Before acclaimed economist William Baumol passed away last month, many of his peers expected him to win a Nobel Prize. Although he did not live to see such an honor, he remains celebrated and respected for his insightful contributions to economics. Thus it comes as no surprise that one of Baumol’s arguably lesser known ideas is particularly relevant to the ongoing fight to advance economy liberty.
While many people celebrate and encourage entrepreneurship as the productive bedrock of healthy economies—along with robust job and wage growth—Baumol took great interest in what kinds of entrepreneurs our system encourages—and at what cost. That’s because not all business models are “productive” in the usual sense of providing services and products of real value that benefit society and innovative businesses.
Instead of creating and marketing real value, some “entrepreneurs” pioneer ways to profit from special relationships with and favors from the government. This special-interest dealing, often known as “rent-seeking,” drains economic productivity and harms economic opportunity by using hardworking taxpayers’ own resources against them to benefit the government’s handpicked “winners.” In Baumol’s words:
[Entrepreneurs] are always with us and always play some substantial role. But there are a variety of roles among which the entrepreneur’s efforts can be reallocated, and some of those roles do not follow the constructive and innovative script that is conventionally attributed to that person. Indeed, at times the entrepreneur may even lead a parasitical existence that is actually damaging to the economy. How the entrepreneur acts at a given time and place depends heavily on the rules of the game—the reward structure in the economy—that happen to prevail.
Changing the protectionist rules that encourage and reward “rent-seeking” is the central goal of the Institute for Justice’s (IJ) recent book, Bottleneckers: Gaming the Government for Power and Private Profit. As authors Dick Carpenter and Chip Mellor note, economically “unproductive” protectionism can take many forms, from onerous occupational licensing schemes for professions that don’t need them to monopolistic restrictions on mobile food entrepreneurs who compete with established restaurants.
IJ’s new lawsuit against Iowa’s “certificates of need” laws for health services—a particularly vicious if little-known form of economic protectionism that have proven life-threatening in places like Virginia—marks the institute’s latest salvo against economic protectionism and the “unproductive” entrepreneurship that Baumol rightly warned against. If more community and political headers hear—and heed—that late economist, and let entrepreneurs wander off from onerous red tape to innovate productively, we would all be better off.