Entrepreneurship and the welfare state: a reply

Abstract

It is widely recognized that the supply of entrepreneurial talent is likely to be important for economic growth, innovation and job creation. In Henrekson (2005) it was shown that the supply of productive entrepreneurship is likely to be reduced by the kind of tax and welfare arrangements that prevail in a mature welfare state. Welfare state institutions developed mostly during a period when it was common among politicians and economists to assume that individual entrepreneurship and new firms were of minor importance. However, in an environment where entry, exit and turnover of firms are important for growth, and where scale-economies are less important, this kind of model may be more problematic. There are a number of measures that can be implemented to strengthen entrepreneurial incentives within extensive welfare states but their implementation is unlikely since there are strong vested interests, including the incumbent business elite, defending the current model. A number of objections against this analysis were raised by James K. Galbraith and Ronald Dore in the previous issue of Industrial and Corporate Change. In this reply I address these objections and provide a more detailed exploration of some important issues currently facing the Swedish welfare state.