Saturday, January 25, 2014

We need to think more about firm dynamics

I watched the Netflix Mitt documentary. This is not a political blog, and I don't like Romney any better than any other politician, but I was intrigued by something he said in a conversation with his family (starting around 41:45):

They don't know how hard it is. They have not been in a setting where you're trying to make it, where you've got a little business and you're trying to make it. They don't know how hard that is. . . . They assume it's always there, and business is always there. They don't know that businesses fail, that people go out of business--that they lose their life savings, they lose their job. They start over again! But they don't know how hard it is for a business to succeed, and they keep piling on more and more thinking "that's ok, these guys will all do fine." At some point, they don't do fine.

The line that caught me was "they assume it's always there." This is the representative firm model of the world, maybe even the exogenous income endowment model of the world, and yes it seems to me that a lot of our dialogue in both politics and economics operates from this assumption. But firm dynamics matter; and the size and age distribution matters, particularly for employment flows.

We don't think about firm dynamics enough.

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