The Ewing Marion Kauffman Foundation, a non-profit that supports entrepreneurship, has a new report out by Paul Kedrosky and Dane Stangler headlined "Financialization and Its Entrepreneurial Consequences." According to the foundation's press release about the study, the growing size of the financial industry in America "potentially suppressed entrepreneurship."
The release quotes Mr. Kedrosky as saying that the financial companies were hiring people who otherwise might have started their own companies. "The financial services industry's steady rise has had a cannibalizing effect on entrepreneurship in the U.S. economy," he is quoted as saying. "Excessive financialization exacerbated and distorted the flow of capital in the economy, potentially suppressing entrepreneurship by drawing away entrepreneurial talent."
The same release quotes Mr. Stangler as saying that "An excessively dominant financial sector may have made it easier for weaker (or potentially weaker) companies to obtain financing, thus helping to maintain that steady rate of entrepreneurship but possibly contributing to the declining quality of newly established businesses."
The use of words like "may have," "possibly," and "potentially" gives a clue to how confident one can be of the claims in the study. Answer: not very.
Not that that stopped Time magazine from picking up the study's claims and summarizing them as follows: "A new study from the Kauffman Foundation, a Kansas City, Mo. — based nonprofit that researches and funds entrepreneurship, has found that over the past several decades, the growth in size and importance of the financial sector has run in tandem with lower — not higher — rates of new-business formation....A number of factors explain that, but one of the most important, argue the study's authors, is that the financial sector is sucking talent and entrepreneurial energy from more socially beneficial sectors of the economy."
Time goes on to opine: "That's worth thinking about carefully, especially as we continue to let bankers off the hook by trimming the already inadequate budgets of the agencies that regulate them."
Cannibalism? Sucking away energy from "more socially beneficial sectors"? The long shadow of usury rears its ugly head yet again.
For one thing, I think these measurements of the growth of the financial sector are inexact. The paper uses the "finance and insurance" sector. Some of the growth in the "insurance" sector, the health insurance part, may be just a measure of the growth in health care expenses. And some of the jobs and economic activity at firms in the finance and insurance sector is not finance or insurance-related; while Berkshire Hathaway is widely classed as a finance and insurance company, it owns Dairy Queen. Is the employee putting the chocolate shell coating on your ice cream cone at Dairy Queen eally working in the finance and insurance sector?
Second, it's not a zero-sum game between a growing financial sector and entrepreneurship. When Steve Schwarzman and Pete Peterson left Lehman Brothers to start Blackstone, they were being entrepreneurs. When people leave Goldman Sachs to start hedge funds, as many have, they are being entrepreneurs.
Third, contrary to what the Kauffman report claims, there's not necessarily a contradiction between going to work for a big established firm right out of college and then, a little later, becoming an entrepreneur. I worked for Times-Mirror (the L.A. Times) and Dow Jones (the Wall Street Journal), and then I used some of the skills I got there to start two companies. Same with the Goldman Sachs guys who then went and started hedge funds. It's the rare college student or person right out of graduate school who has the skills and experience to do a startup. Not that there aren't any such people, and sure, the presence of high-paying opportunities elsewhere may siphon some of that talent away from startups, but if a person is really entrepreneurial, it's a rare large company that is going to keep them satisfied and challenged.
Finally, it strikes me as hard in a free economy to declare what level of "financialization" is "excessive." Usually the way markets cope with excesses in sectors is that companies go out of business, but the government seemed determined not to let that happen to at least some of the players in the financial sector.
I emailed Kauffman about some of these issues and got a brief email back from one of the co-authors, Mr. Stangler, as he was getting on a plane, as follows: "Credit intermediation activities, I think, are the largest sub sector in finance and insurance. We don't see financial activities as zero sum, but with lower social returns than entrepreneurial ventures. Yes, a new hedge fund is an entrepreneurial venture, but that is arguably contributing a higher social return than an I bank, particularly what we know about contributing factors to the financial crisis. By and large, risk was not in hedge funds."
Anyway, it's probably worth a longer discussion, because I think it's possible to encourage entrepreneurship without demonizing or scapegoating or blaming the financial industry, and I think that as far as barriers to entrepreneurship, the availability of high-paying jobs on Wall Street as alternatives to entrepreneurship is probably pretty low on the list of things worth worrying about. Yet even so, this idea that an outsized Wall Street is somehow "strangling" the economic recovery, as the Time headline puts it, seems to have a deep hold on some part of the public imagination.