Can Urban Entrepreneurs Save Our Cities?

04/01/2013 01:19 pm ET | Updated Jun 01, 2013

A battle of ideas about how to save our cities has recently broken out. At issue is a popular "fix" that revolves around inducing members of the nation's "creative class" to alight in a given city and rejuvenate its economy. A respected urbanologist, Joel Kotkin, has accused the idea's author, Richard Florida, of selling snake oil. Florida says a city's future depends on building something like an "arts district" where a young and rootless post-graduate crowd can hang out and be innovative. Somehow new businesses will flow because smart people have been attracted to town.

Florida's point is sound, in part. Economists have know for a long time that smarter people are critical to the future economic performance of any location just as they are to the success of firms that have relatively smarter employees. Human capital makes a big difference. More smart people in any given place is a good predictor of its future economic success.

How to get them? Florida is credited with advancing a solution that was very much underway long before he affirmed what real estate developers already had been doing by creating a new urban landscape characterized by sidewalk cafes, artisan businesses and housing in converted loft buildings. The explicit rhetoric of James Rouse who in the 1970s pioneered his waterfront renaissance strategy with Baltimore's Harbor Place was on point four decades ago. He promised "A revitalized center that will bring the smartest people to Baltimore to live and contribute to the new economy being built here."

Florida caught a wave. It was amplified by others who saw entrepreneurs as creating particular localized success. Since the 1980s the Silicon Valley has served as an irresistible template linking entrepreneurs to future growth of any place they might congregate. When Florida wrote that "creatives" coming to town could restart economies many cities began subsidizing the building of creative neighborhoods more commonly known as arts districts. Florida and others helped conflate the mission of these districts as holding entrepreneurial promise - somehow a scale economy will spring up from these places. There is no evidence that this will happen and none that it has in any city in the country so far.

The notion that a gaggle of entrepreneurs will come to any given town and decide to start businesses just because there is a receptive, "hip," arts district reveals how little is known about entrepreneurs and the way they manage themselves. Entrepreneurs are serious and focused individuals who have taken on significant financial and career risk. They are usually highly informed on the decision of where to start their businesses. Entrepreneurs know that human capital resources are critical and someone building a software-intensive company is not going to try his hand at making it happen in Elmira, New York, one of the cities to which Florida has tended. A fun time after hours can be even more fun in Boston than in the arts district in Elmira. Indeed, nearby Ithaca is more fun!

In fact, its time to question the premise that entrepreneurs can save a whole city's economy. In the current strategic plan for Detroit, entrepreneurs are characterized as the city's "sleeping giant." Just how many giants will have to awake and climb how many beanstalks to the new economy to save a city where over 50 percent of its 350,000 strong workforce doesn't have jobs and many more than 350,000 jobs have left over the last four decades?

Entrepreneurs already have a giant's task in front of them! Each one has to get a successful company going. Its one of the hardest things a person can think about doing. Just what are cities thinking about when they would settle the added role of municipal savior on their shoulders? Looking to entrepreneurs if you are Detroit, Cleveland or Buffalo as the way out of decades of decay and municipal corruption sounds a bit like a "Hail Mary" play in football.

Why is the strategy of relying on "entrepreneur as city savior" so worrisome? For one thing its not quite clear there are enough entrepreneurs to go around. Florida's vision implicitly embraces a notion that America's creative class is an elite corps with a relative fixed number of members. He's pretty much right. In fact the number of entrepreneurs in the U.S. is falling! Until we really figure out how to get more people to start businesses any city will be at a comparative disadvantage to places that have proven congenial to successful start-ups. Elmira, Akron and Toledo will never make it into the club with Palo Alto, Austin, and Boston. Elmira's future is not likely to change because the creative class is not showing up.

For another, for all their rhetorical support of entrepreneurs, many cities don't behave as if they really want more entrepreneurs. Entrepreneurs face hurdles including regulations, zoning, licensing in some cities that are significantly fewer in others. And, many cities appear to want a special kind of entrepreneur. In such venues social-entrepreneurs are seen as somehow more valuable even though the non-profits that they start seldom create large numbers of new jobs and only increase the competition for philanthropic support. Nevertheless, it seems that not being motivated by making money social entrepreneurs are somehow better suited to living and working in such places where, as they would have it, the greedy need not apply.

Still other cities want to attract particularly fashionable businesses. Currently clean-tech firms often receive special support and attention from many cities even though the industry is hardly defined and competition among entrepreneurs over new ideas and support in this field is particularly fierce suggesting that fewer start-ups will be successful. Several cities see "pure water" as their franchise on the future. They are implicitly fishing for a rare breed of entrepreneur in an overfished pond.

In light of the apparent uncertainty over the role that entrepreneurs can really play in "saving" the economies of cities, perhaps its time to think about how cities with failing economies can reset their economic compass and begin to lay the groundwork for economic growth.

Three realities that influence every city must be recognized.

First, as Napoleon famously said "Geography is Destiny." Some cities operate at a geographic disadvantage that was not the case a century ago. As the American population has moved they find themselves farther from domestic markets forced to compete in the increasingly fierce global marketplace. Portland, Maine will never again have a geographic advantage as it once did being close to where most Americans lived and relying on waterpower. Likewise the once fabulously productive cities in the Northeastern and Midwestern "rust belt" have found themselves at an impossible disadvantage as tens of millions of their former residents, with the help of air travel and air conditioning, discovered their preference for living in warmer climates closer to oceans.

The second relates to where entrepreneurs with the talent to build scale companies live and want to live. One of the oldest of human proclivities still operates: smarter people want to live closer to each other. With cheap air travel, instant communication and near-free information this trend has only accelerated. Congregations of those most likely to create new companies happen because they can find each other with comparative ease. Some places are successfully accumulating more and more of what might be called the "economically productive creative class" mostly because they already have robust local economies with jobs to offer as well as being nice places to live. Austin, Miami and

Washington have undeniable advantages over Milwaukee, Buffalo and Cleveland when it comes to attracting youngsters who might build businesses.

Finally, the policy posture of local and state governments either signals "come" or "go" to new businesses and the entrepreneurs who will build them. There are no neutral political signals. A recent report correlates "freedom" from state to state with their "economic performance." New York, as the state with the least freedom for business, presents the best of case examples. In recent weeks Governor Cuomo and the state's legislature raised the minimum wage and indexed it to inflation, prohibited hydro-fracturing for at least another two years, and extended its income tax surcharge on its millionaires. New York's net outmigration in just the last two years exceeds ¼ million residents. Since 1980 the state has lost 12 Congressional seats! The governor's father, in his 1981 campaign for Governor famously lamented that New York was losing its college graduates because there were no jobs to be had. In the face of this never-reversed reality is it reasonable for New York cities to expect entrepreneurs will come to set up shop?

The opposite case, where public policy encourages new start-ups, is obvious. A mutual fund exists that only invests in businesses headquartered in Texas, Florida, Tennessee, both Dakotas and California. Of the six states most have no income tax. On the same index of business freedom that ranked New York 50th, North Dakota (with an unemployment rate between 2 and 3 percent) is ranked first. (California survives as a place to make business investments only because of the ongoing success of its Silicon Valley. And, the state does have the best protection for employees regarding non-compete restrictions imposed by previous employers. This is a critical positive signal to entrepreneurs!)

For any city to look to an influx of entrepreneurs to stimulate its economy it is clear that a mosaic of attractions have to be in place. Given the demand for their presence any place without supportive public policy cannot hope for entrepreneurs to drop in and make things better. Ersatz creative districts cannot substitute for environments that are really conducive to entrepreneurial activity. This being so, cities that cannot grow their own entrepreneurs and keep them, a hero's task in many places, are in serious trouble and have to stop hoping a solution will fall from the sky in the form of new businesses.