Timothy Taylor over at Conversable Economist hits another home run with his lengthy excerpts from Harvard economist Edward Glaeser’s presidential address to the Eastern Economic Association. The speech is titled “Urbanization and Its Discontents.”
Although the whole post is well worth reading, here’s one paragraph that caught my attention:
Somewhat oddly, much of America appears to regulate low human capital entrepreneurship much more tightly than it regulates high human capital entrepreneurs. When Mark Zuckerberg started Facebook in his Harvard College dormitory, he faced few regulatory hurdles. If he had been trying to start a bodega that sold milk products three miles away, he would have needed more than ten permits. One question is whether the inequality that persists in America’s system is exacerbated by the legal and regulatory system.
I have three comments.
First, wow! Isn’t that interesting? It’s one more example of the government going after fledgling entrepreneurs trying to make a buck.
Second, sometimes when critics point out that government hurts poorer people, others conclude that the critics think government should hurt rich people too. I don’t. I’m glad that Zuckerberg was free to start Facebook. I just want everyone to be at least as free as he was. I would put a 0.9 probability on the idea that Glaeser agrees with me.
Third, this reminds me of a section in a classic 1989 article by Clive Crook in The Economist on third world economic development. The article was so good that I hired Clive to do a shorter version for the first edition of The Concise Encyclopedia of Economics, which was then called The Fortune Encyclopedia of Economics. The article, “Third World Economic Development,” is here. One of the things Clive pointed out is that a typical government policy in some African countries was to set tough price controls on the products of poor rural farmers to help the less-poor urban consumers. An excerpt:
Between 1963 and 1979 the price of consumer goods went up by a factor of twenty-two in Ghana. The price of cocoa in neighboring countries went up by a factor of thirty-six. But the price paid by the cocoa marketing board to Ghana’s farmers went up just sixfold. In real terms, therefore, the returns to cocoa farmers vanished. The country’s supposedly price-insensitive farmers responded by switching to production of other crops for subsistence, and exports of cocoa collapsed. Peru and Ghana are extreme cases, but they show in the starkest way that prices do matter in the the Third World and that rejecting market economics carries extremely high costs.
It’s not quite analogous to restrictions on poorer entrepreneurs in the United States because the U.S. restrictions hurt their putative customers as well as the entrepreneurs. Price controls on African farmers also hurt some consumers who are left out but help those who are first in line.
READER COMMENTS
Thaomas
Apr 1 2020 at 7:30pm
No. We should not regulate more or less because the business owner is poor. We regulate to mitigate externalities. Maybe the bodega does not produce any and so should not be regulated, but the income of the owner should have nothing to do with it. Cost-benefit all the way down. 🙂
Simon Whyatt
Apr 2 2020 at 2:00am
I’m not sure that the comparison is exactly fair or accurate.
Bodegas are highly regulated as they’ve been around for much longer, it has nothing to do with the government targeting poorer people.
There are laws relating to the sale of alcohol, food and consumer goods due to past incidences. Also to numbers of fire exits etc.
Zuckerberg progressed unhindered as no one knew the possible ramifications yet, and we’re still trying to catch up.
Mark Z
Apr 2 2020 at 6:19am
I doubt the government targets poorer entrepreneurs because they’re poorer, but wealthier, better educated entrepreneurs are probably more likely to be working in areas on the ‘cutting edge’ where it hasn’t yet occurred to the state to regulate, while poorer ones are more likely to be in established, already heavily regulated domains that perhaps require less formal education. This is just speculation on my part.
Vivian Darkbloom
Apr 2 2020 at 10:27am
“When Mark Zuckerberg started Facebook in his Harvard College dormitory, he faced few regulatory hurdles”.
Is this true? Does Glaeser know what hurdles Zuckerberg and his partners faced? When was Facebook started (as a business)? When it was in the planning phase? When it was offered as a free service? When it was incorporated? Started charging for advertising or subscribers? I think Glaeser underestimates the regulatory and other legal hurdles that “high human capital entrepreneurs” face when they actually start a business. What evidence did he present the audience as to the “lack of regulatory hurdles”?
Zuckerberg started another site at Harvard called “Facemash” shortly before he (and others) programmed “Facebook”. From the history of Facebook at Wikipedia:
“According to The Harvard Crimson, Facemash used “photos compiled from the online facebooks of nine Houses, placing two next to each other at a time and asking users to choose the “hotter” person”. Facemash attracted 450 visitors and 22,000 photo-views in its first four hours online.
The site was quickly forwarded to several campus group list-servers, but was shut down a few days later by the Harvard administration. Zuckerberg faced expulsion and was charged by the administration with breach of security, violating copyrights and violating individual privacy. Ultimately, the charges were dropped.”
This, before he even charged or earned a penny.
https://en.wikipedia.org/wiki/History_of_Facebook
David Henderson
Apr 2 2020 at 11:53am
You wrote:
All good questions. I don’t know the answer.
You wrote:
Interesting. Note, though, that this is not regulation. If I go to a university and the university threatens to expel me for breaking its rules, that’s not regulation in the sense that I use it: it’s not government regulation.
Vivian Darkbloom
Apr 2 2020 at 12:31pm
Does Harvard create copyright rules? But, this was presented merely as a brief taste examples–the issues listed are not exhaustive. Again, I think Glaeser vastly underestimates the amount of “regulatory” hurdles a “high human capital entrepreneur faces” in setting up and operating a business. This does not surprise me as his experience appears to be limited to being an economist employed in academia (regulatory hurdles are dealt with by others). I doubt he has experience advising others on the legal and regulatory hurdles of a start up or has actual experience himself. I spent a career advising “high human capital entrepreneurs” and claims such as the one he makes beg for substantiation and not unsupported conclusory statements.
Thaomas
Apr 3 2020 at 11:01am
I think the implicit (possibly factually incorrect) point is that bodegas, barber and beauty shops, nail salons (firms owned by low-income people] face greater unnecessary/excessively costly regulation than an internet start-up.
Vivian Darkbloom
Apr 3 2020 at 11:33am
Possible, but not likely. I’ve been wondering lately where we would be today if there had been more Chinese regulation of their “wet markets” which appear to be populated mainly by “low human capital entrepreneurs “…
David Seltzer
Apr 3 2020 at 6:30pm
I think the smaller entrepreneur is foiled by regulatory capture and occupational licensure.
Why does a florist need a license. Larger well established firms get in bed with regulators to write rules purposely designed to limit competition and raise prices. If my plumbing business in Georgia succeeded because of fair prices and quality work, why do I need a license from Tennessee if I want expand my business there?
Comments are closed.