Economic Freedom, Economic Freedom, Entrepreneurship, & Entrepreneurship, &

ProsperityProsperity

Russell S. Sobel, Ph.D.Russell S. Sobel, Ph.D.Visiting Scholar in EntrepreneurshipVisiting Scholar in EntrepreneurshipSchool of Business AdministrationSchool of Business Administration

The CitadelThe Citadel

What Explains Prosperity?What Explains Prosperity?

Adam Smith’s Question:Adam Smith’s Question:Why Are Some Countries Rich and Others Poor?Why Are Some Countries Rich and Others Poor?

An Inquiry into the Nature and An Inquiry into the Nature and Causes of the Wealth of Causes of the Wealth of Nations (1776)Nations (1776)

Policies and the system of economic organization Policies and the system of economic organization (e.g., capitalism) matter more than things such as (e.g., capitalism) matter more than things such as resources, geography, education, democracy, etc.resources, geography, education, democracy, etc.

Rankings of Reliance on CapitalismRankings of Reliance on Capitalism

Growth is a function of “inputs” AND “institutions”Growth is a function of “inputs” AND “institutions”

Spending to Spending to increase increase

“inputs” won’t “inputs” won’t work unless the work unless the

“oven” is “oven” is turned onturned on

Route 50Route 50

North Korea vs. South KoreaNorth Korea vs. South Korea

Per Capita Income

= $1,800

Per Capita Income

= $24,200

A Quick Tour of The A Quick Tour of The WorldWorld

As we go through these, ask yourself are As we go through these, ask yourself are these people entrepreneurial? Is it the these people entrepreneurial? Is it the

people or the policies that are the problem?people or the policies that are the problem?

Map of Economic FreedomMap of Economic Freedom

Example 1Example 1

A Country with VERY LOW Economic A Country with VERY LOW Economic FreedomFreedom

Zimbabwe (in Africa)Zimbabwe (in Africa)

Families in Zimbabwe (Africa)Families in Zimbabwe (Africa)

Families in Zimbabwe (Africa)Families in Zimbabwe (Africa)

Example 2Example 2

A Country with LOW Economic A Country with LOW Economic FreedomFreedom

Romania (in Europe)Romania (in Europe)

Families in Romania (Europe)Families in Romania (Europe)

Families in Romania (Europe)Families in Romania (Europe)

Families in Romania (Europe)Families in Romania (Europe)

Families in Romania (Europe)Families in Romania (Europe)

Families in Romania (Europe)Families in Romania (Europe)

Families in Romania (Europe)Families in Romania (Europe)

Example 3Example 3

A Country with MEDIUM Economic A Country with MEDIUM Economic FreedomFreedom

India (in Asia)India (in Asia)

Families in IndiaFamilies in India

Families in IndiaFamilies in India

Example 4Example 4

Another Country with Medium Another Country with Medium Economic FreedomEconomic Freedom

Mexico (in North America)Mexico (in North America)

Families in MexicoFamilies in Mexico

Families in MexicoFamilies in Mexico

Example 5Example 5

A Country with HIGH Economic A Country with HIGH Economic FreedomFreedom

Hong Kong (in Asia)Hong Kong (in Asia)

Families in Hong KongFamilies in Hong Kong

Families in Hong KongFamilies in Hong Kong

Families in Hong KongFamilies in Hong Kong

Example 6Example 6

Another Country with HIGH Economic Another Country with HIGH Economic FreedomFreedom

United States (in North America)United States (in North America)

United States (in North America)United States (in North America)

The Role of the EntrepreneurThe Role of the Entrepreneur

Decentralized entrepreneurship is Decentralized entrepreneurship is one main reason why capitalism one main reason why capitalism works to generate progress and works to generate progress and prosperity prosperity

Entrepreneurs keep inventing new Entrepreneurs keep inventing new things that improve our way of lifethings that improve our way of life

Our HomesOur Homes

Percent of homes with Heating & Air ConditioningPercent of homes with Heating & Air Conditioning19561956 = 6%= 6% 1996 = 81%1996 = 81%

Percent of homes with only one bathroomPercent of homes with only one bathroom19561956 = 71%= 71% 1996 = 9%1996 = 9%

And They are Better: Our ShowersAnd They are Better: Our Showers

Our CarsOur Cars

We now have DVD players, Air We now have DVD players, Air Conditioning, Anti-lock Brakes, Power Conditioning, Anti-lock Brakes, Power windowswindows

Our PhonesOur Phones

Our EntertainmentOur Entertainment

Our ScienceOur Science

Our ComputersOur Computers

MacBook AirMacBook Air

Least expensive-Least expensive-11-inch, 11-inch, 64GB, $999.0064GB, $999.00

Most expensive- Most expensive- 13-inch, 13-inch, 256GB, $1,599.00256GB, $1,599.00

Our Video GamesOur Video Games

From Pong to Rock BandFrom Pong to Rock Band

Our MedicineOur Medicine

U.S. Life Expectancy has risen from 48 in 1900 to 76 todayU.S. Life Expectancy has risen from 48 in 1900 to 76 today

Our MusicOur Music

Creative DestructionCreative Destruction

An economy undergoes continuous change An economy undergoes continuous change – – some industries fail, others are bornsome industries fail, others are born

Capitalism critically relies on Capitalism critically relies on entrepreneurship and the profit and loss entrepreneurship and the profit and loss system to direct this processsystem to direct this process

This process cannot be centrally planned or This process cannot be centrally planned or directed effectively - it must be directed effectively - it must be discovereddiscovered within the marketplacewithin the marketplace

Nobody Knows Enough to Centrally Plan an Economy:

The Future Must be Discovered

Ken Olson, chairman/founder of Digital Equipment Corp., 1977."There is no reason anyone would want a computer in their home."

Fred Smith’s (FedEx) Yale University Senior Project Grade Remark:"The concept is interesting and well-formed, but in order to earn

better than a 'C,' the idea must be feasible."

Would you have invested?Would you have invested?

Microsoft Corporation 1978Microsoft Corporation 1978

Cross State Differences in Cross State Differences in Economic Freedom Matter TooEconomic Freedom Matter Too

South Carolina South Carolina Ranks 43Ranks 43rdrd in in

Economic Freedom Economic Freedom IndexIndex

SC’s PCPI: Rank 46th – 81% of U.S. AverageSC’s PCPI: Rank 46th – 81% of U.S. Average

South Carolina is Falling Behind South Carolina is Falling Behind Due to a Slow Rate of GrowthDue to a Slow Rate of Growth

South Carolina is Falling Behind South Carolina is Falling Behind Due to a Slow Rate of GrowthDue to a Slow Rate of Growth

Growth Rates:Growth Rates: SC = 1.2%SC = 1.2% OK = 1.8%OK = 1.8% SD = 2.1%SD = 2.1%

Policy Reforms to Promote Policy Reforms to Promote EntrepreneurshipEntrepreneurship

1. Make It Easier To Start A Business By 1. Make It Easier To Start A Business By Reducing Artificial Barriers To Entry & Reducing Artificial Barriers To Entry &

CompetitionCompetition

Regulations should be subject to Regulations should be subject to cost-benefit analysis cost-benefit analysis and and include include sunset provisions sunset provisions based on proof of effectivenessbased on proof of effectiveness

2. Make It Easier For Businesses To Be Profitable 2. Make It Easier For Businesses To Be Profitable & Grow By Lowering The Cost Of Doing Business& Grow By Lowering The Cost Of Doing Business

Lower Taxes on Lower Taxes on Capital InvestmentCapital Investment

National Association of ManufacturersNational Association of Manufacturers2009 Competitiveness Redbook2009 Competitiveness Redbook

SC has the highest effective propertySC has the highest effective propertytax rate on manufacturers in the UStax rate on manufacturers in the US

SC = $1,864,900 (highest in the US)SC = $1,864,900 (highest in the US)GA = $760,381 (about ½ of SC)GA = $760,381 (about ½ of SC)NC = $491,071 (about ¼ of SC)NC = $491,071 (about ¼ of SC)

Firm with $25m assets ($12.5m machinery & equip., $10m inventory, $2.5m fixtures)Firm with $25m assets ($12.5m machinery & equip., $10m inventory, $2.5m fixtures)

3. Reduce The Role Of Government In “Playing 3. Reduce The Role Of Government In “Playing Favorites” Or Picking Winners And LosersFavorites” Or Picking Winners And Losers

““Crony Capitalism” is when business winners and Crony Capitalism” is when business winners and losers are determined by political connections losers are determined by political connections rather than private market forcesrather than private market forces

Baumol’s Theory of Productive and Unproductive Baumol’s Theory of Productive and Unproductive EntrepreneurshipEntrepreneurship• ““Too Many Lobbyists & Lawyers and Too Few Scientists Too Many Lobbyists & Lawyers and Too Few Scientists

and Engineers”and Engineers”

Eliminate Targeted Tax Credits & Subsidies in Eliminate Targeted Tax Credits & Subsidies in favor of Broad Based Taxesfavor of Broad Based Taxes

4. Reduce Government Control & Centralization4. Reduce Government Control & Centralization

Increase The Share Of The Economy’s Resources Increase The Share Of The Economy’s Resources Available To Private Entrepreneurs By Reducing Available To Private Entrepreneurs By Reducing The Size Of GovernmentThe Size Of Government

Size of GovernmentSize of GovernmentS.C. is 42.5% = 7th highest in the U.S.S.C. is 42.5% = 7th highest in the U.S.

The Case of DelawareThe Case of Delaware

4. Reduce Government Control & Centralization4. Reduce Government Control & Centralization

Increase The Share Of The Economy’s Resources Increase The Share Of The Economy’s Resources Available To Private Entrepreneurs By Reducing Available To Private Entrepreneurs By Reducing The Size Of GovernmentThe Size Of Government

Government Can Also Be Made More Effective By Government Can Also Be Made More Effective By Decentralizing Spending And Power To Local Decentralizing Spending And Power To Local Governments (SC Is The 14Governments (SC Is The 14thth Most Centralized Most Centralized State)State)

Thank You / Q&A

Russell S. Sobel, Ph.D.Russell S. Sobel, Ph.D.Visiting Scholar in EntrepreneurshipVisiting Scholar in EntrepreneurshipSchool of Business AdministrationSchool of Business Administration

The CitadelThe Citadel