Edmund Phelps, the 73-year-old recipient of the Nobel Memorial Prize in Economic Science, is a big fan of entrepreneurs. The McVickar Professor of Political Economy at Columbia University and director of the Center on Capitalism & Society at its Earth Institute won the prize for his theory that there is a "natural rate" of unemployment that is due to a complex relationship between wages and inflation. But entrepreneurship has been critical to his thinking about the economy. Staff Writer Jeremy Quittner talked with Phelps after the Nobel was announced in October.
Q: Has winning the award changed your life in any way?
A: I now have a much wider audience and many more opportunities to expose my point of view to people. I will be talking and speechifying and writing more and thinking less, perhaps. I'll do a lot more traveling.
Q: How did you become interested in entrepreneurship?
A: In the early 1990s, the fall of the Berlin Wall and the collapse of the Soviet Union raised all sorts of questions about communism, market socialism, capitalism, and so forth. I started thinking about entrepreneurs, a subject pretty badly neglected in mainstream economic programs in universities.
Q: Why are entrepreneurs necessary for the health of capitalism?
A: I think of capitalism as being all about new ideas. That is its essence. And I can't imagine a private ownership society with no entrepreneurs and zero innovation. I would not call that capitalism. The economies of Western Continental Europe look almost like that, with very little innovation and lots of private ownership.
Q: Your specialty is Western Europe. How does the climate for entrepreneurs there compare with that in the U.S.?
A: I think that it is much better in the U.S. than in Europe, where entrepreneurs don't get much help from the financial sector, and they don't get advice and services. I suspect that there is a lot of inefficiency in the way capital is allocated in Western Europe, so the best projects are less likely to be funded than is the case in the U.S. In Europe, startups don't get much nonpecuniary support from venture capitalists and other financiers.
Q: You have talked about the need for higher taxes, but higher taxes are anathema to a lot of small businesses. What is the role of government in fostering a good environment for entrepreneurs?
A: I was talking more about the personal income tax, but of course there are implications for entrepreneurs, as their profits may become personal income. Still, I am not in the market for more tax breaks. We need increased taxes to finance low-wage employment subsidies, to deal with urban problems in this country, and to meet the mountain of pension obligations looming over us. I don't think every dollar in new taxes would be so very painful, and it would go to meet crying needs.
I don't have any hesitation saying that the government is doing a lot for entrepreneurship. But it could do more. Maybe repeal Sarbanes-Oxley, although that is primarily about big enterprise. Less regulation doesn't cost us anything, either.
Q: How will small businesses be affected by competition with fast-growing Asian economies?
A: With the emergence of competitors in China and India, I can see why an existing enterprise in the U.S. might burn the midnight oil longer to keep up. But China and India are countries we can trade with, so this is potentially a two-way street. Entrepreneurs in the U.S. have the whole world before them now, while in the 1930s or even the 1950s they did not. The positive is that there is more opportunity for a bigger jackpot. The negative is that someone might wipe you out before you wipe them out. Globalization has brought more innovation, and innovation is stimulating and creates problems to solve. It also leads to employee engagement and job satisfaction, and so I think that is good.
By Jeremy Quittner