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Economic development depends on innovation and entrepreneurship

We ignore the importance of self-employed people for entrepreneurship at our peril

Ken Phillips

January 2011


I'm not an academic. But in ICA's efforts to lobby and advocate for change we recognise the need to understand academic concepts behind government policy and to engage with academics in discussion. This article gives a highly condensed summary of the concept of economic development as understood from an academic point of view. To this I wish to add the proposition that self-employed people are perhaps the key, but ignored, element in economic development.

What brings about economic development?

Entrepreneurship is at the core of economic development. This is the thesis put by one of the most influential economists of the 20th Century, Joseph Schumpeter. His thesis has startling relevance for self-employed people and for governments seeking to encourage economic development. My proposition, built on Schumpeter's insights, is that the status and experience of being self-employed is central to entrepreneurship-driven innovation and hence to economic development. Further, I argue that governments around the world are suppressing this sort of entrepreneurship. This needs to change.

Schumpeter was one of an influential group of key economists who broke new ground in economic theory around the middle of last century. That group included the likes of Hayek, Friedman, Keynes and others. There were many differences of view between them, but what is common about them is that their published views continue to dominate the debates over how to manage economies today.

Schumpeter's contribution was his argument that economic development is a process of Creative Destruction. This occurs, he says, through innovation and that innovation is primarily the result of individuals defying a status quo and bringing something new to markets. These people are not just inventors, although they might be, but what distinguishes them is their ability to bring an invention into commercial reality. Entrepreneurs break prevailing moulds and create new orders. I've put together a collection of Schumpter's main statements explaining the concept. But as an example, take current events in the computer and mobile/cell phone markets.

Steve Jobs of Apple Corporation fame would, on Schumpeter's analysis, profile as a entrepreneur. He's broken or breaking the dominance of Microsoft, founded by another entrepreneur, Bill Gates, in the personal computer market. Jobs has also broken the mould of mobile phone technology with Apple's iPhone. It's not the technology itself that identifies the entrepreneur, but the ability, against significant odds, to bring the technology into consumer acceptance and use. As a result, a new market status quo is established. This, says Schumpeter, is how economic development occurs. It's a process of Creative Destruction. New innovations constantly overwhelm what's currently happening, destroying the existing market models and creating new (economic) realities. The entrepreneur is not only central to this but the very cause of it.

This process doesn't just happen with technology. As he pointed out in his book in 1934 (the Theory of Economic Development; page xix), this applies to any '... new product, process or method of production, a new market or source of supply, a new form of commercial, business or financial organization.' Since WW2, at least, this thesis has been a guiding principle for government policies and programmes to 'encourage' innovation.

In today's hyped media environment, the focus on entrepreneurs is particularly directed at the high-flying success stories. People such as Oprah Winfrey (rags-to-riches media mogul), Mark Zuckerberg (Facebook founder and Time person of the year 2010) and others dazzle as media stars in the same realm as super sportspeople and rock legends. This attention on the big success stories is natural and it also fits with Schumpeter's analysis.

The idea, as Schumpeter explains it, is that innovation only occurs with small numbers of unusual individuals. This is because the nature of human society forces individuals to conform. Conformity is a powerful force for shaping human behaviour when they form groups. The entrepreneur breaks from this conformity to form something new and in doing this comes under attack and immense pressure from many directions still pushing for conformity. Few individuals can withstand the pressure or have the drive and personality to deal with it. If they do, they must have even greater tenacity in the biggest of all challenges---winning consumers.

Because of these social, institutional and sometimes even physical threats and challenges to them personally, the innovative entrepreneur is rare in society according to Schumpeter.

It's under this conceptual structure that government policies to encourage and promote innovation have been and continue to be devised. Politicians in government need to claim that they bring about economic development. 'Elect me and the economy will grow!', they say.

As a consequence it's rare to find a government in a developed economy that doesn't have a department or programs for innovation or for funding university departments of innovation. What they are all trying to do, consistent with the alleged rarity of the entrepreneur described by Schumpeter, is to give birth to economic messiahs within their populations. In this way, economic development occurs and economies move forward---at least according to the theory.

Failure of government programmes

Unfortunately, these programmes are abject failures. At least that's the story according to two leading academics in the area---Ken O'Neill and Simon Bridges of Ulster University.

O'Neill and Bridges have been advising upon and studying innovation programmes for several decades and are high-profile experts in the field. They say that for all the many millions spent by governments on encouraging innovation, there is absolutely no evidence that any of the programmes have or do make any difference to the quantity or quality of entrepreneurship or innovation. Their observation is a global one, based on the fact that programmes internationally are all based on set models.

My claim is that the failure of government innovation programmes stems from an unquestioned acceptance of one aspect of Schumpeter's thesis. I say that entrepreneurship, the ability to innovate, is not the preserve of small numbers of select people in our communities. In fact, entrepreneurship is an essential human trait in every person. It resides deep in each person as part of our DNA. The question is not whether entrepreneurship exists within us, but whether or not we erect or permit institutional barriers to suppress it.

In saying this I don't dispute the relevance of Schumpeter's thesis on this point. Rather, we live in different times. Schumpeter published his thesis in 1934. At that time, he lived in a Europe dominated by empires controlled by monarchs. People were born into social classes and for individuals to defy 'class', to do something different, was to defy the social and political institutions of those empires. The Second World War, however, destroyed the European empires and the subsequent global surge of democracy has deconstructed class. Nowadays, education systems in developed economies as well as social expectations more often emphasise confidence in individuality. Being different, finding your own path in life, exploring news ways is 'the way'! Societies have changed.

But what has occurred, from my observations, is that academic thinking on the nature of innovation, entrepreneurship and hence economic development has not moved on. At the official government and even at the managerial end of things, there continues to be a search for economic messiahs to drive economic development. This is, I think, misplaced.

I contend that entrepreneurship is alive at the very individual level in all populations. The demand for and respect for diversity in societies has created the social circumstances to enable entrepreneurship to flourish, for everyone to be an innovative entrepreneur. It's just that this potential is not recognised or supported. And there's one big blockage. It's called 'employment'.

The anti-entrepreneurship of employment

Employment is one of the last institutionalised structures of class enforcement maintained in developed economies. But it is a class and structured hierarchy maintained and enforced only in one aspect of our lives: work. Employment is the dominant structure around which work is organised.

Employment is a legal, managerial and institutional structure artificially maintained for the very purpose of forcing people at work into controlled conformity. I've explained this in my book Independence and the Death of Employment. (Here's a recent review.) Employment is the instrument used to suppress entrepreneurship by all the individuals working in the firm for the purposes of achieving the vision of the entrepreneur/s who control the firm. This is consistent with Schumpeter's observation that entrepreneurs seek to create their own kingdoms (that is, a firm). It's part of their motivation.

But look at the outcome. By enforcing employment, societies guarantee that entrepreneurship is restricted to small numbers of individuals. The entrepreneurship that (I claim) is latent in all humans is denied expression. The potential for innovation in massive numbers of small ways is squashed. In this way economic development is considerably less than it should be and humanity that much the poorer for it. But it's a poverty we don't know about because we've never seen the full explosion of economic development that's potentially available if everyone at work is able to be an innovator.

Nonetheless, something has broken the anti-innovation mould of employment. It's called self-employment.

The promise of self-employment

Self-employment is described by many terms, such as independent worker, independent contractors, free agents, freelancer, contractor, consultant, micro-business and so on. In fact all these terms are embraced by one thing. The self-employed individual earns his or her income through the use of the commercial/civil contract.

The International Labour Organisation (the peak global body on employment matters) has recognised this fact. It has also been recognised, for example, by the Australian Bureau of Statistics in the collection of data on self-employed people.

But here's the real significance. Self-employed people now make up some 20 per cent of workforces in developed economies. That is, one in five workers is not working as an employee. It's quite remarkable.

The status of not being employed but working for oneself and having 'clients' as opposed to 'a boss' has surged and changed the very fundamentals of how work in societies is organised. Self-employment is not dominant, but it's fundamentally changed the work system mix. What this means is that self-employed people respond to the requirements of their clients rather than to the instructions given to them by a person of higher social or legal standing (in the firm). This is a structure that enables, perhaps even demands, innovation. When people work for clients instead of 'bosses' they are always looking to do something better to attract and please the client. With a 'boss', people just do what they are told!

This is a work environment that enables entrepreneurship to flourish. It's not easy. It's no free ride. But entrepreneurship is not easy. Innovation is not easy. However, it's the way to go if societies want to realise their full potential and achieve economic development.

Governments enabling entrepreneurship

font>Unfortunately in this new environment governments are badly stifling this potential. Ken O'Neill and Simon Bridges have argued that government programmes and polices to encourage entrepreneurship have failed. Here are some things that could be done, nevertheless.
  • Stop discriminating against self-employed people: The institutions of government have routinely built their administration around the assumption of employment. Where employment does not occur, the institutions take an aggressive position towards self-employed people and try to force them into employment. This includes tax systems, welfare, work safety, small business financing---the list goes on. ICA's website is dedicated to campaigns to stamp out this discrimination. www.contractworld.com.au
  • Study self-employed people: What few studies have been conducted on self-employed people are generally scant and cursory. They normally fit into studies of 'small business' but tend to focus on 'the firm' rather than on individuals. However, from studying and understanding self-employed people, in particular what motivates them, it should be possible to reveal the human dynamic of innovation. Such discovery should guide government to better policy formulation.
  • Ensure integrity of commercial/civil contract: Because self-employed people are dependent on the commercial contract, government can play a significant role by ensuring that commercial contracts have effective integrity for the average person. This means that contracts must comply with common law principles of 'fairness' and that they can easily and cheaply be enforced. It's really about the effective rule of law. Again, ICA campaigns heavily on this.
Each of the foregoing prescriptions falls into the category of removing blockages to people being their own boss. Removing the blockages and discrimination should establish the social, legal and commercial circumstances which will allow the broad base of latent human entrepreneurship to rise. This is the most valuable contribution that governments can make towards entrepreneurship and economic development.

But can government do more and actually 'create' entrepreneurship? Ken O'Neill and Simon Bridges say that what's been tried so far has been a waste of time and money. Perhaps there are things that could be done! But I'd contend that the study, analysis and understanding of what needs to be done is almost non-existent and that, as a result, identification of specific programmes that could work is almost non-existent as well.

At the moment, the priority should be on removing the institutional blockages. By taking away the gum that clogs up human capacity, new and further surges of human achievement should be achievable.

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