Our Role In The Evolution Of Capitalism

Excerpt from

“Discovery consists of seeing what everybody has seen and thinking what nobody has thought.”

KAUFFMAN Thoughtbook

2009

Fourth in an ongoing series, the Kauffman Thoughtbook 2009 captures what we are thinking, learning, and discovering about education, entrepreneurship, and advancing innovation. This collection of more than forty essays is written by the talented Kauffman Foundation associates, partners, and experts who are pursuing the principles and vision set by our founder, Ewing Kauffman. REQUEST YOUR COMPLIMENTARY COPY AT

kauffman.org

©2008 by the Ewing Marion Kauffman Foundation. All rights reserved.

Our Role in the Evolution of Capitalism carl J. Schramm, Ph.D. President and Chief Executive Officer, Ewing Marion Kauffman Foundation

It would seem to be a safe bet that Ewing Kauffman was unfamiliar with the works of Joseph Schumpeter and Max Weber. Both were dead when Mr. Kauffman began Marion Labs, and Schumpeter’s work was nearly forgotten. But these three men have played an important and ongoing role in the evolution of capitalism. Schumpeter was the theoretical champion of the entrepreneur; he forced economists to understand the entrepreneur’s importance in keeping capitalism self-renewing. Weber was the first to see clearly the way bureaucracy establishes itself within expanding firms, stifling the creative, entrepreneurial energy of their early years. Mr. Kauffman was the first philanthropist to see foundations as important adjuncts to preserving and supporting the entrepreneurial genius of American capitalism. At one time, the perspectives of these men seemed discordant with the direction in which American society was headed. Following the disruptions of the Depression and World War II, the emerging power of economic analysis, alloyed with regulatory government, promised that we could experience steady growth. But this industrial capitalism—dependent on balancing the power of unions, business, and government—ultimately failed. During the period of stagflation in the early 1980s, we experienced a transformation in the nature of American capitalism, through actions that reduced the government’s regulatory role in the economy. Will 8 Excerpt from Kauffman Thoughtbook 2009. ©2008 by the Ewing Marion Kauffman Foundation. All rights reserved.

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Baumol, acclaimed economist and Kauffman senior advisor, Bob Litan, Kauffman’s vice president of research and policy, and I have characterized what emerged as entrepreneurial capitalism in our book, Good Capitalism, Bad Capitalism. The Kauffman Foundation has played a role in the development of entrepreneurial capitalism, and we have an even more critical role to play in the future of capitalism. As the patrimonial legatees of Mr. Kauffman and, I think, the intellectual descendants of Schumpeter and Weber, it may fall to us to describe and grapple with the changing nature of capitalism as a necessary predicate to advancing it. Toward a New Capitalism To speak of the advance of capitalism may seem incongruous at this particular moment. The fruits of entrepreneurial capitalism over the past three decades have been undeniable and, in a comparative lens, startling. Personal computers, cell phones, the Internet, medical procedures—these and many other innovations are now so ingrained into the fabric of daily life that it is difficult to appreciate how new they are. Together, they add up to a remarkable achievement: the average American today is two-thirds wealthier than in 1980. Yet as the financial crisis of 2008 clearly demonstrates, the system that brought forth such growth is unpredictable, uncertain, and, in a very real sense, messy. The essential features of our market system remain stable over time: supply and demand, price signals, government regulation, small firms, large corporations, etc. The nature of these features, however, is by no means stable. The ways in which technological innovation proceeds, the methods by which companies finance their activities, the size and scope of consumer markets—each of these is far different today from a century ago, and will be different a century hence.

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This fact—constant tumult beneath a surface of stability—points to the fundamental tension we are experiencing today. The messiness of entrepreneurial capitalism generates economic growth, but we instinctively seek protection by a larger force in the face of that messiness. This tension appears to be pushing us toward a new form of capitalism in the future, and people from all corners of the world are already seeking to lay claim to it. It will, in these variegated claims, be “social” capitalism or “sovereign” capitalism or “creative” capitalism. It is all too easy in times of crisis to reach for abstractions like “greed” and “venality,” and to turn to government for a solution, thinking that the absence of government

If there is to be a new capitalism, then, it is most likely to arise from the platform of expanding entrepreneurial activity and evolving economic institutions.

led us into the crisis in the first place. Inevitably, we over-rely on government’s ability to tame human nature, threatening the very source of capitalism’s capacity for self-renewal. That source is not government, nor a label of what one thinks capitalism ought to be—it is, and ever will be, the creative actions of individuals pursuing an idea of how to do something better. Growing the Economy in a Lab If there is to be a new capitalism, then, it is most likely to arise from the platform of expanding entrepreneurial activity and evolving economic institutions. While we operate in an ecosystem currently composed of entrepreneurs, universities, large companies, and government, I believe it is likely that a new form of institution will emerge that will accelerate growth, most likely by being a boundary-crossing organization that will fuse resources with a new mission. It is my hope that our emerging plans around a new entity that will train entrepreneurs in a wholly different way—what we’ve been referring to as Kauffman Laboratories 10

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for Enterprise Creation—may be an example of just such an institution. (See the essay on page 52 for more on the Kauffman Labs concept.) Kauffman Labs is premised on the view that America should pursue and can attain a higher rate of economic expansion. Where once upon a time a 3 percent growth rate in GDP was seen as better than satisfactory, we must think in terms of annualized growth of 4 percent or even 5 percent if we are to advance entrepreneurial capitalism, eradicate global poverty, and address our most persistent national problems, such as the lack of health insurance, the coming failure of Social Security funding, and our nation’s woefully underperforming schools. (There is, in fact, precedent for such a goal. In 1956, Nelson Rockefeller helped form the Rockefeller Commission on National Priorities. In its 1958 report, Prospect for America, the Commission called for the United States to reach for an annual growth rate of 5 percent.) We clearly face a challenge, too, around growth and environmental degradation. Some years ago, however, an economist suggested that, rather than viewing environmental problems as a chasm to be avoided by slamming on our economic brakes, we should seek a higher growth rate that allows us to leap across that chasm. Thus, we must continue to engage the entrepreneurial genius of our country on this question as new challenges arise. As one example, the Kauffman Foundation’s Lesa Mitchell is examining a “clean-tech” initiative for future grantmaking. This area holds great excitement for us going forward. Kauffman Labs will contribute to increased growth by seeking three unequivocal goals: the nation must prepare more entrepreneurs, those entrepreneurs must anticipate the highest possible rates of success, and their success must include the creation of larger numbers of new businesses that help create wholly new industries. In fusing the practices and ideas of several embryonic, nonconventional ways of teaching entrepreneurs with the best synthesis 11

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of business accelerators, we aim to create the test bed on which to build a systematic knowledge base for teaching entrepreneurship. Kauffman Labs will propagate this knowledge base, which we might refer to as the “science of startups.” Used as the base of a new type of training facility at the local level—a kind of entrepreneurial academy—Kauffman Labs will seek to help propel a movement of entrepreneurship throughout the economy. Addressing the Challenges Such a vision returns us to the question of capitalism’s future evolution. In this vein, one of the central foci of our work ahead relates to how big firms operate in the face of two fundamental challenges. The first is the decreasing need for capital as human capital displaces physical capital. This relates to our thinking about firm size. It is not clear that large firms will be held together in the future by artificial forces in capital markets. This condition may be exacerbated by the continuing advance of technology, especially information technology. I look forward to our efforts to stimulate entrepreneurship inside larger firms. The second challenge is health care for individuals, who we know will be employed more and more by themselves and in small, entrepreneurial firms. It is important that we have a system of rational and affordable health care coverage that aligns with people’s changing career profiles. This is the Gordian knot of policy issues but, once again, it may be entrepreneurs, working with technologies as distant to health care as networking software, who provide a new way of reordering health care and its financing. We must engage in thinking and possible grantmaking around this issue as well.

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If the steps we take to accelerate growth are effective, the nation and the world will have the resources to eliminate poverty. With this potential in hand, we must open a discussion about a different kind of poverty, one where those with fewer resources are systematically excluded from the ability to engage in entrepreneurial activity with all its promise for self-definition and self-respect. We have committed ourselves to the notion that the big dreams

We have committed ourselves to the notion that the big dreams of entrepreneurs can be the province of anyone.

of entrepreneurs can be the province of anyone. As we build toward instigating a grassroots, city-centric movement for entrepreneurship through Kauffman Labs, we will be taking the promise of entrepreneurship to those seen by others as hopelessly locked in chronic, unshakable poverty. Mr. Kauffman would not have stood for any commitment less than this. Of course, this takes us to the role of other institutions and what they must do to help make an entrepreneurial future for America and the world. Already we have begun to tackle American jurisprudence as it encounters the capacities of a nation that is producing marvelous technologies whose development seems inhibited by law. Bob Litan further describes this promising area on page 102. We already are a not-always-welcome presence inside our university system. Our message is that, if universities fail to change in the way they prepare students for an entrepreneurial culture and in the way they share their inventions and innovations, they will lose their authority and credibility as economic contributors. Finally, we must help government to understand its next evolutionary steps. In at least two periods over the last century, foundations have helped to shape government. In the post-war era, foundations lay claim to having taught government how to become the big central grant-dispensing agent that it is. The 13

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National Institutes of Health traces its roots to the designs of foundations. Likewise, in the period of the Great Society and continuing to this day, many foundations behave as if their role is to fund pilot studies of new social programs that government must adopt and expand to scale. In a time when individuals control more wealth, perhaps foundations should lead a discussion about reorienting government, making it more sensitive to the entrepreneurial culture that is growing up throughout the land and is clearly at odds with the bureaucratic mindset. Our recent decision to take responsibility for entrepreneurship.gov, and its mirrored site at entrepreneurship.org, may prove to be an initial step with enormous ramifications. It may be an example of how government can efficiently delegate needed new services to organizations—services that stimulate growth through making specific knowledge readily accessible. I believe the Kauffman Foundation stands at one of the most exciting moments of its life. Throughout this Thoughtbook, you will find examples of new research and partnerships that we hope have the potential to make an impact on every citizen on earth. We are a small band of ninety people, yet we are compelled to contemplate this ambitious vocation. Mr. Kauffman’s vision and his monetary endowment are, of course, our touchstone. As you’ll read on page 16, it was he who said that a group of common people working together could achieve uncommon things. Our group includes the brilliant associates of this foundation and our wonderfully talented and committed partners and grantees with whom we are privileged to work. Their individual ideas, their reputations, and their social networks are our living assets, which we leverage in the cause of the Kauffman Foundation every day. Working together, we strive to make history by changing the world for the better, which is just what Ewing Kauffman hoped his successors would do.

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