The entrepreneurial boom of the '80s grew out of profound market changes in the '70s. So what can we expect in the '90s?
When I studied economics in college -- this was 25 years ago -- I learned about those perfectly competitive markets economists are so fond of. I also learned about the huge corporations that, by dominating their industries, had all but eliminated effective competition in much of the real world. The giants, pointed out theorists such as Harvard's John Kenneth Galbraith, jostled with one another for a point or two of market share. But they set their own prices, managed the demand for their products, controlled their suppliers and distributors. To say they were governed by free-market competition was to stretch the concept beyond recognition.
How could the past decade's entrepreneurial explosion have occurred in so thoroughly managed a marketplace? The answer, of course, is that it didn't, and thanks to the work of University of Massachusetts at Amherst economist William G. Shepherd we know why not. By 1980 the American economy had undergone a series of changes that rendered the Galbraithian model obsolete. Shepherd's accomplishment was measuring how much difference those changes made.
Galbraith's model rested on what economists call institutional analysis -- that is, sector-by-sector scrutiny of the way individual industries actually functioned. Autos were dominated by the Big Three, steel by U.S. Steel, detergents by Procter & Gamble and Colgate-Palmolive. Two massive studies, Shepherd knew, had determined that about half the U.S. economy fit this model of what might be called managed competition, while the other half was considerably more freewheeling. But the 1970s were a decade of turmoil, with imports invading major markets and trends such as deregulation beginning to affect whole industries. In that turmoil, Shepherd found himself wondering if the underlying structure of the economy was shifting.
The only way to answer the question was through yet another massive study, breaking the economy into its component parts and figuring out what, if anything, had changed. Was General Motors or P&G facing new competition? Was the structure of the banking industry somehow different in 1980 from what it had been in 1960? Shepherd, who had studied such matters for much of his career, collected government reports, industry analyses, and research monographs; he studied antitrust cases and combed the business press.
Then he plunged in, sifting through information on literally hundreds of industries. Automobiles. Once a prototype for Galbraith's arguments, it was now effectively competitive, thanks to a rise in imports from less than 10% of shipments in 1967 to about 25% in 1980. Banking. The rise of money-market funds and the subsequent deregulation of financial services had led to a sharp increase in competition. Breakfast cereals. No change here: it was utterly dominated, as it had been for decades, by Kellogg and its colleagues. Using benchmarks such as the market share controlled by the top four companies in an industry, Shepherd assigned each sector a number from one to four, indicating the degree of competition. Then he weighted the sectors by their share of national income and compared his totals with previous studies.
The results: where researchers studying data from both 1939 and 1958 had found about half the nation's output produced under true competitive conditions, Shepherd now upped that estimate to over three-quarters. Office copiers. Once dominated by Xerox, the industry was transformed by the arrival of imports in the 1970s. Automotive rentals. Cozy arrangements involving the three largest companies' airport locations were the subject of a major antitrust action, thus opening the field to new competitors. Railroad transportation. Deregulated in 1976 and 1980, its routes and rates were suddenly up for grabs.
Overall, the conclusion was inescapable. "The U.S. economy experienced a large and widely spread rise in competition during 1958-80," Shepherd wrote in the prestigious Review of Economics and Statistics for November 1982. "It can now be viewed as a large laboratory case, in which the effects . . . of pervasive competition will be tested for the next decade or two."
In retrospect, we can see one such effect clearly: drastic shrinkage in many big companies' market share, coupled with a quick, dramatic rise in entrepreneurship. Some of the linkages are obvious, such as the proliferation of rental-car companies following the antitrust case. Others are less visible but no less significant. Challenged by Toyota and Nissan, Detroit turned its attention to cost control, laying off tens of thousands of workers and relying heavily on outsourcing. That set the stage for the hundreds of growing companies now supplying the auto industry. Entrepreneurship was a cause as well as an effect of increased competition. Every stage in the growth of the microelectronics industry, for example -- from the development of the transistor to the latest applications software -- was pioneered by upstart companies. Despite its size, IBM has never been able to relax.
Will the trend continue? As Shepherd's study suggests, that depends to some extent on changes in competitive conditions, which are difficult to assess in the absence of another major study. Nevertheless, Shepherd himself, now 52, says he believes the economy is just about as competitive today as it was a decade ago, and most businesspeople would agree. So can we expect the entrepreneurial boom of the '80s to carry on into the next decade? Not necessarily. A continuing high level of competition is not the same as an increase in the level of competition.
What happened in the '70s was that markets were destabilized -- some by new technologies, others by deregulation or imports. That opened up all kinds of niches for growth-oriented company builders. Today, technology continues to change and to shake up the marketplace, thereby offering new opportunities. But a lot of U.S. industries have already reacted to the threat of imports or the opportunities of deregulation, and some are in the process of restabilizing. The clearest example is air transportation. A bevy of new airlines were created after deregulation in the late '70s. By now, most of them have been bought up or shaken out. The industry is moving toward the Galbraithian model, its three or four dominant players blithely increasing fares whenever they feel like doing so.
No one's predicting a wholesale return to the managed markets of the '60s, nor to the kinder, gentler competition they encouraged. But no one should expect as much turmoil -- and therefore as much chance for entrepreneurship -- as we experienced in the '70s. As Shepherd showed, that was a change of historic proportions. Today, we're more likely to slouch toward stability. And entrepreneurs will have to look harder and harder for niches conducive to growth.