Nobel Economist Pans Start-Up Chile Concept

The Economist, Business Week, and TechCrunch have recently published optimistic articles about Start-Up Chile. Program proponent Vivek Wadhwa ponders:

How do we get the economy to grow at 4 percent, doubling GDP in 18 years, vs. 24 years? …To answer this question, the Kauffman Foundation’s Robert Litan just published Inventive Billion Dollar Firms: A Faster Way to Grow. It’s a succinct argument that suggests helping a few really innovative startups become big businesses….Since I am not an economist, I don’t know how accurate Litan’s analysis is.

Start-Up Chile advocate Steve Blank says:

Read this with all the usual caveats: visiting a place for a few weeks doesn’t make you an expert (heck I’ve lived in Silicon Valley for over 30 years and I’m still surprised), I’m not an economist, and the odds are I misunderstood or misinterpreted what I saw or just didn’t see enough.

Why do people disparage the importance of studying economics while advocating government policies? An economist is similar to a lawyer; a challenger who identifies risks and opportunities, revealing unpleasant possibilities that surprise uneducated economically illiterate laymen.

I asked Vernon Smith, a Nobel Prize winner in economics, what he thinks of the interpretation of the Kauffman studies quoted above:

Government subsidy for new enterprises is not a policy implied by the Kauffman studies of new enterprise entry and exit.

What makes the Kauffman study of start up firms compelling, is that many survive in a world rich with innovative experiments in which most fail. This means that the relatively few who succeed and grow find the means of overcoming technical obstacles that transform new ideas into products with self sustaining demand. The prospect and fact of failure is essential to this winnowing process. 

It is important to remove artificial barriers–stumbling stones, often local in origin and coming from incumbent opposition to entry–and to not burden businesses with taxes that reduce their internally generated funds for reinvestment, growth and striving to overcome market challenges.

Any attempt to pick winners and subsidize them politicizes a free economic entry and exit process, and will tend to compromise the path to wealth creation.  Resist all such temptations to externally micromanage a healthy economic process.

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