Is Entrepreneurship Dying?

In my last piece, I noted that the risks borne by entrepreneurs—which I define as those who start a business and employ others—overwhelmingly exceed those of the average salaried position. For this reason alone, most people, even if they harbour intense dreams of becoming an entrepreneur, remain in stable employment their entire careers. Every developed economy has a predominance of fixed-wage workers. In the UK, 87% of workers are employees. In the US, it’s closer to 90%. When presented with the choice, people overwhelmingly opt for the surety of a consistent wage over the uncertain income of an entrepreneurial venture, even when the latter comes with the potential for massive profits should the business succeed.

From a purely economic perspective, the calculus for choosing entrepreneurship has undergone a seismic shift in the context of advanced, stable economies. In past eras, limited job opportunities and economic volatility may have compelled individuals to carve out their own avenues of income, providing them with profit and a semblance of control over their financial destinies. Yet today, the economic landscape presents a far different picture. A proliferation of well-paying job opportunities, undergirded by a robust social safety net, has significantly altered this risk-reward matrix. Relative economic stability, employee benefits, pension plans, and promising career trajectories offer a security that entrepreneurship, with its complex melange of uncertainties, cannot guarantee. Rational individuals who, in a bygone era, might have started a business are increasingly opting for a path that minimises financial risk and maximises long-term gains.

Joseph Schumpeter, often considered the first scholar of the modern era to theorise about entrepreneurship, posited that entrepreneurs—or “wild spirits” as he called them—drive economic progress by introducing innovations that disrupt conventional businesses through a process of "creative destruction". But despite being the great evangelist of entrepreneurship, later on in his career, he began to believe that as capitalism matured, large firms and corporations would increasingly dominate the economic landscape. In his 1942 work Capitalism, Socialism, and Democracy, he theorised that large firms, with their vast resources and R&D departments, would take over the role of innovation, displacing the role of individual entrepreneurs.

Indeed, the graph below shows a clear downward trend in self-employment (which includes entrepreneurs in its definition) in the UK from 1868 to the early 1980s.

But what happened in the 1980s? In 1981, like much of the world, the UK was hit by a severe recession that sent unemployment rates skyrocketing. This led many people into self-employment by necessity. In response to the crisis, Margaret Thatcher took aim at the perceived structural issues facing the UK economy. She introduced several supply-side reforms, including deregulation, tax reforms, and other measures to foster entrepreneurship.?

But the sudden upward trend starting in the early 1980s belies the truth about the trend in entrepreneurship uptake over the past 40 years. The graph below gives a clearer picture.

What Thatcher’s measures actually did was make it easier for workers to become “solo self-employed”. This meant we got a greater number of self-employed contractors, external consultants and the like. But we did not get a greater number of entrepreneurs. Thatcher’s solo self-employed are largely, though not entirely, employees by another name.

Indeed, as the graph reveals, the number of entrepreneurs—those who start a business and employ others—has steadily declined since the mid-1980s, fully halving over the past 30 years. These figures, illuminating in their own right, can be juxtaposed against the economic principle of opportunity cost. Every hour and every pound spent launching and running a business that will probably fail could otherwise be invested in a stable job with a higher wage, pension contributions, private healthcare, assured career growth and much less stress.

In this day and age, who in their right mind would bet their future solely on the vicissitudes of entrepreneurial pursuits?

In my next post, I’ll argue that the answer is only the deluded.