How Not to Encourage Entrepreneurship

Today I am going to do something different. Instead of using a bunch of data to illustrate a point, I am going to discuss a single example of a town whose central planners discourage entrepreneurship. Lest you think I will pluck the case study from a World Bank study of a developing country, let me clarify that I am talking about Shaker Heights, Ohio.

Last month, the town’s Planning Commission rejected a plan by Compass Self Storage, a Cleveland-based developer of self-storage units, to move into space that has been vacant since the auto dealership that had occupied it closed three years ago.

This would be a non-event were it not for the fact that the city of Shaker Heights says that it is trying to encourage entrepreneurship. As the mayor Earl Leiken told WKYC News at the opening the town’s business incubator;

“We’re welcoming business and looking for a strong business presence in our city.”

In fact, to encourage more entrepreneurship, the city paid part of the cost of renovating the incubator location and is allowing tenants to occupy the space rent free for four years.

Unfortunately, in its evaluation of Compass Self-Storage’s efforts to expand into Shaker Heights, the town’s Planning Commission has fallen right into the trap that Nobel Prize winning economist Friedrich Hayek called the “fatal conceit” - the idea that centralized planners can make decisions better than a free market.

The Planning Commission thinks it knows better than the market what the former auto dealership should be used for. But Hayek explained that no one organization can know all of the information necessary to match supply and demand as well as a free market. Efforts by centralized planners to intervene in free markets, he explained, do little more than keep them from operating effectively.

Economists have identified a very good way to encourage entrepreneurial activity - by reducing the regulations that deter people from starting and growing businesses. They have found that the very activity that the Shaker Heights Planning Commission engages in - having more procedures to start a company - reduces business formation. Moreover, this business-formation-deterring “red tape” lowers economic growth and employment.

If the town really wants more entrepreneurship, then its elected officials need to think harder about the economics here. You get more job and wealth creation if you let free markets operate.

So Planning Commission members: If you need a refresher on economics, there’s this professor I know really well who teaches a course you might want to take …

Shaker Heights, OH Photo via Shutterstock