Women-Owned Businesses - Unintended Consequences Case Study

Since the 1990s and through the 2000s I have been hearing about how women are starting businesses at a faster rate than men. This was hailed as a triumph of changing gender roles and equality. I had my doubts about how the data was being interpreted which I'll outline below. Sophie Quinton explores a different aspect of female entrepreneurialism in Why Are Women-Owned Businesses So Small? .

Women now start businesses at higher rates than men do, and minority women start businesses at the highest rate of all. Yet women-owned businesses have fewer employees, lower sales, and less chance of survival than male-owned businesses, according to a 2010 Commerce Department report. The report found that women-owned businesses are smaller across every sector of the economy, from educational services to manufacturing.

Nobody is really sure why this dynamic exists, but Emilia DiMenco has a theory. "It really has to do with access to information, access to contacts, access to contracts, and to capital," says the head of the Women's Business Development Center, a Chicago-based nonprofit that has worked with Alva Rosales.

I think DiMenco's explanation, other than possibly the issue of access to capital, is pretty anemic and probably doesn't hold much water.

That other factors might be at least as important is signalled in this paragraph.

In general, female entrepreneurs are more likely to grow their businesses organically, without relying on outside capital. That's true of Alva Rosales, who used her own money to get her company started. "Especially from a Latina background—we prefer not to have to borrow, I think," she says. The approach has worked for her business, but she's also learned to establish lines of credit—just in case—and to think critically about financing.

Risk management and financial planning - yes, pretty critical.

My speculation in the 1990s and 2000s was that advocates were misinterpreting what was going on. Several observations, substantially anecdotal but I have not seen any data that rebuts them.

1) As a partner in a global consulting firm we were aggressively working to stem the outflow of talented women managers and senior managers (typically 25-35 years old). They had great educations and had built up ten or fifteen years of talent and then left the consulting industry. Obviously part of it is that consulting, with it endless hours, always on demand to clients, extensive travel, is relatively unconducive to the demands of parenting. But what I saw a lot of was former counsellees leaving to both start a family and start a business, usually in a very focused area of consulting and with a small client base. In that model, they were essentially working intermittently while spending the bulk of their time with their family. Not a bad model but it is, I think part of the explanation for increase in female entrepreneurship, and, pertinent to this article, a drag on average size of firm.

2) In that time period I was also seeing a lot of wives of successful businessmen in the generation just ahead of mine starting new businesses after their kids were grown and out of the house: cooking, real estate, businesses based on hobbies, etc. Where in past generations most of them might have become more involved in community or volunteer activities, it seemed like a greater proportion were starting small businesses. In most instances, these were not endeavours that had to actually make money or to grow. It seems disparaging to call them hobby businesses or vanity businesses, and I don't mean to disparage, but that was effectively what they were. Again likely to reduce the average size of the reported business as revealed in Quinton's article.

3) In the 1980s and 1990s there were a ton of Federal and State programs intended to encourage female in general and minority female in particular start-up businesses. Program set-asides, special access to subsidized loans, etc. I think some of this has slimmed down over the years but also suspect that the rudiments are probably sill in place. As with the housing crisis (where the Federal government loosened lending standards and pressured lenders to extend mortgages to otherwise unqualified borrowers leading to disproportionate forfeitures among minorities when the bubble burst), I suspect that the well-intentioned government programs had the unintentional consequence of bringing forward female business start-ups before they were ready to be founded.

Lets resort to Dr. Seuss' Sneetches to clarify. That population with Stars; those who are interested in starting their own business and are encouraged to so with cheap loans and set-asides to start a business. Presumably they have some experience, let's say five years. It is simple economics that if you make the cost of entry cheaper (subsidized loans) and the effort to sustain lower (guaranteed business through set-asides), then you will effectively move the normal distribution curve of capable candidates to the right. You will get more Sneetches with Stars starting businesses but you will also get a higher proportion that are less qualified.

All the rest, the Sneetches with no Stars on thars, face the normal hurdles, higher cost of starting and more competition to remain in business. Perhaps it takes ten years before they are able to start. Ten years of experience versus five. Five years older as well. The older you get, the more there is a premium to succeed (because your alternate opportunities narrow as you age). Once you are in a position to start a small business you are both more experienced in general, have had a longer experience of unprotected competition and you have a greater incentive to succeed.

So which group will have longer lasting businesses and larger businesses, those with Stars or those without. I suspect it is those without Stars.

These explanations are not an attempt to ignore that there are numerous women-owned businesses that match male-owned businesses in terms of motivation or experience or challenges. Rather, it is to highlight that, with subsidies, there are additional categories of business that don't match the levels of motivation, experience, or resilience to challenge, and that those subsidized businesses bring down the overall averages.

I suspect that these three factors; life-style businesses, vanity businesses, and subsidized businesses are probably the main explanation for the finding that these businesses are smaller. Motivated advocates always want to find that disparate outcomes are the result of evil intent or structural discrimination. My experience is that people are better than that, life is more complex than binary judgments and consequences are much more closely tied to individual choices than to abstract hypotheses.

What does it mean to think?

From The Trouble With Harvard:The Ivy League is broken and only standardized tests can fix it by Stephen Pinker.

It’s easy to agree with him that “the first thing that college is for is to teach you to think,” but much harder to figure out what that means. Deresiewicz knows what it does not mean—“the analytical and rhetorical skills that are necessary for success in business and the professions”—but this belletristic disdain for the real world is unhelpful. The skills necessary for success in the professions include organizing one’s thoughts so that they may be communicated clearly to others, breaking a complex problem into its components, applying general principles to specific cases, discerning cause and effect, and negotiating tradeoffs between competing values. In what rarefied ivory chateau do these skills not count as “thinking”? In its place Deresiewicz says only that learning to think consists of “contemplating things from a distance,” with no hint as to what that contemplation should consist of or where it should lead.

That is a wonderfully succinct description of what it means to think: "organizing one’s thoughts so that they may be communicated clearly to others, breaking a complex problem into its components, applying general principles to specific cases, discerning cause and effect, and negotiating tradeoffs between competing values." It almost serves as a checklist for major decisions. Have you:

* Organized your thoughts?
* Communicated clearly to others?
* Broken complex problems into constituent components?
* Applied general principles to specific cases?
* Properly discerned cause and effect?
* Resolved tradeoffs between competing values?

Each of these steps has, of course, plenty of subordinate elements. And for each, you have to be able to answer, "How would we know . . . ?" How would you know if you have communicated clearly?

What did socialists use for lighting before candles?

I grew up in Europe in the 1970s and there was a furrow of humor related to socialist and communist economies of the ilk: "we pretend to work and they pretend to pay us". The Washington Post has an update on socialism in Venezuela as illustrated by the fate of an industrial city, Ciudad Guayana. The article is A once-proud industrial city, now a monument to Venezuela’s economic woes by Nick Miroff.

In the comments section there is a socialist economy joke I haven't heard, probably for decades.

Q: What did socialists use for lighting before candles?

A: Electricity

There used to be books of these jokes. It would be interesting to go back and read one. Post-1989 and the fall of the iron curtain, everyone is to some degree a capitalist free marketer. It is easy to forget how passionately so many of the clerisy believed they knew a better alternative.

“Well then…” says Chen Sheng

From Radicalizing the Romanceless by Scott Alexander. A long essay with which I suspect I might be sympathetic but am finding my interest flagging. Something of a hypothetical abstraction overload of the cognitive circuits.

But there is this:

I’m saying the causal arrow goes the opposite direction from the one Barry’s suggesting. As usual with gender issues, this can be best explained through a story from ancient Chinese military history.

Chen Sheng was an officer serving the Qin Dynasty, famous for their draconian punishments. He was supposed to lead his army to a rendezvous point, but he got delayed by heavy rains and it became clear he was going to arrive late. The way I always hear the story told is this:

Chen turns to his friend Wu Guang and asks “What’s the penalty for being late?”

“Death,” says Wu.

“And what’s the penalty for rebellion?”

“Death,” says Wu.

“Well then…” says Chen Sheng.

And thus began the famous Dazexiang Uprising, which caused thousands of deaths and helped usher in a period of instability and chaos that resulted in the fall of the Qin Dynasty three years later.

The moral of the story is that if you are maximally mean to innocent people, then eventually bad things will happen to you. First, because you have no room to punish people any more for actually hurting you. Second, because people will figure if they’re doomed anyway, they can at least get the consolation of feeling like they’re doing you some damage on their way down.

Sturgeon's Law and Sturgeon's Revelation

Sturgeon's Law from The Claustrophile by Theodore Sturgeon.

Nothing is always absolutely so

Sturgeon's Revelation from Venture Magazine, 1958 where Theodore Sturgeon wrote:

I repeat Sturgeon’s Revelation, which was wrung out of me after twenty years of wearying defense of science fiction against attacks of people who used the worst examples of the field for ammunition, and whose conclusion was that ninety percent of SF is crud.

Using the same standards that categorize 90% of science fiction as trash, crud, or crap, it can be argued that 90% of film, literature, consumer goods, etc. is crap. In other words, the claim (or fact) that 90% of science fiction is crap is ultimately uninformative, because science fiction conforms to the same trends of quality as all other artforms.

Interesting to think it through. As a side note, it appears that Sturgeon's Revelation is now usually referred to as Sturgeon's Law and the original Sturgeon's Law ("Nothing is always absolutely so") has fallen from circulation. For this discussion I will use the original nomenclature.

Of the original Sturgeon's Law, "Nothing is always absolutely so", there is little to be said. It is an absolute categorical,and by its nature inherently a paradox. If nothing is always absolutely so, then so is the claim that nothing is always absolutely so. A contemporary version of the old Epimenides paradox (A Cretan philosopher who earned immortality with his paradoxical claim, "All Cretans are liars"). It is a self-refuting claim.

Interestingly though, while not technically true, it is usefully true. Most claims which we believe to be absolutely true have exceptions and Sturgeon's Law is a useful call to consider whether the absolute certainty in a claim is indeed warranted.

Sturgeon's Revelation sounds like a version of the Pareto principle which observes that for many functions 80% of X is caused by 20% of Y. However, it is not. Rather, he is pointing out a rhetorical strategy which I am not aware has a name which is based on a logical fallacy false analogy (comparing two unlike things). In any field you can establish some threshold of excellence (and any corresponding measure of excellence), whether it is 80%, 90%, 95%, or 99%. The threshold is meaningful but arbitrary. The measurement can be interesting. 90% of what? Sales volume? Citations? Positive critical reviews? It doesn't particularly matter. All you need is the measure and the threshold and all fields will have a similar distribution.

The real insight of the Revelation is that rhetorically people frequently/usually arrive at a conclusion by comparing two unlike things. In Sturgeon's example, they are denigrating Science Fiction by comparing the worst examples in Science Fiction to the best examples in another field. What you ought to be doing is comparing the best in one field to the best in the other field.

So when someone cites Sturgeon's Revelation, they might be calling attention to the mundane observation that in all fields 90% of everything falls below a measured threshold. Alternatively, when someone cites Sturgeon's Revelation, they may be, more relevantly, calling attention to the false analogy fallacy.

The doctrine of the sovereignty of sentiment over sense

From The Rush from Judgment by Theodore Dalrymple.

The triumph of the doctrine of the sovereignty of sentiment over sense would have delighted the Romantics, no doubt, but it has promoted an unconscionable amount of misery.

Experts and the future

From Edward Ellsberg in Under the Red Sea Sun.

“Experts” are people who know so much about how things have been done in the past that they are usually blind to how they can be done in the future.

Talent exodus from Blue Model cities

From A Look At College Degree Migration by Aaron M. Renn.

Net migration of people to or from metro areas is reported annually by the Census Bureau and widely discussed. Less well known is that their American Community Survey (ACS) provides migration figures broken down by characteristics such as race, age, income, and educational attainment. This lets us drill into finer grained details about who is moving where.

Here is a map of net migration of people with a bachelor’s degree or higher, based on data from the 2007-2011 ACS, with blue indicating net migration gains and red net migration losses:

These patterns of migration have a lot of implications. Walter Russell Mead refers to the Blue Model versus the Red Model; unionized, high welfare, high regulation, significant social policy intrusion cities or states versus laissez faire, thin policy, low regulation, right-to-work states. What is striking to me in this map is the implicit rejection of the Blue Model and endorsement of the Red Model. I am sure no person moving cities is thinking of it in those terms but that is the revealed preference of the torrent of talent from Blue to Red.

It is interesting to speculate on another aspect implicit in the map. Where are all the major media organs located? Primarily in the coastal traditional Blue Model cities losing intellectual capital. Where are the many complaints about media distortion originating? I suspect mostly in the flyover country which this map shows to be gaining intellectual capital. That raises the question: is the media biased or are they simply seeing a different picture from everyone else? Probably a false dichotomy. The bias is well documented but it probably has to do both with self-selection AND the fact that being where they are, they are seeing things differently from everyone else.

Easier to provide things than to inculcate values

An observation reminding us that all facts can be viewed from either an absolute or a comparative perspective. From What Ferguson Means for Urban Planning by Randal O'Toole.

The sad events in Ferguson, Missouri are being used by urban planning advocates to popularize their latest cause: suburban poverty. Ferguson is "emblematic of growing suburban poverty," says the Brookings Institution. "Hit by poverty," says CBS News, "Ferguson reflects the new suburbs." According to a Brookings infographic, between 2000 and 2011 the numbers of central city poor grew by 29 percent while the numbers of suburban poor grew by 64 percent.

There was a time that the suburbs were demonized because only middle-class and wealthy people lived there, leaving poor people in the inner cities. Now that lower-income people are living in the suburbs, the suburbs are being demonized for having "concentrated poverty," with a distinct implication that wealthy whites have moved back to the cities leaving the undesirable suburbs to the poor and minorities.

The reality is that all demographic classes -- all ages, races, and income levels -- are growing faster in the suburbs than the cities. The suburbs offer less congestion, lower-cost housing, and often better schools and other benefits over the cities. Instead of turning the movement of low-income people to the suburbs into some kind of crisis, this movement should be celebrated as a success.

Someone, I forget who, though I think it is likely to be Glenn Reynolds, has observed that most US government policies are structured to provide people with the outcomes of the the middle class life without imbuing them with the attributes that generate a middle class life. That can be viewed as naive optimism or less charitably as magical thinking. It is far easier to give things than to inculcate values but only the latter is sustainable.

The behavior-shaping power of a cultural consensus

Sometime in the recent past, I posted about an essay that was commenting on the inappropriateness of applying the lessons learned from the decade long anti-smoking campaign to other social pathologies. IIRC smoking has declined from 50% of the population to 20% or so today and through a mixture of taxation, education, social policy, etc. In that essay, the author was pointing out that taking those lessons learned and trying to apply them to education was a doomed effort, even though many advocates were doing just that.

Here is a related example from Teen Births and the Complexities of Culture by Ross Douthat. The teen birth rate has fallen nearly 40% in the six years between 2007 and 2013. Great news. How did that happen and can we replicate it for out-of-wedlock births, another social pathology with gargantuan consequences? Douthat suggests that the circumstances leading to reduced teen births cannot be replicated for out-of-wedlock births.

This seems like a suitably-humble read on the available data, but as you’d expect I have a few less-immediately-measurable theories about what’s going on here. The first is that we shouldn’t underestimate the behavior-shaping power of a cultural consensus: We live in a society that’s deeply, anxiously divided over issues related to sexual activity and childbearing, but the idea that we should (and, just as importantly, can) reduce the teen birth rate unites just about every faction in American politics and culture, from abstinence pledgers to Bloombergist technocrats to left-wing sex educators, and done so has more or less since the teen birth rate spiked in the 1980s. (Even in Hollywoodland, where permissiveness generally rules the day, quickie divorces and unwed baby bumps are unremarkable, but pregnant teenage starlets and heartthrob baby daddies − for sound careerist reasons, of course − are vanishingly rare.)

True, this consensus’s “red” and “blue” variations, emphasizing chastity and contraception, are very different on the extremes (and the influence of pro-life sentiment may play an interesting role that’s too complicated to get into here) … but they blur together in many contexts, and even when left and right promote radically different means the basic message and sought-after end is much the same: However you manage to avoid getting pregnant as a teenager, avoid it you definitely should. And as Kliff notes, both emphases have seen results: teen contraceptive use has increased overall since the ’80s and teen sexual activity has been increasingly delayed, more high schoolers are virgins, etc.

One take-away from this essay is the suggestion that too often we divide ourselves and argue to the point of inaction based on the means to an end when we both agree on the end. If our political leaders would spend more time exploring where there is agreement on the goals and then exploring the means to achieve those ends, we might be far better off. We also too quickly fall into false-choices. Does it matter which strategy, abstinence or contraception, is the best mitigator when both work well under different circumstances?

The problem is that there is money in focusing on the means and there is very little opportunity for soft corruption in focusing on the goals. There are plenty of motivated actors who have a stake in the means to solving a problem and there are relatively few interesting in figuring which problems to solve and openly-mindedly figuring out how to solve them.

The other take-away is that all the different, complex, dynamic social pathologies have different attributes and different root causes from one another and over time. Its not an engineering problem where a static problem can be solved, the solution tested, and then deployed for uniform outcomes. With social policies, there are probably some very generic macro-lessons to be learned, but most likely there is relatively little knowledge that can be effectively transferred from one arena to another. I suspect that what we often refer as an inability to scale (what works on a small scale does not work on a large scale) might really be masking the fact that there are actually multiple different problems.