Apr 26, 2019

What Ship Captains Can Teach Us about Barriers to Entrepreneurialism

Adam Thierer Senior Research Fellow

Saint Thomas Aquinas has been paraphrased as saying that “If the highest aim of a captain were to preserve his ship, he would keep it in port forever.” Of course, no captain stays put in the harbor because they have higher aspirations.

In a similar way, entrepreneurs take bold risks in uncharted waters and choppy seas--but only if the stars are properly aligned. Entrepreneurs will be more likely to take risks when they feel as though they will receive great benefits for doing so. They are racing for a prize, whether it be profitability, notoriety, novelty, or whatever else they desire. And it is absolutely essential that public policy not remove that potential prize, or else fewer people will enter the race. This was one of Joseph Schumpeter’s great lessons, as I noted in a new AIER essay recently.

Tax and regulatory policies profoundly affect how many entrepreneurs are willing to leave their port and brave the high seas. At its root, the study of economics can be reduced to a couple of two-word truisms: trade-offs exist and incentives matter. When I am explaining the innovation-deterring dangers of certain policies to people, I often ask them to keep those two truths in mind and then imagine themselves in the shoes of an entrepreneur who is trying to decide whether or not to embark on a new venture. Should they, like the ship captain, take the risk and leave port?

The answer depends on the various other uses of their time and money (i.e., the trade-offs), and the particular marketplace and policy signals that influence the level of risk associated with the venture (i.e., the incentives).

Regulatory Policy

With regulatory policy, it is obvious how the quest for the prize can be discouraged or flatly disallowed. Occupational licensing regulations, for example, make it too expensive (or perhaps impossible) for new players to enter a particular field and challenge entrenched incumbents.

Other technocratic administrative rules issued by federal and state regulatory bureaucracies can directly or indirectly limit entrepreneurial activities. It is hard to get those proverbial ships out of the harbor when layers of red tape suffocate creative activities. “Like sediment in a harbor, law has steadily accumulated, mainly since the 1960s, until most productive activity requires slogging through a legal swamp,” notes legal reform advocate Philip K. Howard. “It’s degenerative,” he says, and as law continues to grow denser, “[t]his growing legal burden impedes economic growth.”

Mercatus Center scholars have meticulously documented just how big of a problem regulatory accumulation has become and the deleterious effects it has on our lives and economy. Patrick McLaughlin and Michael Wilt note that, “the buildup of more and more regulatory restrictions distorts and deters the business investments that drive innovation and economic growth.” For our would-be entrepreneurial ship captains, accumulating regulatory burdens sends a clear incentive: don’t bother leaving port, or even trying to invest in a ship for that matter.

Tax Policy

Tax policy has an equally important influence on how many ship captains we get. In a new white paper on “Tax Policy and Entrepreneurship,” Tax Foundation analysts Garrett Watson and Nicole Kaeding outline the various policies that have a bearing on innovative activities and, by extension, the innovative capacity of the entire economy. “Taxes influence the risks entrepreneurs take, the incomes they earn, and their fixed costs,” they note, “Policymakers should consider the impact of the tax code on the entrepreneurial community as a vehicle for accelerating economic growth and dynamism.”

Again, think about our would-be ship captains. The harbor is already gummed up with red tape, and regulatory barnacles are stuck all over their ship hulls, slowing them down. But things then get worse because before they can try to leave port, they learn several tolls must be paid to a variety of authorities. Not only are those tolls quite expensive, they are numerous and confusing. In fact, captains may need to read many impenetrable pages of rules to understand how to comply with these tolls, or hire someone who can do it all for them at added expense.

What sort of an incentive does that send the captains? “Ideally, entrepreneurs would not make decisions to start businesses, invest, and engage in risk because of the tax code,” Watson and Kaeding argue. Alas, they must pay close attention because “a higher effective tax rate on entrepreneurs drives up the required gross return an entrepreneur needs to move forward on an investment.” Unfortunately, America’s tax code is so excessive—in terms of both rates and volume of rules—that it is discouraging a great deal of entrepreneurial activity.

Extending our seafaring metaphor once more, we can think of burdensome taxes and regulations as signals from a lighthouse warning captains away from treacherous waterways. When would-be entrepreneurs heed those warnings and never get a ship out of port, it means fewer jobs, fewer choices, higher prices, stagnant economic growth, and a lower standard of living.

America needs to clean up its tax and regulatory policies to get more entrepreneurial captains building more ships and braving the unchartered seas of the future. The health of our economy and the progress of our civilization depends upon it.

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As James Broughel and I discuss in our recent Mercatus study on “Technological Innovation and Economic Growth,” generations of economists, historians, and political scientists have found a symbiotic relationship between innovation, economic growth, and human betterment. But those experts also find that this relationship is strongly influenced by societal attitudes and policy incentives that affect the overall “innovation culture” of a nation. If we get the incentives wrong, we get less entrepreneurialism and innovation.

America needs to clean up its tax and regulatory policies to get more entrepreneurial captains building more ships and braving the unchartered seas of the future. The health of our economy and the progress of our civilization depends upon it.

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