Why China Might Be Right About Capitalism and Government

From Engine:

A report from Engine and the Kauffman Foundation has found that over the past few decades, the entire business sector outside of firms less than a year old has given us a net job loss.

Debunking conventional wisdom, and adding to an emerging thread of research, our latest report establishes new and young businesses -- not small businesses -- as the engine of job creation in the United States. Though older firms are the major source of employment, young business are a critical source of new jobs. In fact, outside of new firms--those aged less than one year--overall job creation was negative the last few decades.

Where, geographically, is this growth coming from?

Adjusted for city size, San Francisco places a distant 7th in overall startup density, trailing behind places like Boulder and Fort Collins, Colorado. Here are the top ten:


Top 10 Metro Areas for High-Tech Startups, by Density:

1. Boulder, CO
2. Fort Collins-Loveland, CO
3. San Jose-Sunnyvale-Santa Clara, CA
4. Cambridge-Newton-Framingham, MA
5. Seattle, WA
6. Denver, CO
7. San Francisco, CA
8. Washington-Arlington-Alexandria, DC-VA-MD
9. Colorado Springs, CO
10. Cheyenne, WY

And why, in terms of density, have cities like Boulder risen to the top of the pack? Engine/Kauffman identify three main factors, none of which should be any surpise:

1) They are well-known tech hubs with highly skilled workforces, 2) They have a strong defense or aerospace presence, and 3) They are university cities.

Looking at the cities listed above, it's interesting to see that being a "tech hub" doesn't seem to matter as much as being a center of government funding. Perhaps, given this observation and the fact that startups are the only net job creators, government intervention is a whole lot more important than free market capitalists like me want to admit. If startups are where jobs and progress come from, and startups are much more likely to thrive in a place with high involvement of and dependence on the government... maybe China is on to something. Food for thought.

 

Ranking by density is misleading as Silicon Valley, or San Jose-Sunnyvale-Santa Clara, CA as listed here is a sprawling metropolitan area with a much larger population than any of the other areas on the list hence the perceived lower density even thou there are far more startups and capital in SV than anywhere else, despite the lack of government presence. Also Stanford is a private university.

SF itself did not become a hotbed for startups until rather recently.

Too late for second-guessing Too late to go back to sleep.
 
Best Response
brandon st randy:

Ranking by density is misleading as Silicon Valley, or San Jose-Sunnyvale-Santa Clara, CA as listed here is a sprawling metropolitan area with a much larger population than any of the other areas on the list hence the perceived lower density even thou there are far more startups and capital in SV than anywhere else, despite the lack of government presence.

If you're talking in terms of which city is the top city, or the best place to build a career, or the most number of startups, yes, areas like SV win hands down. However, I think if you are looking at the situation from a macroeconomic perspective, it is useful to take the size of the city (which is dependent mostly on unrelated factors) and see on a per capita basis who produces the most. In this case, density is the best factor to tell us what we are trying to find out.
Also Stanford is a private university.

Yes, and most startups probably come out of private universities. However, the post-secondary education industry would be practically non-existent if it wasn't for government-subsidized student loans, so I think it's fair to put university presence under the umbrella of "government intervention".

 

I disagree that density is a better indicator. It is far more important to have a critical mass of talents and capital. The problem with per capital analysis is that it is disproportionately biased in favor of smaller cities, hence the high ranking of Boulder, Fort Collins, Colorado Spring and Cheyenne. Do you think Cheyenne WY (population 60000) is a better engine for generating new high tech jobs and a better ecosystem for startups than NYC?

I think the authors deliberately used this eschewed methodology to generate result consistent with their political talking point.

Too late for second-guessing Too late to go back to sleep.
 
Rhys da Vinci:

Yes, and most startups probably come out of private universities. However, the post-secondary education industry would be practically non-existent if it wasn't for government-subsidized student loans, so I think it's fair to put university presence under the umbrella of "government intervention".

The government also funds a lot of research, even at private universities. 20% of Penn Engineering's research budget comes from the DoD (not even the government as a whole), and I imagine that the numbers are similar at other schools.

Array
 
brandon st randy:

I disagree that density is a better indicator. It is far more important to have a critical mass of talents and capital.
The problem with per capital analysis is that it is disproportionately biased in favor of smaller cities, hence the high ranking of Boulder, Fort Collins, Colorado Spring and Cheyenne.
Do you think Cheyenne WY (population 60000) is a better engine for generating new high tech jobs and a better ecosystem for startups than NYC?

I think the authors deliberately used this eschewed methodology to generate result consistent with their political talking point.

Spot on.

 
UFOinsider:

Most startups come out of private universities?

Check your premises

As opposed to public universities, probably (again, on a per capita basis), but that's just a guess. Here's a peer-reviewed study that suggests I'm right - see the second page: http://iis-db.stanford.edu/evnts/4097/SShane_Why_More_Start-Ups.pdf.

A quick web search doesn't provide anything more convincing, but either way it's not relevant to the original post and its conclusion. The point is that most schools, public and private, are highly dependent on government in a variety of ways.

 
Andrés:

LOL at how socialists ("liberals") are ranking success of businesses by how much costs they have. They might have even less clue about microeconomics than they do about macroeconomics.

I don't know how to disagree with you while agreeing. It's not a liberal thing, just look at some industries (defense is an easy example) that have only a net cost given they pretty much only exist because taxpayer money funds their operations....that some employees and shareholders benefit on an individual level does not change this. To say that startups, howeve, are the only businesses that are a net financial gain, and that the only profitable small businesses are ivy league tech companies is at the same time a gross misnomer...one could easily make the case that a tech company like Amazon only has an advantage because they aren't taxed yet.

I'm tempted to pick apart OPs thesis but I just don't see it as worth it, profitable and productive businesses abound aplenty and speak for themselves.

I don't much see the whole point of this line of reasoning. What am I missing here?

Get busy living
 

It's simpler than all this: China's method only works for now because they have a creative external source of ideas. Were they to exist in a vacuum, their rate of progress would grind to a halt, and they would be surpassed just as they had been for so long up until last century. Also, they can't maintain their grip forever, people ultimately don't want to have their lives dictated and they will rebel at some point. Whether is in the near future or not is irrelevant, it's just a matter of time.

Get busy living
 
brandon st randy:

I disagree that density is a better indicator. It is far more important to have a critical mass of talents and capital.
The problem with per capital analysis is that it is disproportionately biased in favor of smaller cities, hence the high ranking of Boulder, Fort Collins, Colorado Spring and Cheyenne.
Do you think Cheyenne WY (population 60000) is a better engine for generating new high tech jobs and a better ecosystem for startups than NYC?

I think the authors deliberately used this eschewed methodology to generate result consistent with their political talking point.

I agree with what you're saying, but you're missing the point of the post. No, of course places like Cheyenne aren't better engines for creating jobs and startups than places like SV, NYC, and Boston, but that's not the subject of the article. All the authors are saying is that given a city size (determined by external factors), some cities have proportionately more startups. They then list the three factors that cause this density. This was a factual study, and didn't have anything to do with a political talking point. I'm the one who suggested a new perspective based on their data.

 
UFOinsider:
To say that startups, however, are the only businesses that are a net financial gain, and that the only profitable small businesses are ivy league tech companies is at the same time a gross misnomer...

No one said anything about profitability. The researcher's data shows a net job loss for companies other than startups.

I don't much see the whole point of this line of reasoning. What am I missing here?

The fact above is simply very interesting. Here's the line of reasoning again, coming from that fact and broken down but worded differently:

1) On a net basis, only startups create jobs. 2) A thriving economy needs a virtuous cycle of jobs -> individual spending -> company profitability -> jobs. (Yes, I'm oversimplifying the cycle - you get the point.) 3) Given any random city, town, or locality, that place will have more startups (and, given the facts above, more jobs being created) if there are more universities and defense spending in that place. 4) Other factors apparently are not as significant as the one above.

Therefore, if government spending is the primary factor contributing to startups, and startups are the only net job creators, the "You didn't build that" line of reasoning has more merit than I gave it credit for before I saw this research.

 
UFOinsider:

It's simpler than all this: China's method only works for now because they have a creative external source of ideas. Were they to exist in a vacuum, their rate of progress would grind to a halt, and they would be surpassed just as they had been for so long up until last century. Also, they can't maintain their grip forever, people ultimately don't want to have their lives dictated and they will rebel at some point. Whether is in the near future or not is irrelevant, it's just a matter of time.

You are 100% correct sir. Bonus book recommendation: Why Nations Fail by Daron Acemoglu and James Robinson. Among other things, the book explains why China's method is unsustainable. The book also gave me a better appreciation for the interconnection between politics and economics, which is probably where this post is coming from.

 

This is a very interesting topic. I think as with many things there should exist a balance. It would be unwise for a society or group of people to occupy some geographic region with no authority. That authority does not necessarily have to be centralized as in a federal government but there should be an authority nonetheless. On the flip side, that authority must be kept in check by the people under that authority's regulation to avoid the authority becoming oppressive. From an economic standpoint government's can both add value to their nation's job count or subtract value. Perhaps though we shouldn't lump all small businesses into a single category and say that because a region has greater defense spending (only a part of total government spending as we know) that region thus has a greater number of start-ups and small businesses. For example, micro brewing is BIG business in Colorado (and coincidentally Michigan as well). According to the Michigan Brewer's Guild, the brewing industry in the state adds around $24 million in wages and around $133 million in total economic value (you can find this info on their website: http://www.michiganbrewersguild.org/brewery-tours). Brewing is also BIG business in Colorado with 151 craft breweries in the state in 2012 (see the Brewers Association website for the numbers). Yelp.com lists about 14 breweries in Boulder along, and those are just the ones that are big enough to be listed on their site.

I apologize that this is a big long winded but my point is that there are many different kinds of small businesses. I would be willing to wager that their is almost no correlation between the density of small breweries in a region to the amount of defense spending in that region. Defense is not a driver for breweries. So again, maybe I'm reading too much into what this post was intended to be, and what the study finds is indeed interesting, but my point is just that I don't think we can make a blanket statement about government spending in specific regions of the country as being drivers for small business. Then we also get on the topic of government regulation now regarding things like healthcare and the changes in healthcare law over small businesses. Anyways, just my two cents. I'm not disagreeing with you but I'm just saying that I don't think we can necessarily suggest government defense spending in a region as a driver for all small business in that region.

"Successful investing is anticipating the anticipation of others". - John Maynard Keynes
 

The only correlation that exists between government involvement within the economy and employment growth is a negative one. You're cherry picking data. In other words, your data points are not representative/they are too narrow (the states with the highest level of government involvement are in fact the very same ones with the worst economic performances. Texas, for example, from 2010 to 2012, created more jobs than all other states combined. Additionally, North Dakota's growth is driven almost exclusively by innovations in energy discovery and extraction. This would be true whether the government was heavily involved in the economic sphere or not (by varying degrees), but you need to make sure that you are holding all other variables constant).

Also, the idea that elite, private institutions of higher education require government aid/assistance is spurious--no evidence suggests this. The fact that government is involved within this sector of the economy does not prove that its existence is a necessary prerequisite. You have not provided any evidence suggesting that it is either a necessary or sufficient condition.

And finally, China's economic performance is anything but exemplary. It's growth is primarily attributable to 3 major factors: (a) partial economic liberalization, (b) the current international monetary system that fuels their export-led growth and (c) arbitrary government 'investment' (primarily in real estate) that increase GDP variables but which lead to disproportionate (less than one) net social value.

“Elections are a futures market for stolen property”
 

China's current 'success' revolves around us. If we decide to inflate our currency to devalue the deficit and start looking for cheap labor in another region, say India, they could very well be forced to adopt some changes. ....oh, right, we've kind of already done that.

Hang on to your hats

Get busy living
 
SquaredFractals:

If UFOinsider is correct why would you say that China's system may be better?

I think it's obvious to most of us that China's system is not sustainable, on a lot of levels, but just because China is wrong doesn't mean that the U.S. is completely right in the way it views government involvement/intervention. The findings of this research were thought-provoking to me as I tend to lean libertarian in my economic views; perhaps the West shouldn't dismiss perspectives of the East quite so quickly without considering that in some ways (though certainly not all), the success of society is more dependent on government (or, in general terms, the group/collective society) than we think.
 
Esuric:

The only correlation that exists between government involvement within the economy and employment growth is a negative one.

More or less, than sums up my general viewpoint on government. However, while I agree with the sentiment, I think it is productive to consider whether that is really an absolute truth, or one that is only true to a certain extent.
You're cherry picking data. In other words, your data points are not representative/they are too narrow (the states with the highest level of government involvement are in fact the very same ones with the worst economic performances. Texas, for example, from 2010 to 2012, created more jobs than all other states combined. Additionally, North Dakota's growth is driven almost exclusively by innovations in energy discovery and extraction. This would be true whether the government was heavily involved in the economic sphere or not (by varying degrees), but you need to make sure that you are holding all other variables constant).

I think it's pretty easy to get the data to say what you want it to say, which is why I think it's important to consider points of view that run contrary to what I believe is reality. This data suggests to me that the creation of new jobs may be more dependent on government than I previously thought, and as the data is taken across several decades and cities throughout the U.S., I think it appears to be relatively unbiased. It is certainly less "cherry picking" than extrapolating based on one state's data over three years.

Also, the idea that elite, private institutions of higher education require government aid/assistance is spurious--no evidence suggests this. The fact that government is involved within this sector of the economy does not prove that its existence is a necessary prerequisite. You have not provided any evidence suggesting that it is either a necessary or sufficient condition.

I wouldn't think that any evidence needs to be provided. We all know that the government provides direct subsidies (i.e. subsidized loans and grants) and indirect subsidies (by law, student loans can't usually be discharged in bankruptcy) to students. The government also provides significant research funding to private schools. Elite private universities would certainly be hurt less than public or less elite universities if the government were to pull all funding, but I think it's pretty obvious that it would still hurt.

 

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