Creative Class

Guess what country has just said a big, fat resounding “no” to industry bailouts? Sweden, that’s right, Sweden. The land of the big state, socialism, and social democracy. My colleague Charlotta Mellander writes:

It’s interesting how differently the financial crisis is being met by governmental authorities in North America and Scandinavia.  With Saab on the brink of bankruptcy, GM – which owns Saab – turns to the Swedish state asking for support, approximately in the same manner in the  US. And the Swedish government says – NO. No tax money will be spend on saving the car industry. The message is that if a company can’t make it on its own then tax money shouldn’t be  to bail it out. I must say I’m kind of surprised – but in a positive way. I didn’t think they’d have the  courage to say no to such an “institution.”

Here’s a report from Sweden’s The Local:

The Swedish government said on Wednesday it would not intervene to take over Saab. Enterprise Minister Maud Olofsson slammed Saab’s US owner General Motors for “abandoning” the struggling Swedish car maker. General Motors has warned that the unit would go under without official help. “Voters picked me because they wanted nursery schools, police and nurses, and not to buy loss-making car factories,” Enterprise and Energy Minister Maud Olofsson told Swedish public radio.

Can we get her to be our new Commerce Secretary?

… one victim will be entrepreneurship.

I monitor the financial blogs quite a bit and over the last two weeks an amazing transformation has occurred. Initially, many were calling the current wave of government takeovers “socialism.” Now, with the most recent Bush-Dodd-Frank plan to give enormous amounts of U.S. government money to global financial institutions, few believe this has nothing to do with “socialism.” What a canard. This is simply the final act in a long bout of “crony capitalism.”

Socialism is about government ownership of parts of the economy in an effort to transfer some of the gains to the less fortunate in society. For anyone to believe that the last two decades of financial deregulation and the current giveaways of government monies have anything to do with socialism is simply ridiculous. This is about some sort of booty capitalism where theft was legitimated. When the State abdicates its role as an enforcer of rules of the game, things quickly get out of control and outright fraud becomes the rule.

The New Deal was not socialism, though many accused it of being that. It had many components, but one of them was the enforcement of transparency and rules upon the stock market. It was this that made U.S. markets the envy of the world. These have now collapsed as few trust the financial results being reported by U.S. firms or even a day’s trading results, as investment banks are clearly investing in their own stocks for day trading profits. The SEC and the Fed have openly told firms they do not need to report their results truthfully. This is extremely dangerous throwing the major principles necessary for operating markets overboard at the first whiff of a crisis is extreme and dangerous short-termism. Regaining public trust will take a very long time.

How does all of this affect entrepreneurship and creativity? The U.S. entrepreneurial model was to start a firm, build it, and then use public stock markets to raise capital to build the firm further. In the last decade, many of the advocates for entrepreneurship came to think of public markets simply as exits from which the promoters got rich. This type of thinking is a fundamental misunderstanding of the role of stock markets. The initial public offering is meant to raise more capital so that a firm can grow. The EXIT is only a by-product of the raising of capital for further growth.

This mistaking of a private goal for the public good led to the offering of ridiculous firms in the dot.com bubble, which made billions for unscrupulous “entrepreneurs,” venture capitalists, and investment bankers. It also destroyed the public markets. Unfortunately, this most recent meltdown, which is only in its first stages, will be catastrophic for small firms wanting to raise capital.

For Schumpeter’s gales of creative destruction to work, one needs the transparency that can only come from stern and fair regulation. Otherwise, the creativity that creates new value cannot be expressed because of a generalized lack of trust.

I know I have combined two thoughts in this post. We need to sharpen up our vocabulary so that we can discuss the issues clearly and thoughtfully.

What do you think will be the effect of this collapse on entrepreneurship?