroduce pay-related insurance benefit

• If John loses his job, he would get 80 percent of his former salary (up to a high threshold) for a year

We used to have this system but it was abolished in the 1980s.  Yet it makes great sense - it provides a safety net and allows people to readapt to a changing economy.  There is no sense in asking people to retrain, to even provide those services, if they can't afford to avail of the opportunity.  Social protection gives them that breathing space.

But most of all, let's ditch these romantic notions of entrepreneurship and adopt models more in keeping with these modern times:

• Collective entrepreneurship

• In non-hierarchical, egalitarian corporate structures

• With strong social protection provision to facilitate continuing adaptation and upgrading

This is looking less and less like the out-of-date capitalism that my friends' friends are still stuck in, and more like a modern, dynamic, forward-looking society.

Comments

[KevanB]

I too suffer from the chunterings of those who cry up the entrepreneur. To silence them it is normally enough to ask if they are self employed or run their own company themselves.

However, most of the self employed are actually in serial employment which is a bit different from becomeing the new Rockafeller. It would be very nice if the new companies that are founded every year did spring up to be large employers of others. So few do. A small number stick at under 50 employees. The majority are vehicles for one form of tax scheme or other.

As you say serious wealth is created by large companies. And most of the large companies operating in Ireland are foriegn owned.

[Michael Taft]

Good point, KevanB - especially regarding the vehicles of one form of tax scheme or other. I know that the Bank of Ireland tracks the number of start-up companies. In recent years they have been disproportionately in the construction / property related sectors. I'd love to get a follow-up report on how well their thriving. Do you happen to have any info on small business formation as a tax vehicle?