Tweet

Drunks, A Wall, Entrepreneurs and Jobs

Guest post by: Paul Kedrosky

Article Overview: That young firms account for most of the job creation in the U.S. – as written about my Kauffman colleagues Dane Stangler, Bob Litan, and others -- has quickly become one of those compelling facts that changes the way you apprehend the entrepreneurial world. Young firms assume their rightful priority of place, and the vexing conflation of young/growth firms with small firms is finally and rightly undone.

Drunks, A Wall, Entrepreneurs and Jobs

That young firms account for most of the job creation in the U.S. - as written about my Kauffman colleagues Dane Stangler, Bob Litan, and others -- has quickly become one of those compelling facts that changes the way you apprehend the entrepreneurial world. Young firms assume their rightful priority of place, and the vexing conflation of young/growth firms with small firms is finally and rightly undone. I am going to take a different perspective on the relation between young firms and job creation, however. I want to explain its mathematical inevitability, and I'm going to do that using the probabilistic idea of the drunkard's walk.

It works like this: Imagine an inebriated bar-goer having exited the bar, and now standing outside along the wall. Imagine further that in his or her state every single step is random, a coin flip whether it will be toward or away from the bar wall.

At first, however, the bar-goer is at the wall, so further steps toward the wall can't happen. The only direction he or she can go with that first step is toward the curb. After that things change, of course, with at least some steps toward the wall possible, after which the drunkard is back at the wall and unable to go further. Given enough time, and with 100% probability, the drunkard will eventually end up in the gutter away from the wall.

Evolutionary theorist Stephen Jay Gould famously used the idea of the drunkard's walk to explain the rise of complexity over time in humans. It wasn't progress, he argued, just a blind evolutionary process staggering away from a left wall of minimum biological complexity.

The same holds in job creation. Young companies are the single-celled paramecia of the economic world: at t=0 they stand at the bar wall facing the gutter. They can't lose jobs because they haven't created any yet. All they can do initially, other than fail, is stagger away from the zero employment wall. Now, we know that about half of young companies last five years, more than enough time for companies to stagger back and forth such that, even if we assume no managerial skill, the drunkard's walk model tells us they will grow and add jobs, even if only because that left bar wall prevents them from going below zero jobs.

The same doesn't hold for older companies. They have been in business long enough that at t=0 they are already some distance from the bar wall, staggering back and forth. They can create jobs, of course, but they can also lose many jobs, the latter being something young companies mathematically cannot do given how they start at the left wall of zero employment.

In short, the central thing about job creation from young companies is its inevitability. It is a species of mathematical certainty (one driven by initial simplicity and a wall) that young companies must create the most jobs (even without assuming particular skill on their part, or taking into account sectoral or economic growth, both crazily conservative assumptions). That the drunkard's walk applies to the economics of young firms is an mind-altering realization (in a good way), one that helps put the messy data of company and job creation in a more plain and meaningful context.

Related Articles
  SMEs - South African SMEs and development capital
  Be Positive Every Single Day
  Change Management Led Zeppelin Style
  Any Walls In Your Way?
  You Have Only Yourselves to Depend On, Ladies and Gentlemen!
  Great Entrepreneurship
  High Growth Women Entrepreneurs Poised to Transform Economies
  Using Entrepreneurs
  Five Steps to Startup Success
  Lesson #2: Don’t Settle
  Tips to Growing Your Home Based Business
  Can Entrepreneurialism be the Saving Grace?
  Franchise Businesses Appeal to Women Entrepreneurs
  There are always opportunities
  Lesson #3: Seize The Day
  canvas artwork wall art
  America's Most Wanted Workers
  SMEs - government strategies
  Wealth Management Expert In Sacramento Keith Springer Quoted In The Wall Street Journal
  Right Entrepreneurs

Article Tags: biological complexity, colleagues, conflation, different perspective, drunkard, drunks, economic world, goer, gutter, inevitability, job creation, jobs, litan, paramecia, priority, probability, single step, stephen jay gould, theorist



Related Forum Posts
Re: What If Steve Jobs Hadn't Returned To Apple In 1997? - Thanks for sharing with us Yinko. Steve Jobs is definitely a visionary. Not only his products are innovative in a technological sense, but he's managed to turn a tech-company's products into a lifestyle.... a lifestyle!! [quote:zfqoq43n]Fast Forward to today. Apple has the sexiest products in the business: iMacs, Macbooks, iPhones, iPods and more.[/quote:zfqoq43n] I think not only tech would be different (music players and phones), but ways we can think of marketing and branding. What Steve Jobs did was of course no easy task for the smaller businesses, but he did start somewhere. What I did not know was that Apple is worth about as much as Google. How do you think Apple accomplish what they did? In terms of strategy wise? If you could advice Steve on one thing, what would it be?
Re: Internet of the future. - [quote="BuzzAroundBooks":4vw6oega] Whether "The Terminator" and "Wall-E" warn people about the pitfalls of technological advancement... [/quote:4vw6oega] I don't think that technological advancement is necessarily the problem...just advancement without the necessary human development as well. For example, one of the interesting things about Wall-E is that it had its message about "rampant consumerism" -- the "villain" behind the story was the huge congomerate Buy N Large, for example... But when I bought my ticket for the movie, I was handed a watch that the clerks were giving away with each ticket purchased. A cheap watch --- and one that you cannot replace the battery -- so once the battery inside it runs out, the only thing to do with that watch is throw it away -- into a land fill! So they're giving a message on one hand, and destroying the message on the other!
Re: How important is your name? - Great American entrepreneurs have been using their names as brand. Dell Hewlect Packard Wall Mart etc
Re: Are you getting an iPad 2? - @GT - we can talk more about it once I get one and I'm happy to answer any questions to see if it might fit your lifestyle. @Yinka - Sorry, no payment from Steve Jobs... I wish!
CEOs and Email - Slaves? - I wonder if the emails they are responding to are filtered thru their assistants first 'cos they seem to spend a lot of their off hours responding to them. True they are successful but I'm not sure I'd be willing to pay that price. I'd be interested to know what's the in the typical day planner of Entrepreneurs on the Forum. Entrepreneurs are a different breed than Paid Employees- so it would be interesting to view the contrast.


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

TOP Level Selling

Emotional Intelligence in Business

Starting a Business a Brave Move or a NoBrainer

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.