Preface

Entrepreneurship is often a form of rebellion.

Many people think of entrepreneurs as builders, which is certainly true. It takes a Herculean effort to launch a company, and most successful entrepreneurs have a relentless drive to create, sustain, and develop their enterprises. They work continually on growth and planning for the future. They invest extraordinary amounts of time and resources, and they take on great risks.

But underneath this effort, entrepreneurship is frequently an act of dissent, an attack on the status quo, and sometimes even a political manifesto. The attack may be subtle, through an unserved niche in the market or a product idea that incumbents are neglecting, rather than going head-to-head with those companies. But the entrepreneur is still challenging the established order.

These two sides to entrepreneurship - the encouragement to build, the empowerment to destroy - show up throughout American history. The colonies began as commercial enterprises, with London-based investors serving as venture capitalists. Yet many of the early colonists were dissenters, not just religious but also cultural. The U.S. Constitution put in place checks and balances to mediate this ongoing tension through the institutions of government. The result was a persistent tension between a desire for stability and investment on the one hand, and an implicit culture of disruption on the other. From the colonial period through the current day, this balancing act between rewarding builders and enabling challengers, often the same people, has been at the heart of the American entrepreneurial economy. It has been our internal combustion engine of progress.

These dual aspects are easy to see on college campuses today. Many of the most successful start-ups have emerged out of universities, particularly those receiving government grants to support research and promote innovation. These institutions provide stability and access to resources critical to building a company and are often openhanded in allowing students and professors to commercialize their work. But many of these campuses also have a strong undercurrent of anti-authoritarianism, such as MIT with its strong hacker culture, and Stanford with its legacy of freewheeling culture from the 1960s.

This tension, and how it developed over time, is the topic of this book. We show how the American political economy evolved to manage the dynamic between upstarts and incumbents and to balance the various competing forces at play. Just as it is difficult to maintain democratic government over long periods of time, it is hard to sustain an economy that favors both disruptive competition and stable property rights. But the United States has pulled it off, and the ensuing creative destruction has yielded astounding gains in living standards and material prosperity. While daring entrepreneurs and the country's entrepreneurial spirit deserve most of the credit, the political, legal, and institutional systems are not far behind.

Too often we see American history in extremes, either as a deeply flawed, exploitative project, or as a consensus-based march of progress to ever-increasing liberty, participation, and growth. But the genius of America's political economy has been its ability work through competing interests without falling into chaos. We had deep-seated conflict from the beginning, but just enough consensus to keep from disintegrating altogether (except in the 1860s), and the political system worked to channel those conflicts in a way that balanced property rights and openness. People think wise administrators and leaders can achieve the perfect system, but in practice that often leads to cronyism or stagnation, as many countries have found. In both the political and economic spheres, the adversarial process worked well, as long as it stayed in bounds. America's entrepreneurial economy is often messy and inconsistent, but it retains enough openness and stability to motivate daring entrepreneurs to risk their fortunes.

Entrepreneurship is a core American value, and its virtue is one of the limited number of things that almost all Americans agree upon. For conservatives, entrepreneurship reflects important values such as hard work, individual effort, and reward for success. For progressives, the inherently rebellious nature of entrepreneurship represents a check against power and vested interests. While people might differ on who, precisely, is an entrepreneur and what characteristics should be most prized, the debates - which go back as far as Hamilton and Jefferson - take place within a broad consensus of support.

Multiple perspectives have informed our work on this project. The first is practical experience. One of the authors (Howard Wolk) spent three decades as an entrepreneur, corporate executive, and investor in start-up enterprises. He helped to start and build several technology-enabled ventures, and he has made numerous early-stage investments directly in start-ups and through leading venture capital firms globally. This includes experience as an early investor and board member in what is now the largest auto rental company in China.

More pointedly, along with his father and brother and talented teams over many years, he helped build one of the largest privately held firms in Massachusetts, a classic story of a small business that grew into an industry leader and worked hard to maintain its position. The company began in 1972 as Cross Country Motor Club, selling individual memberships, but it pioneered private-label versions of roadside service for automobile companies and insurance carriers in the 1980s and '90s. As the company grew, it took on incumbent players AAA and GE (which had a motor club for many years), ultimately succeeding by customizing its services in ways that the larger firms would not or could not. Later, once the organization's flagship company (renamed Agero) became the industry leader, it had to fend off challenges from a new generation of upstarts. It acquired a firm in San Francisco and embarked on aggressive digital transformation in order to stay ahead. While no successful incumbent likes competition, many at the company would grudgingly admit that the challenge has kept the company sharper and at the forefront.

The second perspective comes from the academic world, including economic history, law, and public policy. John Landry earned a PhD in American economic history at Brown University and has worked in the business publishing world for close to three decades, including years as an editor at the Harvard Business Review. There he came to appreciate the messiness and vitality of how companies and economies actually work. Howard Wolk has degrees in history, economics, law, and public policy, and also served in the Clinton Administration as a lawyer and a member of the National Performance Review, a project that sought to "reinvent government" and make it work more effectively; the latter helped inform his perspective on both the possibilities and inherent limitations of political institutions.

Both of us have witnessed the recent explosion of interest in entrepreneurship, even as the understanding of it in the broader context is still new. 1 Business schools offer more classes on the topic each year, and economic policymakers aim to create "the next Silicon Valley." Governments around the world track their progress in fostering innovation and industrial clusters. Still, those governments and policymakers and other interested parties often have little appreciation of the forces that enable a sustained entrepreneurial economy, particularly the legal, political, and institutional factors. At a time of general rethinking of capitalism and the role of government in regulating business, we have written this book to describe how these factors have operated through American history and how they can be maintained, leveraged, and improved going forward.2

Summary of the Book

Chapter 1 lays out the basic argument: that the United States developed a dynamic entrepreneurial economy because it balanced the right to compete with property rights. It contrasts the American propensity to allow creative destruction with other countries that take a conservative approach and are much more likely to protect existing corporate, market, and social arrangements.

Chapter 2 delves into entrepreneurial competition and the differences between start-ups seeking to enter markets and incumbents erecting barriers to that entry. Each side has strengths and weaknesses, and a vibrant economy allows both to prosper. Indeed, most successful firms progress from start-up to incumbent.

Chapter 3 is the first of six tracing the entrepreneurial balancing act from its roots in early modern Europe to the present. Unlike their traditionalist neighbors, such as Catholic Spain, the Netherlands and England challenged imperial restrictions and respected merchants and others outside the traditional gentry. They favored personal discipline, risk-taking, and the mobilization and capital for productive purposes, and distinguished the enterprises of individuals from those of the crown. They carried their commercial bent, egalitarianism, and tolerance to the European colonies of North America, which lacked the highly marketable natural resources of the Caribbean and Spanish colonies and thus had to develop sophisticated policies to encourage development. The colonies' desperate need for settlers created an unprecedented egalitarianism and pragmatism that...