In our efforts to spur economic growth and retain American dynamism, we tend to be overly consumed by surface-level tweaks to our economic systems. Yet economists continue to discover that the distinguishing features of flourishing societies are more readily found at the levels of culture.
Deirdre McCloskey has emphasized the role of ideas and rhetoric, arguing that our newfound prosperity has “not come from piling brick on brick, or bachelor’s degree on bachelor’s degree, or bank balance on bank balance, but from piling idea on idea.” Others, like Douglass North, have focused on the role of institutions, noting that “belief structures get transformed into societal and economic structures by institutions – both formal rules and informal norms of behavior.” More recently, the role of social capital has come into focus, highlighted by thinkers like Robert Putnam and Charles Murray, as well as economists like Edward Glaeser.
In a new working paper, researchers John M. Barrios, Yael Hochberg, and Daniele Macciocchi add to this area of study, focusing on the ways in which certain cultural factors can shape entrepreneurial environments. While many have marveled at the ways in which start-up havens like Silicon Valley have served as concentrated forces for growth and innovation, what’s less understood is exactly how and why these economic cultures emerge in the first place.
“Entrepreneurial activity has long been recognized as a primary contributor to economic growth…and innovation-driven growth in particular,” the authors write. “Entrepreneurs are often considered drivers of urban growth in general and innovation-driven growth in particular. Despite this, our understanding of the factors determining the geographic distribution of new business formation remains limited.”
The paper, Rugged Entrepreneurs: The Geographic and Cultural Contours of New Business Formation, focuses on three factors, observed in county-level data: (1) “the frontier experience, which leads to the development of a more individualist culture in the local area”; (2) a county’s “birthplace diversity,” which “may lead to a diversity of viewpoints and thoughts as immigrants transmit their values into the local area”; and (3) “the ruggedness of the geographic terrain of the local area,” which may contribute to a population’s overall resiliency in overcoming economic obstacles.
The conclusion? Culture matters.
“County fixed effects explain approximately 75% of the new business registration variation over the entire sample period,” they write. “We provide evidence that time-invariant historical-cultural and geographic factors explain a significant portion of the prevalence of entrepreneurial entry in a local area. Our study documents a fundamental role for America’s frontier culture in shaping new business formation and entrepreneurial activity in the U.S.”
On the influence of “the frontier experience”:
During the process of westward expansion in the early years following the formation of the United States, living in a frontier state or county particularly rewarded those who demonstrated independence and self-reliance, as pioneers had little infrastructure to rely on. Historians suggest frontier locations historically demonstrated greater individualism. Recent work in economics suggests that such individualism has persisted in these locations in the long run. Consistent with entry into entrepreneurship being characterized by individualistic nature…we observe a positive relation between [the frontier experience] and new business formation per capita in U.S. counties, with a one standard deviation increase in [the frontier experience] being associated with a 3% to 5% increase in per capita new business starts.
…While the individualism brought about by [the frontier experience] leads to increased entrepreneurial activity, it does not appear to meaningfully change the type of businesses started (small business versus innovation-driven high-growth startups)…Overall, the analysis suggests that individualism, as proxied by the county’s historical frontier experience, is a significant factor in explaining the current geographic distribution of new business formation.
On the economic value of historical diversity in immigrant backgrounds:
To the extent that immigrant values spill over into the local population and these cultural values persist over time, the broader diversity of initial immigrant backgrounds can lead to the diversity of viewpoints and thought, which can lead to creative recombinations that support innovation and entrepreneurial activity. Alternatively, such diversity may lead to societal fragmentation and a lack of social cohesion, impeding new business formation.
We observe a positive and significant relation between a county’s historical diversity and per capita new business starts, suggesting that on average, the diversity of viewpoints and values brought by immigrants creates a persistent local culture that facilitates new business formation. The estimated effect is also economically significant: a one standard deviation increase in diversity of birth countries is associated with a 14% increase in new business registrations per capita. We observe no significant relationship, however, between diversity in birthplaces and entrepreneurial quality.
When it comes to risks to social cohesion, the authors note that fragmentation appears to be more likely when immigration comes to areas with no historical diversity. Conversely, “minority groups integrated into a historically diverse environment lead to greater entrepreneurial activity,” they write. “This finding suggests that the positive effects of societal diversity may take time to materialize fully.”
On the role of geographic ruggedness:
We document a positive and significant relation between a county’s terrain ruggedness and the number of new business registrations per capita…A one standard deviation increase in geographical ruggedness is associated with a 14% increase in new business registrations per capita, consistent with the notion that rugged terrain imposed historical constraints that may contribute to individualistic culture and self-reliance…We also observe a small positive and statistically significant relationship between geographic terrain ruggedness and entrepreneurial quality.
The statistical significance of these findings holds when all three are “horse raced in the same model,” the authors write, indicating that “counties characterized by greater historical diversity see a magnification in the effects of terrain ruggedness and TFE on new business formation.”
Such observations are not entirely new, of course. From Max Weber’s argument about the “Protestant work ethic” spurring Christians toward entrepreneurial vocations to Samuel Bazzi’s original assessment of “the frontier experience,” this latest paper is but another stride in the path to discovery. And its insights are more than a bit relevant for the challenges ahead.
At a time when American policymakers seem increasingly drawn toward top-down policy solutions, and as state governments and city planners continue to focus their innovation-boosting efforts on lavish incentives packages or strange schemes to place “incubation hubs” in major metros, the paper reminds us that the diversity and dynamism of associational life holds much more promise.
Such a revelation stretches back to Alexis de Tocqueville, who, in his travels to America in the 19th century, observed that much of the country’s strength came from the depth, diversity, and, more notably, the dispersion or distribution of its townships and urban centers.
“The intelligence as well as the power of the country are dispersed,” he wrote in Democracy in America. “Instead of radiating from a point, they cross each other in every direction; the Americans have established no central control over the expression of opinion, any more than over the conduct of business.”
If detached from civil society and corresponding virtues, America’s “rugged individualism” can work to our detriment – promoting a view of the economy as a mere tool for self-provision and self-protection. But when paired with a robust vision of freedom and virtue (not to mention the proper legislative restraints), we see an opportunity to spur American dynamism in the ways we always have: facing the frontier, but with creativity, resiliency, and an openness to new neighbors, new ideas, and new challenges.