President Ronald Reagan (1981-89) heralded entrepreneurs as capitalist heroes, yet for the most part the policies his administration promoted did not help real-life entrepreneurs, including both small business owners in traditional sectors and venture founders in high technology. The Reagan administration officials’ neoliberal ideology impaired their ability to promote entrepreneurship because they viewed support for entrepreneurs primarily in negative terms as the removal of government tax and regulatory burdens rather than in positive terms as the cultivation of a dynamic market infrastructure.
Reagan stressed themes of innovation, self-reliance, and freedom in his speeches and public statements as president – freedom from government, not freedom secured by government. In his second inaugural address, for example, he linked entrepreneurialism to freedom and small government:
At the heart of our efforts is one idea vindicated by 25 straight months of economic growth: Freedom and incentives unleash the drive and entrepreneurial genius that are the core of human progress. We have begun to increase the rewards for work, savings, and investment; reduce the increase in the cost and size of government and its interference in people’s lives.
The Myth
Yet the image of an entrepreneur who thrives in the absence of government support was fundamentally flawed. Since neoliberal leaders viewed markets as naturally occurring and spontaneously evolving, they failed to grasp how governments, industry and individuals create and sustain the market environment in which entrepreneurs flourish. Since they situated free markets as a universal ideal, they did not recognize the range of government regulations, business practices, and social norms that govern markets, and how this governance varies across time and space. And since they conceived of markets as a realm of freedom and regulations as constraints, they did not appreciate how much real-world markets are characterized by imbalances of power and status that constrain entrepreneurial opportunity for less privileged groups.
The irony is that the policy agenda adopted in the name of entrepreneurs – including lower taxes, lower social spending, less regulation, financial liberalization, and weaker antitrust enforcement – hurt entrepreneurs more than it helped them. These policies helped large firms more than small firms, and financial institutions more than manufacturers. They enabled incumbent firms to garner “rents,” meaning returns in excess of value created. They set the stage for a sustained increase in economic inequality, whereby growth no longer benefited most entrepreneurs. And they undermined economic opportunity and social mobility for would-be entrepreneurs, especially racial minorities and immigrants. Startups declined steadily in the United States beginning in the 1980s (see figure). The share of firms less than five years old in the economy decreased steadily, from about 50% in 1980 to about 35% today.
Start-up and Exit Rates for U.S. Firms.
What explains the gap between the political commitment to entrepreneurs and the actual policy benefits for entrepreneurs? In a nutshell, “neoliberal” reforms tended to favor incumbents over challengers. Table 1 illustrates how various types of market governance constitute balances of power. Neoliberal reforms have moved in the direction (to the right on the table) of the more wealthy and powerful, from challengers to incumbents, stakeholders to shareholders, employees to employers, etc. Entrepreneurs require an opportunity to compete, and the government has to foster that opportunity. As Adam Smith recognized, businessmen would prefer to collude than to compete, given the choice. Incumbents engage in outright collusion, such as fixing prices, and more subtle anti-competitive practices, such as exclusive dealing arrangements with business partners, to fend off challengers. So governments have to press businesses from value extraction strategies toward value-creation strategies.
Market Governance and Market Power Relationships
The free-market ideology resonated with many small business owners, who believed in self-reliance and resisted dependence on the state. But it also served as a convenient smokescreen for policies that favored incumbents. In fact, the Reagan policy agenda was riddled with contradictions. It claimed to reduce regulation, but increased it. It vowed to limit the power of the state, but marshalled the power of the state to advance its goals, from attacking labor unions to restructuring the financial system. It promised to un-rig the economy from capture by special interests, but re-rigged it in favor of the wealthy and the powerful. And it claimed to champion entrepreneurs, but undermined entrepreneurship.
Market Governance
Let us review this thesis by briefly surveying specific policies from the Reagan era, beginning with market governance and then proceeding to the broader policy agenda.
Antitrust: The Reagan administration shifted decisively from the proactive U.S. antitrust policy of earlier decades toward the more laissez-faire Chicago School. It drastically cut the number of attorneys, eased enforcement, and loosened merger review. As mergers boomed, the increase in market concentration meant there were fewer small firms with less ability to challenge incumbents.
Intellectual property rights: IP protection – such as patents, copyrights, and trademarks – provides a critical incentive for innovation. Yet it can also impede inventors, who must avoid violating the exclusionary privileges of existing IP holders. The Reagan administration exacerbated this problem by extending patent protection to new products, such as software and business methods. This produced a patent “thicket”: a dense web of patent rights that companies must hack through to commercialize new technology. And it fostered non-practicing entities (“trolls”) that would buy up huge numbers of patents (largely for software), search for possible infringements, and demand financial settlements or seek judgments through litigation. In the process, these trolls impeded the development of new products, increased costs for businesses and consumers, and clogged the judicial system.
Financial liberalization: The Reagan administration accelerated a process of financial liberalization that began before it and continued after. These reforms produced a financial sector that was more competitive and less stable, facilitated financial innovation, fueled a sustained increase in the financial sector’s share of national income, exacerbated economic inequality, and permitted a major consolidation of the sector. This eliminated many small financial institutions, weakening a major channel of finance to small businesses, which often relied on close personal ties to local lenders for credit. The reforms also fueled the savings and loan crisis of 1986-95 and set the stage for the global financial crisis of 2008.
Deregulation: Many small business owners felt that much government regulation was expensive, unnecessary, and placed a disproportionate burden on them. And for Reagan administration officials, attacking red-tape fit nicely with their reverence for self-reliance and economic freedom. Yet regulations bestow benefits as well as costs. The Office of Information and Regulatory Affairs (OIRA) has consistently found that the net benefit of regulations exceeds the costs. And regulations do not actually impair entrepreneurship at the aggregate level. Alex Tabarrok, a libertarian economist, designed a study to test whether the increase in regulations caused the decline in economic dynamism over the past 30 years in the United States, including the reduction in business startups and the pace of job reallocation – but he found that they did not. To his credit, he changed his perspective on the relationship between economic regulation and economic dynamism and published his negative results, to considerable acclaim.
The Broader Policy Agenda
Let us now briefly review some other Reagan era policies and consider their impact on entrepreneurs.
Taxes: Reagan centered his attack on high taxes and big government. His advisers proclaimed that lower taxes would boost growth and innovation. With several decades of data and research now in hand, however, the evidence does not support that view. The level of taxation is less important to entrepreneurship than its mode and distribution.
Welfare services: Reagan vowed to shrink the welfare state, although the actual reforms were more modest than advertised. Neoliberals claim that lower taxes and spending help entrepreneurs. Yet public provision of health care insurance and pensions can benefit small businesses because it puts them on an even footing with large businesses and relieves them of some administrative costs. Research confirms that welfare programs can promote entrepreneurship by moderating risks.
Public investment: The Reagan administration proposed drastic cuts to the federal education budget, although Congress pared back the cuts. In 1983 the National Commission on Excellence in Education released a report, A Nation at Risk, warning that mediocrity in education threatened the future of the American nation and its people. Reagan responded by prioritizing education issues in his re-election campaign, but he did not devote greater resources to education in his second term. The Reagan administration also selectively cut other types of public investment, including transportation and water infrastructure. But these are precisely the types of public investments that could help entrepreneurs.
Small business support: The Reagan administration’s approach to small business focused on negative measures such as tax cuts and regulatory relief rather than positive measures such as preferential lending. In fact, it reduced small business assistance by 27% from 1980 and 1985. It then sought to disband the Small Business Administration (SBA), which provides preferential lending, legal advice, and consulting services to small businesses, including support targeted at socially disadvantaged groups. But it relented due to strong resistance from Congress and the small business lobby. In a remarkable rebuke from this ostensibly favored constituency, the New York Times reported that delegates at the 1986 White House Conference on Small Business booed Chief of Staff Donald Regan and lashed out at the administration for abandoning them: “Owners of small companies from around the country expressed frustration today with President Reagan’s treatment of small business and complained that while Mr. Reagan had devoted much oratory to the importance of small business his policy initiatives did not reflect that concern.”
Industrial and technology policy: This brings us to another irony: the Reagan administration supported entrepreneurs the most when it deviated from its neoliberal ideology. It objected to industrial policy in principle, but sometimes adopted it in practice. For example, it created the Small Business Innovation Research (SBIR) program in 1982 to provide research funding for small independent firms. The program has supported some of the most innovative American startup firms, and guided the transition from laboratory to marketplace.
Neoliberals have bestowed exalted status on entrepreneurs as folk heroes, but their ideology has impaired their ability to design policies to support real entrepreneurs. The ideology of the free market and the heroic image of the self-made entrepreneur served as smokescreen for policies that served the interests of the wealthy and the powerful at the expense of the broader public. A dynamic entrepreneurial economy requires not a withdrawal of government intervention, but rather an active government that empowers entrepreneurs to challenge incumbents.
About the author: Steven K. Vogel is Chair of the Political Economy program, the ll Han New Professor of Asian Studies, and a Professor of Political Science at the University of California, Berkeley, and the author of Marketcraft: How Governments Make Markets Work, from Oxford University Press. This essay is based on a working paper on “Neoliberal Ideology and the Myth of the Self-Made Entrepreneur.” Follow him on Twitter @StevenKVogel
Image: Reagan gives a televised address from the Oval Office, outlining his plan for tax reductions in July 1981. https://catalog.archives.gov/id/12008442.