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Government Regulation of Poorer Entrepreneurs

Summary:
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

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Government Regulation of Poorer Entrepreneurs

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 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.

David Henderson
David Henderson is a British economist. He was the Head of the Economics and Statistics Department at the OECD in 1984–1992. Before that he worked as an academic economist in Britain, first at Oxford (Fellow of Lincoln College) and later at University College London (Professor of Economics, 1975–1983); as a British civil servant (first as an Economic Advisor in HM Treasury, and later as Chief Economist in the Ministry of Aviation); and as a staff member of the World Bank (1969–1975). In 1985 he gave the BBC Reith Lectures, which were published in the book Innocence and Design: The Influence of Economic Ideas on Policy (Blackwell, 1986).

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