New firm creation, or how to start a company, seems to be the missing basic curriculum or general education that every college student needs. The lack of jobs for college grads entering the workforce seems to be related to the lack of this curriculum.
Ohio University economics professor Richard Vedder spoke on WBEZ, Chicago public radio on a program called What’s a liberal arts degree worth nowadays? He shared that “there are 80,000 bartenders and 115,000 janitors with bachelor’s degrees,” [assume US statistic].
Richard further points out that graduates traditionally study in fields that prepare them for professional, technical, and managerial jobs in the workforce. Unfortunately, Vedder continues, “30% of the adult population is coming out of school with degrees, but yet less than 30% of the jobs available are in professional, technical or managerial fields.”
The Problem
We all agree, the rate of return on a higher education is great, and at record levels for a college degree. Northwestern University President Morton Shapiro, also on the WBEZ program, confirms that, “Over a person’s career lifetime, a higher education provides about an 85% to 100% rate of return.” Many students are admitted to university, attend classes, study curriculum and receive training to perform a professional, technical or managerial job. But, upon graduation many cannot find a job in their field of study in existing industry and corporate job market landscape.
This sounds like a simple supply and demand economics equation. Traditional study of economics is around firm existence and decay – simply put, the study of supply and demand assumes that there is industry to produce supply, and that there are consumers who can drive demand for it.
Supply and demand equations are simple, and are easily understood in terms of existing, growing, and decaying industries, businesses and economies. From this traditional study, leaders in existing business, defined industry and established government can apply knowledge to manage growth.
The Issue
Traditional study of economics has not focused on the dynamics of new firm creation. What that means is that as we add people to the existing static workforce in a generally static set of industries (e.g., Manufacturing, Technology, Banking, etc.) we are producing increasingly more qualified candidates for a generally finite number of professional, technical and managerial jobs. This is, of course, compounded by the lengthening of time people are spending in the workforce due to both living longer, and being forced to work beyond 65 due to personal financial situations.
We rely on the newly surfaced knowledge and developing skills of “innovation” and “entrepreneurship” to start entire industries like what Microsoft did to put a PC in everyone’s home. Or what Apple has done for putting technology and data in our mobile phone. Sure, there are some university level classes that teach “how to be a start-up,” but these are largely anecdotal-based afterthoughts, not considered true fields of studies based on scientific research. And, most certainly this curriculum does not hold a primary position in basic college curriculum as a requirement for all students.
Rays of Hope for New Firm Creation
To be fair, there is an up and coming interest in PhD-level study of new firm creation economics, but we are behind the curve, and the statistics about job demand show it. The amount of time EMBA’s spend learning traditional operations, finance, accounting, leadership and strategy studies far outweighs the study of new firm creation.
There are champions for driving new firm creation knowledge, like Paul Magelli, Senior Professor, and Senior Director of the Academy of Entrepreneurial Leadership at the University of Illinois at Urbana=Champaign, and lifetime master of entrepreneurship and new firm creation, and as well, the entire Kaufman foundation in Kansas City and its former CEO, Carl Schramm.
Solution
A few months back, I wrote Carl Schramm – Straight Talk on Entrepreneurship a blog post on what he presented to the University of Illinois EMBA classes of 2012 and 2013. Listening to Carl is when I first realized that what our economy is missing is the knowledge to successfully execute new firm creation. We need the same level of academic rigor for new firm creation as we have knowledge about private equity turnarounds, and general business studies that focus on existing industry, business, and opportunity.
Imagine if the same level of knowledge backed up by decades of research on the economics of new firm creation were driving our economic decisions as those that advised the President in his team of economic advisors on the GM bailout?
We need to research, understand, study, and learn the science of new firm creation. Not the basic “start a company for dummies” self-help book approach for getting a Tax ID and putting up a website. That is not new firm creation, instead it is misguided administrivia. We need to have more people coming out of university with degrees in their field of study AND fully able and ready to embark on new firm creation in order to make them successful, and increase the overall economic pie. This is a slightly different formal skill set than taking an invention through commercialization (a.k.a. innovation).
The truth is that economic recovery and real growth comes from expanding the economic pie, entirely. Graduates coming out of school expecting to compete in the musical chairs game for the few jobs with salaries from existing enterprises is no longer the solution. I see three steps that must be done.
- Academic institutions must do the critical research, develop a deep understanding of the science of successful new firm creation.
- New curriculum that presents that research in terms of knowledge must be developed.
- This new curriculum for new firm creation must be made a basic curriculum requirement for graduation just as basic college English and Math courses are required.
Through this process we will produce graduates with not only the professional, technical and managerial skills in their chosen field, but more collective knowledge in the workforce that can statistically begin to develop ideas, initiate action and execute on the new firm creation imperative. In this way, we stand a much better chance to expand the overall economic pie through new firm creation. Incidentally, this also gives us a better chance of solving some of society’s more difficult problems without relying on government to do it for us.
Proof
We have data to prove that this path is the right path to take. It is found from the Kaufman foundation research. Their study in 2009 pointed out that new non-employer businesses made up 70% of all businesses (that means the GMs and the Walmarts only make up 30% of American businesses). And, that these new businesses go uncounted by the government economic analysis; however, new businesses or new firm creation, contribute a Trillion dollars to the US GDP, annually.
We need to train every professional, technical, and managerial graduate about firm creation – in addition to their chosen field of study. In this way, we’ll have more graduates who know how to successfully start new businesses in those fields. This means more businesses will grow to become even larger growth engines, and moreover, end up hiring more college graduates.
To Ponder
Some academic economists suggest we should tweak the existing supply and demand curve for education since we have a surplus of college graduates. More specifically, some suggest we should regulate for-profit institutions or tighten government money for students and education. Others even go so far as to suggest that we control/limit the number of students we “allow” to go to college.
Wouldn’t this widen the gap between those with knowledge and those without? Do we really want to manage the production of qualified bartenders and janitors in this way? Wouldn’t we have fewer with higher educations, and therefore fewer ideas for disruptive growth from new businesses, the kind that Bill Gates and Paul Allen started in Microsoft? Wouldn’t this in the long-term stifle growth overall from both new firm creation and the internal-to-industry innovation incubators as well? These all sound like bad ideas.
More To Ponder
What does sound interesting is to implement a program in every accredited educational program that required “firm creation studies” just as we now require college English and college algebra. Whether studying to be a medical doctor, a lawyer, a geologist, or a law enforcement officer, graduates need to understand how business value is created, captured and sustained – from new firm creation to end of life. This knowledge would make every college graduate more able to produce and contribute. Just like college level English and mathematics skills, this would help graduates whether they worked at a traditional company, in a mature industry – or they engaged in new firm creation to start-up something of their own.
We need both more study and teaching of new firm creation science. And we need more students to know and understand it upon graduation as a “basic curriculum or general study.” If the research was there, and the curriculum was part of general studies, could we turn out more successful graduates that were also a success in new firm creation, and new opportunity for hiring those graduates that overflow into bartender and janitor jobs? That will change the GDP in ways we cannot imagine.
What’s your take on the economics of new firm creation?
Please comment and share your thoughts with other readers.
Image Credit: NASA/JPL-Caltech/Harvard-Smithsonian CfA [Public domain], via Wikimedia Commons
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Andrew,
Very good article; quite worth reading.
Of all the ‘useful’ things I was required to take to complete either of my degrees, there are a few I would trade out for your ‘start a firm’ studies. Having started 3 now, you’re spot-on when you say it takes more than hanging a shingle and putting up a website.
The article triggered another thought, as well. From an American perspective, I think the very situation you describe speaks to the general cultural change we are struggling with. As government has grown, so has citizens’ dependence, and the raw entrepreneurial -spirit-, driven by necessity in the past, has dimmed.
Question is, will that spirit be rekindled at some point? Or no.
Thank you JT, you raise the important question. I think the answer is that “it must.” There is no way to budget-cut our way out, nor is there a way to stimulate-the-economy or spend our way out. The only way out (and this is a “global” problem, not just a US or EU problem) is to “grow” our way out, with new firm creation which will be innovation-driven. My thinking, anyway – hence pondering the question about basic curriculum on new firm creation.
Very interesting post, Andrew.
To the curriculum on firm creation that you are proposing, I would welcome the addition of studies on the role of public agencies (USA: government) in fostering and hampering new firm creation.
Many countries make it their specialty to burden start-ups with the same administrative workload they expect from multinationals. Teaching people what is a proper legislative and regulatory environment for firm creation can help prepare people that will operate on both sides of the counter.
In some countries I saw absolute jungles of micro-firms that never reached criticall mass because they never prepared themselves to mergers and joint-ventures. Independence is great, but critical mass is important to sustain innovation after the initial spark. The topic of mergers in the firm-creation curriculum would help prepare even young firms for mergers.