Rich Karlgaard on Entrepreneurs and Europe

It's the Entrepreneurs, Stupid! - Forbes.com: "Digital Rules
It's the Entrepreneurs, Stupid!
Rich Karlgaard, 07.04.05, 12:00 AM ET

A dearth of entrepreneurs explains the economic mess in Europe. What a sad turn of events: France, after all, gave us the word entrepreneur. (It comes from the French verb entreprendre, 'to undertake.' An entrepreneur undertakes a business, assuming the financial risk for the chance of profit.) France also birthed one of the giants of economic philosophy, Jean-Baptiste Say (1767-1832). Say's Law (1803) was popularized soon after by Scottish Enlightenment philosopher James Mill as the well-known adage 'supply creates its own demand.' Say said it better: 'Products are paid for with products.'

Whichever translation you prefer, the implication of Say's Law is clear enough. Too bad Europe doesn't get it. Growth requires production, which requires investment, which must come out of profits. You destroy growth when you destroy investment capital by way of taxation and regulation. Evidence: France and Germany. The latter has had just one year of 3% GDP growth during the last 12 years. Last year France grew at 2.1%, Germany at 1.6%.

Consumption will never lift a country's growth rate. Only new production--the work of entrepreneurs--will do that. Europe's recovery depends not on more laws or a reworked EU Constitution (or taxpayer subsidies of so-called national champions, such as the Airbus consortium EADS), but on attracting, keeping and nourishing entrepreneurs. Here's how. "

Taxes must be reasonable.

Trade and labor markets must be free.

Regulations must be light.
In Germany business startups need approval from the government, and the process takes months or years. French startups are choked by paperwork, which is why a generation of French restaurant entrepreneurs has decamped to London. In much of the world this master-serf relationship between government and citizens persists--if not in law, in mind--and the thinking is, "Who gave you permission to start a business?" How poisonous to entrepreneurship.

The rule of law must be understood and enforced.
When given a chance, large companies will manipulate the political system to their advantage. This occurs everywhere in the world (think big agribusiness in the U.S.). But where such unlevel playing fields are the norm, not the exception, the country's top entrepreneurs will say, "To heck with this!" and leave.

Entrepreneurs come in all types.
Some want to escape poverty or obscurity. Some have an urge to change the world. Others want to prove their intellect, or stick it to their former bosses. But one thing entrepreneurs rarely appear to be is their university's class valedictorian. Countries that place too much emphasis on showy scholastic achievement, such as France and Japan, will be short on entrepreneurs.

Immigration must be encouraged.
Australia, New Zealand and, to a lesser extent, the U.K. are booming because of immigration, just as America historically has. Educated immigrants start tech companies. Noneducated immigrants also boost the economy, if they are willing to assimilate. They start mom-and-pop businesses, some of which grow to be large. Memo to France and Germany: The U.S. has made a disastrous wrong turn regarding skills-based immigrants. Because of its H-1B visa plan, the U.S. is admitting only a third of the peak number it did five years ago. That's terrible policy. It will damage U.S. technology for years to come. I hate to suggest this, but now's the time for other countries to take advantage of our shortsightedness.

Waste and inefficiency must be accepted.
Old Europe has been infected with a bad idea from its Green parties. The idea is that "sustainability" is good and waste is sinful. But "sustainable" never brings the big breakthrough. For that, you need armies of entrepreneurs "wasting" time and resources in experimentation.

Honest failure must be tolerated.
One of the secrets of Silicon Valley's success is an acceptance of multimillion-dollar cock-ups. Billionaire venture capitalist John Doerr says a VC isn't seasoned until he's crashed the equivalent of an F-18 fighter jet--booted $20 million on a startup that didn't work. In countries where bankruptcy laws are too tilted toward creditors, you get fewer risk takers.

Social mobility must be applauded. Why would a French entrepreneur want to struggle for success, only to find at the head of the receiving line someone like Dominique de Villepin, a haughty mandarin eager to cut him down? One of the reasons Silicon Valley surpassed the Boston area in tech leadership is that Boston was more class-riven. Graduates of Harvard Business School, wanting to protect their social status, tended to go into white-shoe consulting and banking. Graduates of Stanford Business School felt less social pressure and gravitated toward misfit startups. In the U.S. the best entrepreneurial hives offer the most social mobility: New York City, the New South, the West.