From FiveThirtyEight:
When Jeff Bezos founded an online bookstore in 1994, no one could have guessed that in less than 15 years, Amazon would fundamentally reshape the U.S. retail landscape. No one, that is, except Bezos himself: As Brad Stone’s book about Amazon, “The Everything Store,” makes clear, Bezos’s goal from the start was to change the way Americans shop.
Amazon’s remarkable rise carries two important lessons for economists: First, one ambitious, innovative company can have a huge impact not only on an industry but also on the economy as a whole. Today, Amazon employs more than 230,000 workers, a figure that doesn’t count thousands more who work as contractors in the company warehouses, sell products on its marketplace and rent out their labor on its “Amazon Mechanical Turk” platform. Amazon has contributed to the decline of entire industries — department stores, bookstores, movie rentals — while helping to create whole new ones.
The second lesson: Amazon’s success was almost completely unpredictable, at least from the outside. To an economist looking at data on new ventures, Amazon was merely a bookseller, hardly a business known for its breakout growth even before the Internet upended the industry. And even if someone had looked more closely, what distinguished Amazon from Pets.com or Kozmo.com or any of the other high-flying startups that came crashing down to earth when the tech bubble burst in 2000?
As a result of those lessons, policymakers concerned with entrepreneurship at both the local and national level have long favored what economist Robert Litan dubbed a “shots on goal” approach: Try to encourage as many startups as possible. Most of those companies will fail. Of the survivors, most will never grow into major economic engines. But statistically, a few will turn out to be the next Amazon, with huge rewards for their local economies.
In research set to be published on Monday, however, a team of researchers at MIT argues that Amazon’s rise wasn’t so unpredictable after all. The researchers believe they have found a set of characteristics that can identify which companies have a shot at success. That could allow cities and states to move beyond the shots-on-goal approach and instead try to foster the specific types of companies that are most likely to create jobs and drive innovation.
“The shots-on-goal approach, really, I think was the best that could be done based on the information that was available before,” said Catherine Fazio, who is studying the policy implications of the new research. “But if you have further insight into the entrepreneurial potential … then you can start to experiment with programs and have a more tailored approach.”
The new research comes amid a three-decade-long slump in U.S. entrepreneurship. In 1980, Americans started more than 450,000 new companies, according to data from the Census Bureau; in 2013, the most recent year for which data is available, there were just over 400,000 new companies even though the U.S. population is nearly 40 percent larger. The startup drop-off has corresponded with a decline in other measures of economic dynamism — Americans are changing jobs less often, for example, and are moving across the country less frequently — leading economists to worry that the U.S. as a whole has become more risk-averse.
The new research, led by economists Scott Stern and Jorge Guzman, calls that narrative into question. Startups as a whole may be declining, they find, but the kind of entrepreneurship that economists care the most about — fast-growing, innovative companies like Amazon — hasn’t shown the same downward trend; in fact, in the past few years, those kinds of startups have surged in number....MOREHT: Ritholtz@BloombergView
