Introduction: The EntrepreneurialEconomy

I
Since the mid-seventies, such slogans as "the nogrowth economy," the"deindustrialization of America," and a longterm "Kondratieff stagnation of the economy"have become popular and are invoked as if axi oms. Yet the facts and figures belie everyone of these slogans. What is happening in the Unit ed States is something quite different:a profound shift from a "managerial" to an "entrepren eurial" economy. In the two decades 1965 to 1985, the number of Americans over sixteen (thereby countedas being in the work force under the conventions of American statistics) grew bytwofifths, from 129 to 180 million. But the number of Americans in paid jobs grew in thesame p eriod by onehalf, from 71 to 106 million. The labor force growth was fastest in thesecond decade of that p eriod, the decade from 1974 to 1984, when total jobs in theAmerican economy grew by a full 24 million. In no other peacetime period has the United States created as many new jobs, whethermeas ured in percentages or in absolute numbers. And yet the ten years that began withthe "oil sh ock" in the late fall of 1973 were years of extreme turbulence, of "energy crises,"of the nearcollapse of the "smokestack" industries, and of two sizable recessions. The American development is unique. Nothing like it has happened yet in any othercountry. Western Europe during the period 1970 to 1984 actually lost jobs, 3 to 4 millionof them. In 1970, western Europe still had 20 million more jobs than the United States; in1984, it had al most 10 million less. Even Japan did far less well in job creation than theUnited States. Duri ng the twelve years from 1970 through 1982, -1jobs in Japan grew by a mere 10 percent, that is, at less than half the U.S. rate. But America's performance in creating jobs during the seventies and early eighties also ranc ounter to what every expert had predicted twentyfive years ago. Then most labor forceanalysts expected the economy, even at its most rapid g rowth, to be unable to provide jobsfor all the boys of the "baby boom" who were going to rea ch working age in the seventiesand early eighties -the first large cohorts of "baby boom" babies having been born in1949 and 1950. Actually, t he American economy had to absorb twice that number. For -something nobody even dreamed of in 1970 -married women began to rush into thelabor force in the midseventies. The result is that today, in the mideighties, every othermarried woman with youn g children holds a paid job, whereas only one out of every fivedid so in 1970. And the Americ

an economy found jobs for these, too, in many cases farbetter jobs than women had ever hel d before. And yet "everyone knows" that the seventies and early eighties were periods of "nogrowth," of stagnation and decline, of a "deindustrializing America," because everyone stillfocuses on what were the growth areas in the twentyfive years after World War II, theyears that came to an end around 1970. In those earlier years, America's economic dynamics centered in institutions that werealrea dy big and were getting bigger: the Fortune 500, that is, the country's largestbusinesses; gov ernments, whether federal, state, or local; the large and superlargeuniversities; the large consolidated high school with its six thousand or more students; andthe large and growing hospital. These institutions created practically all the new jobspro vided in the American economy in the quarter century after World War II. And inevery reces sion during this period, job loss and unemployment occurred predominantly insmall institut ions and, of course, mainly in small businesses. But since the late 1960s, job creation and job growth in the United States have shifted to ane w sector. The old job creators have actually lost jobs in these last twenty years.Permanent jo bs (not counting recession unemployment) in the Fortune 500 have beenshrinking steadily year by year since around 1970, at first slowly, but since 1977 or 1978 ata pretty fast clip. By 1984, the Fortune 500 had lost permanently at least 4 to 6 millionjobs. And governments in America, too, now employ fewer people than they did ten orfifteen years ago, if only because the -2number of schoolteachers has been falling as school enrollment dropped in the wake of the" baby bust" of the early sixties. Universities grew until 1980; since then, employment thereha s been declining. And in the early eighties, even hospital employment stoppedincreasing. In other words, we have not in fact created 35 million new jobs; we havecreated 40 million or more, since we had to offset a permanent job shrinkage of at least 5million jobs in the traditi onal employing institutions. And all these new jobs must havebeen created by small and me dium-sized institutions, most of them small andmediumsized businesses, and a great many of them, if not the majority, new businessesthat did not e ven exist twenty years ago. According to The Economist, 600,000 newbusinesses are being started in the United States every year now -about seven times asmany as were started in each of the boom years of the fifties and sixties .

II
"Ah," everybody will say immediately, "high tech." But things are not quite that simple. Ofth e 40 millionplus jobs created since 1965 in the economy, high technology did notcontribute more than 5

or 6 million. High tech thus contributed no more than"smokestack" lost. All the additional j obs in the economy were generated elsewhere. Andonly one or two out of every hundred ne w businesses -- a total of ten thousand a year --are remotely "hightech," even in the loosest sense of the term. We are indeed in the early stages of a major technological transformation, one that is farmor e sweeping than the most ecstatic of the "futurologists" yet realize, greater even thanMegatr ends or Future Shock. Three hundred years of technology came to an end afterWorld War II. During those three centuries the model for technology was a mechanicalone: the events that go on inside a star such as the sun. This period began when anotherwise almost unknown F rench physicist, Denis Papin,* envisaged the steam enginearound 1680. They ended when w e replicated in the nuclear explosion the events inside astar. For these three centuries advan ce in technology meant -- as it does in mechanicalprocesses -more speed, higher temperatures, higher pressures. Since the end of WorldWar II, however , the model of technology ____________________
*

The dates of all persons mentioned in the text will be found in the index. -3has become the biological process, the events inside an organism. And in an organism,proce sses are not organized around energy in the physicist's meaning of the term. Theyare organi zed around information. There is no doubt that high tech, whether in the form of computers or telecommunication,ro bots on the factory floor or office automation, biogenetics or bioengineering, is ofimmeasura ble qualitative importance. High tech provides the excitement and theheadlines. It creates t he vision for entrepreneurship and innovation in the community,and the receptivity for the m. The willingness of young, highly trained people to go to workfor small and unknown emp loyers rather than for the giant bank or the worldwideelectrical equipment maker is surely r ooted in the mystique of "high tech" -even thoughthe overwhelming majority of these young people work for employers whose te chnology isprosaic and mundane. High tech also probably stimulated the astonishing transf ormationof the American capital market from nearabsence of venture capital as recently as t hemid-sixties to near-surplus in the mideighties. High tech is thus what the logicians usedto call the ratio cognoscendi, the reason w hy we perceive and understand a phenomenonrather than the explanation of its emergence and the cause of its existence. Quantitatively, as has already been said, high tech is quite small still, accounting for notmuc h more than oneeighth of the new jobs. Nor will it become much more important interms of new jobs within

the near future. Between now and the year 2000, no more thanonesixth of the jobs we can expect to create in the American economy will be hightechjobs in all likelihood. In fact, if high tech were, as most people think, the entrepreneurial sector of the U.S. economy, then we would indeed face a "nogrowth" period and a periodof long-term stagnation in the trough of a "Kondratieff wave." The Russian economist Nikolai Kondratieff was executed on Stalin's orders in themid1930s because his econometric model predicted, accurately as it turned out, thatcollectivizat ion of Russian agriculture would lead to a sharp decline in farm production.The "fiftyyear Kondratieff cycle" was based on the inherent dynamics of technology.Every fifty years, so Kondratieff asserted, a long technological wave crests. For the lasttwenty years of this cyc le, the growth industries of the last technological advance seem tobe doing exceptionally wel l. But what look like record profits are actually repayments ofcapital which is no longer need ed in industries that have ceased to grow. This situa -4tion never lasts longer than twenty years, then there is a sudden crisis, usually signaled byso me sort of panic. There follow twenty years of stagnation, during which the new,emerging te chnologies cannot generate enough jobs to make the economy itself growagain -and no one, least of all government, can do much about this.* The industries that fueled the long economic expansion after World War II -automobiles, steel, rubber, electrical apparatus, consumer electronics, telephone, but alsope troleum -perfectly fit the Kondratieff cycle. Technologically, all of them go back tothe fourth quarter of the nineteenth century or, at the very latest, to before World War I.In none of them has th ere been a significant breakthrough since the 1920s, whether intechnology or in business co ncepts. When the economic growth began after World War II,they were all thoroughly matu re industries. They could expand and create jobs withrelatively little new capital investment, which explains why they could pay skyrocketingwages and workers' benefits and simultane ously show record profits. Yet, as Kondratieffhad predicted, these signs of robust health wer e as deceptive as the flush on aconsumptive's cheek. The industries were corroding from wit hin. They did not becomestagnant or decline slowly. Rather, they collapsed as soon as the "o il shocks" of 1973 and1979 dealt them the first blows. Within a few years they went from rec ord profits tonearbankruptcy. As soon became abundantly clear, they will not be able to return to theirearlier employment levels for a long time, if ever. The hightech industries, too, fit Kondratieffs theory. As Kondratieff had predicted, theyhave so far no t been able to generate more jobs than the old industries have been losing.All projections in dicate that they will not do much more for long years to come, at least forthe rest of the cent ury. Despite the explosive growth of computers, for instance, dataprocessing and informatio

n handling in all their phases (design and engineering of bothhardware and software, produ ction, sales and set ____________________
*

Kondratieff's long-wave cycle was popularized in the West by the AustroAmericaneconomist Joseph Schumpeter, in his monumental book Business Cycles ( 1939).K ondratieff's best known, most serious, and most important disciple today -and alsothe most serious and most knowledgeable of the prophets of "longterm stagnation" --is the MIT scientist Jay Forrester.

Which, contrary to common belief, was the first one to start declining. In fact,petroleum cea sed to be a growth industry around 1950. Since then the incremental unitof petroleum need ed for an additional unit of output, whether in manufacturing, intransportation, or in heatin g and air conditioning, has been falling-slowly at first butrapidly since 1973. -5vice) are not expected to add as many jobs to the American economy in the late 1980s andea rly 1990s as the steel and automotive industries are almost certain to lose. But the Kondratieff theory fails totally to account for the 40 million jobs which theAmerican economy actually did create. Western Europe, to be sure, has so far beenfollowing the Kond ratieff script. But not the United States, and perhaps not Japan either.Something in the Unit ed States offsets the Kondratieff "long wave of technology."Something has already happened that is incompatible with the theory of long-termstagnation. Nor does it appear at all likely that we have simply postponed the Kondratieff cycle. For inth e next twenty years the need to create new jobs in the U.S. economy will be a great deallower than it has been in the last twenty years, so that economic growth will depend farless on job creation. The number of new entrants into the American work force will be upto onethird smaller for the rest of the century -- and indeed through the year 2010 -than it was in the years when the children of the "baby boom" reached adulthood, that is,196 5 until 1980 or so. Since the "baby bust" of 196061, the birth cohorts have been 30percent lower than they were during the "baby boom" year s. And with the labor forceparticipation of women under fifty already equal to that of men, a dditions to the numberof women available for paid jobs will from now on be limited to natur al growth, whichmeans that they will also be down by about 30 percent. For the future of the traditional "smokestack" industries, the Kondratieff theory must beacc epted as a serious hypothesis, if not indeed as the most plausible of the availableexplanation s. And as far as the inability of new hightech industries to offset thestagnation of yesterday's growth industries is concerned, Kondra tieff again deserves to betaken seriously. For all their tremendous qualitative importance as

vision makers andpacesetters, quantitatively the hightech industries represent tomorrow rather than today,especially as creators of jobs. They are the makers of the future rather than the makers ofthe present. But as a theory of the American economy that can explain its behavior and predict itsdirecti on, Kondratieff can be considered disproven and discredited. The 40 million newjobs create d in the U.S. economy during a "Kondratieff longterm stagnation" cannot beexplained in Kondratieff's terms. -6I do not mean to imply that there are no economic problems or dangers. Quite thecontrary. A major shift in the technological foundations of the economy such as we areexperiencing in the closing quarter of the twentieth century surely presents tremendousproblems, economic , social, and political. We are also in the throes of a major politicalcrisis, the crisis of that gre at twentiethcentury success the Welfare State, with theattendant danger of an uncontrolled and seeming ly uncontrollable but highly inflationarydeficit. There is surely sufficient danger in the inter national economy, with the world'srapidly industrializing nations, such as Brazil or Mexico, suspended between rapideconomic takeoff and disastrous crash, to make possible a prolong ed global depression of1930 proportions. And then there is the frightening specter of the ru naway armamentsrace. But at least one of the fears abroad these days, that of a Kondratieff stagnation, canbe considered more a figment of the imagination than reality for the United States. Therewe have a new, an entrepreneurial economy. It is still too early to say whether the entrepreneurial economy will remain primarily anAme rican phenomenon or whether it will emerge in other industrially developedcountries. In Ja pan, there is good reason to believe that it is emerging, albeit in its own,Japanese form. But whether the same shift to an entrepreneurial economy will occur inwestern Europe, no one c an yet say. Demographically, western Europe lags some ten tofifteen years behind America: both the "baby boom" and the "baby bust" came later inEurope than in the United States. Eq ually, the shift to much longer years of schoolingstarted in western Europe some ten years la ter than in the United States or in Japan; andin Great Britain it has barely started yet. If, as i s quite likely, demographics has been afactor in the emergence of the entrepreneurial econo my in the United States, we couldwell see a similar development in Europe by 1990 or 1995. But this is speculation. So far,the entrepreneurial economy is purely an American phenome non.

III
Where did all the new jobs come from? The answer is from anywhere and nowhere; inother words, from no one single source. The magazine Inc., published in Boston, has printed each year since 1982 a list of the onehu ndred fastest-

growing, publicly owned American companies more than five years andless than fifteen year s old. -7Being confined to publicly owned companies, the list is heavily biased toward high tech,whic h has easy access to underwriters, to stock market money, and to being traded on oneof the stock exchanges or over the counter. High tech is fashionable. Other new ventures,as a rule, can go public only after long years of seasoning, and of showing profits for agood deal more than five years. Yet only one-quarter of the "Inc. 100" are high-tech;threequarters remain most decidedly "low-tech," year after year. In 1982, for instance, there were five restaurant chains, two women's wearmanufacturers, a nd twenty health-care providers on the list, but only twenty to thirtyhightech companies. And whilst America's newspapers in 1982 ran one article after theother be moaning the "deindustrialization of America," a full half of the Inc. firms weremanufacturin g companies; only onethird were in services. Although word had it in 1982that the Frost Belt was dying, with the S un Belt the only possible growth area, onlyonethird of the "Inc. 100" that year were in the Sun Belt. New York had as many of thesefastgrowing, young, publicly owned companies as California or Texas. And Pennsylvania,New J ersey, and Massachusetts -- while supposedly dying, if not already dead -also hadas many as California or Texas, and as many as New York. Snowy, Minnesota, had s even.The Inc. lists for 1983 and 1984 showed a very similar distribution, in respect both toin dustry and to geography. In 1983, the first and second companies on another Inc. list -- the "Inc. 500" list offastgrowing, young, privately held companies -were, respectively, a building contractorin the Pacific Northwest (in a year in which constru ction was supposedly at an alltimelow) and a California manufacturer of physical exercise equipment for the home. Any inquiry among venture capitalists yields the same pattern. Indeed, in their portfolios,hi gh tech is usually even less prominent. The portfolio of one of the most successfulventure ca pital investors does include several hightech companies: a new computersoftware producer, a new venture in medical technology, a nd so on. But the mostprofitable investment in this portfolio, the new company that has bee n growing the fastestin both revenues and profitability during the three years 198183, is that most mundaneand least hightech of businesses, a chain of barbershops. And next to it, both in salesgrowth and profitabili ty, comes a chain of dentistry offices, followed by a manufacturer of -8handtools and by a finance company that leases machinery to small businesses.

Among the businesses I know personally, the one that has created the most jobs duringthe fi ve years 197984, and has also grown the fastest in revenues and profits, is afinancial services firm. Within five years this firm alone has created two thousand newjobs, most of them exceedingly well paid. Though a member of the New York StockExchange, only about oneeighth of its business is in stocks. The rest is in annuities,tax-exempt bonds, moneymarket funds and mutual funds, mortgage-trust certificates,taxshelter partnerships, and a host of similar investments for what the firm calls "theintelligent investor." Such investors are defined as the well-todo but not rich professional,small businessman, or farmer, in small towns or in the suburbs, who makes more moneythan he spends and thus looks for places to put his savings, but wh o is also realisticenough not to expect to become rich through investment. The most revealing source of information about the growth sectors of the U.S. economy Ihav e been able to find is a study of the one hundred fastest-growing "midsize" companies,that is, companies with revenues of between $25 million and $1 billion. Thi s study wasconducted during 198183 for the American Business Conference by two senior partners ofMcKinsey & Company, th e consulting firm.* These midsized growth companies grew at three times the rate of the Fortune 500 insales and in profit s. The Fortune 500 have been losing jobs steadily since 1970. But thesemidsized growth companies added jobs between 1970 and 1983 at three times the rate ofjob gro wth in the entire U.S. economy. Even in the depression years 198182 when jobs inU.S. industry declined by almost 2 percent, the hundred midsized growth co mpaniesincreased their employment by one full percentage point. The companies span thee conomic spectrum. There are hightech ones among them, to be sure. But there are alsofinancial services companies -the New York investment and brokerage firm ofDonaldson, Lufkin & Jenrette, for instance. One of the best performers in the group is acompany making and selling livingroom furniture; another one is making and marketingdoughnuts; a third, highquality chinaware; a fourth, writing instruments; a fifth,household paints; a ____________________
*

It was published under the title "Lessons from America's Midsized Growth Companies," by Richard E. Cavenaugh and Donald K. Clifford Jr., in the Autu mn 1983 issue of theMcKinsey Quarterly. -9-

sixth has expanded from printing and publishing local newspapers into consumermarketing services; a seventh produces yarns for the textile industry; and so forth. Andwhere "everybo dy knows" that growth in the American economy is exclusively in services,more than half of these "mid-sized growth" companies are in manufacturing. To make things more confusing still, the growth sector of the U.S. economy during thelast te n to fifteen years, while entirely nongovernmental, includes a fairly large andgrowing numb er of enterprises that are not normally considered businesses, though quitea few are now bei ng organized as profitmaking companies. The most visible of these are,of course, in the healthcare field. The traditional American community hospital is in deeptrouble these days. But th ere are fast-growing and flourishing hospital chains, both"profit" and (increasingly) "notforprofit" ones. Even faster growing are the "freestanding"health facilities, such as hospices for the terminally ill, medical and diagnostic laboratories,freestanding surgery centers, frees tanding maternity homes, psychiatric "walkin" clinics,or centers for geriatric diagnosis and treatment. The public schools are shrinking in almost every American community. But despite thedecli ne in the total number of children of school age as a result of the "baby bust" of the1960s, a whole new species of nonprofit but private schools is flourishing. In the smallCalifornia city in which I live, a neighbo rhood babysitting cooperative, founded around1980 by a few mothers for their own children , had by 1984 grown into a school with twohundred students going on into the fourth grade. And a "Christian" school founded a fewyears ago by the local Baptists is taking over from the city of Claremont a junior highschool built fifteen years ago and left standing vacant for lack of pupils for the last fiveyears. Continuing education of all kinds, whether in the form of exe cutive managementprograms for midcareer managers or refresher courses for doctors, engineers, lawyers,and physical therapists , is booming; even during the severe 198283 recession, suchprograms suffered only a short setback. One additional area of entrepreneurship, and a very important one, is the emerging"Fourth Sector" of publicprivate partnerships in which government units, either states ormunicipalities, determine p erformance standards and provide the money. But then theycontract out a service -fire protection, garbage collection, or bus transportation -to aprivate business on the basis of competitive bids, thus ensuring both -10-