Economic Freedom, Entrepreneurship, & Prosperity Russell S. Sobel, Ph.D. Professor of Economics and Entrepreneurship Baker School of Business The Citadel

What Explains Prosperity?

Adam Smith’s Question: Why Are Some Countries Rich and Others Poor? An Inquiry into the Nature and Causes of the Wealth of Nations (1776) Policies and the system of economic organization (e.g., capitalism) matter more than things such as resources, geography, education, democracy, etc.

Rankings of Reliance on Capitalism

Growth is a function of “inputs” AND “institutions” Spending to increase “inputs” won’t work unless the “oven” is turned on

Route 50

North Korea vs. South Korea Per Capita Income = $1,800 Per Capita Income = $37,900

A Quick Tour of The World As we go through these, ask yourself are these people entrepreneurial? Is it the people or the policies that are the problem?

Map of Economic Freedom

Example 1 A Country with VERY LOW Economic Freedom

Zimbabwe (in Africa)

Families in Zimbabwe

Families in Zimbabwe

Example 2 A Country with LOW Economic Freedom

Romania (in Europe)

Families in Romania

Families in Romania

Families in Romania

Families in Romania

Families in Romania

Families in Romania

Example 3 A Country with MEDIUM Economic Freedom

India (in Asia)

Families in India

Families in India

Example 4 Another Country with Medium Economic Freedom

Mexico (in North America)

Families in Mexico

Families in Mexico

Example 5 A Country with HIGH Economic Freedom

Hong Kong (in Asia)

Families in Hong Kong

Families in Hong Kong

Families in Hong Kong

Example 6 Another Country with HIGH Economic Freedom

United States (in North America)

United States

The Role of the Entrepreneur Decentralized entrepreneurship is the main reason why capitalism generates progress and prosperity Entrepreneurs keep inventing new things that improve our way of life

Our Homes Percent of homes with Heating & Air Conditioning 1956 = 6% 2016 = 89% Percent of homes with only one bathroom 1956 = 71% 2016 = 7%

And They are Better: Our Showers

Our Cars Features added such as Air Bags, Air Conditioning, DVD players, Accident Avoidance, Automatic Parking 2016

Our Phones

Our Entertainment

Our Science

Our Computers MacBook Air Least expensive-13-inch, 128GB, $850.00 Most expensive- 13-inch, 256GB, $1,299.00

Our Video Games

From Pong to Rock Band

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

Creative Destruction An economy undergoes continuous change – some industries fail, others are born Capitalism critically relies on the profit and loss system to direct this process This process cannot be centrally planned- it must be discovered within 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? Microsoft Corporation 1978

Cross State Differences in Economic Freedom Matter Too South Carolina Ranks 36rd in Economic Freedom Index

Policy Reforms to Promote Entrepreneurship

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

2. Make It Easier For Businesses To Be Profitable & Grow By Lowering The Cost Of Doing Business Lower Taxes on Capital Investment

3. Reduce The Role Of Government In “Playing Favorites” Or Picking Winners And Losers “Crony Capitalism” Baumol’s Theory of Productive and Unproductive Entrepreneurship Eliminate Targeted Tax Credits & Subsidies in favor of Broad Based Taxes

4. Reduce Government Control & Centralization Increase The Share Of The Economy’s Resources Available To Private Entrepreneurs By Reducing The Size Of Government

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

The Case of Delaware

Thank You / Q&A Russell S. Sobel, Ph.D. Professor of Economics and Entrepreneurship Baker School of Business The Citadel