Tuesday, July 03, 2007

Reich: Financial Vs. Product Entrepreneurship

Robert Reich explains the difference between the traditional product innovation, or as Reich calls it "Product Entrepreneurship" and the new form of investment innovation which he calls "Financial Entrepreneurship." As he explains in his article, unlike product innovation, the new investment innovation does not lead to new product innovation. It doesn't build a better mousetrap; it makes money by charging fees for managing investment pools. Furthermore, as Reich explains, it receives very favorable tax treatment compared to traditional labor through product entrepreneurship or even public corporations.

America is the greatest entrepreneurial nation in the world. But there are really two kinds of entrepreneurs here – product entrepreneurs and financial entrepreneurs –- and only one of them truly builds the economy. Product entrepreneurs find new ways of satisfying customers. Financial entrepreneurs find new ways of ... well, making money off money.


Often they have to cut long-term investment – research, employee development, and basic innovations – in order to pump up profits so they can dump the company back on the stock market at a big profit.

What’s the answer? At the very least, stop giving tax financial entrepreneurs huge tax advantages over product entrepreneurs. Treat their compensation as income, not capital gains. And tax their partnerships that go public at the same rate public corporations are taxed.

Warren Buffett has warned about this very issue of the tax treatment of hedge fund managers, which I have linked to before.

Mr. Reich's article is well worth a read and it is not very long.

No comments: