How the Growing Income Gap Is Killing Entrepreneurship

Source: Thinkstock

Source: Thinkstock

A downward slide has been slowly shifting the business landscape for years. Beginning sometime in the 1960s or 70s, an economic force silently started to take hold in America, taking with it jobs, traditions, and livelihoods. Mom and pop shops quietly started closing across the country, and small businesses from every sector — retail, dining, manufacturing — all started to close up shop. Several decades ago, something shifted that started to kill entrepreneurial spirit, and it persists to this day.

The data speaks for itself — and entrepreneurship across the board is on the decline. Although magnified recently by the financial crisis, the trend isn’t new. According to FiveThirtyEight, Americans started 27 percent fewer businesses in 2011 than they had done five years before that. But across the board, entrepreneurial efforts from all sectors have been declining for more than 30 years. Not only is entrepreneurship in trouble, but the process of business dynamism — a process in which companies are established, grow, contract, and shut down — has also hit rock bottom, as at some point in 2008, the country saw more companies shutter than open up. Entrepreneurs, or those who take it upon themselves to organize and manage a new venture, often take great risk when chasing their ideas, and they themselves play a critical role in driving business dynamism.

Around the same time that entrepreneurs started to slow down and business dynamism rates began to trend downward, the income inequality gap started to increase. Roughly around 1980, corporate tax rates started to see a decline and profits started to climb. Several years before tax rates started to recede, something else happened that sent corporate profits skyrocketing: worker productivity went through the roof, while compensation stayed more or less the same.

A combination of increased productivity driving massive profitability, along with leaner taxation, has led to corporations reaching levels of wealth and influence rarely seen in the world before — if not only by monarchs and old money aristocrats still clinging to fortunes of generations past. With massive amounts of capital at their beck and call, and armies of lobbyists to work over Congress, big business has put itself in a very strong position. This positioning leads to collusion and anti-competitive behavior to keep newcomers out of the game completely, stifling innovation and using legislation to protect the interests of the incumbents. The blend of economic forces at work against middle and lower class workers has metastasized into an environment where being the “little guy business owner” in the marketplace is not only difficult, but possibly not even worth it.

One example of this in action is within the automotive industry, where for years big name car makers worked together to keep products like the electric car off the market. A recent upstart that has actually been able to break through is Tesla (NASDAQ:TSLA), who has been dragged into courtroom after courtroom, fighting for its very existence almost since it opened its doors. The barrage of lawsuits trying to keep Tesla off the radar has been spearheaded by car dealers and watched over by manufacturers in an obvious attempt to use legislation as a protectionist tool against a new challenger. One of the main reasons Tesla has been able to break through and experience some success is due to the capital put behind it by CEO Elon Musk.

Another example would be to look at the retail sector. What entrepreneur would truly have the resources — and the courage — to take a shot at opening up a standard retail shop with the likes of Wal-Mart (NYSE:WMT) and Amazon (NASDAQ:AMZN) dominating the market? The odds of survival are very low. Of course, entrepreneurs are savvy, and can find a niche that has so far gone ignored by other businesses. However, with the far reach and resources of the bigger companies, it wouldn’t be long until big business did decide to point its guns at an emerging market, or acquire the new business directly as to eat up competition.

The data the New Republic has accumulated seem to indicate is that the working class, the soup that spawns entrepreneurs and small businesses, is hurting. As wages stagnated several decades ago and productivity went up as shown by the Washington Post, the outlook for startups and small business started to decline. Can this be blamed on a lack of disposable income with which to kick start a new company? With workers putting in extra effort to keep big business’ shareholders happy with growth from quarter to quarter, do they have the time to put their own ideas to work on the side? The evidence appears to point to some kind of link, although it’s hard to say for sure.

There will always be entrepreneurs in some shape or form, but with the deck becoming more and more heavily stacked against the little guy, it would appear only natural to see their numbers dwindling. There are examples of ideas that are truly too big and innovative to be stopped; companies like Facebook (NASDAQ:FB) immediately come to mind. But Facebook required little capital to get off the ground, and took off in a manner no one expected. As time marches on, entrepreneurship will becoming increasingly more concentrated in the tech industry, as start up costs tend to be lower, innovative minds are in high concentration, and the internet still persists as a relative “wild west” of the 21st century.

As business dynamism slows to a trickle and entrepreneurs become less and less able to leave their jobs and chase their own ideas, taking a look at the rise of income inequality, as in the data from Pew Research, may point to some answers. The business climate has been tumultuous to say the least, especially over the past several years. But given that declines in small business and new enterprise are not confined to one industry and are instead being seen across the board, the idea that the two ideas are linked does have some merit. It’s been obvious to see that incumbent corporations have and will do everything in their power to keep competition levels to a minimum, through anti-competitive practices and lobbying for legislative advantages.

The fundamental  idea of capitalism that the most powerful and successful businesses rise to the top, and the inevitable endgame of such a system ends up being consolidation of power under the few that remain in the market. With so many advantages, both political and in capital, starting a venture to capture a portion of a given market as an entrepreneur looks less and less like a good idea. As Mother Jones notes, thanks to growing income inequality, people are not willing to take as many risks with their money, including the big risk of starting a business.

Is income inequality the only factor behind dwindling entrepreneurship and dropping rates of business dynamism? Most likely not, but a quick peek at the figures over the years does look to provide some insight into the shifting business world.

More From Wall St. Cheat Sheet: