Introduction: the next frontier: the future of America's economy is riding on its entrepreneurs. The future of its entrepreneurs is riding on government.

• Author: Kedrosky, Paul
• Position: SPECIAL REPORT ON ENTREPRENEURSHIP

This spring, during the battle over the stimulus package, I stumbled upon a television news program where analysts were debating whether government or entrepreneurs would get us out of the economic crisis. As someone who both invests in and studies the history of business start-ups, I was glad to see the subject of entrepreneurship being discussed. But the way the question was posed was hopelessly wrong: the notion that our economic salvation lies in either government or entrepreneurs is a classic false choice. And yet it corresponds to certain battle lines that many have drawn over economic policy.

On one side is the belief that government stimulus spending will be the primary force in our eventual recovery. This view holds that the key to exiting economic downturns is countercyclical public spending to keep the U.S. economy closer to its optimal level of activity. You should deficit-spend when the economy is operating at less than its full capacity; you should shrink spending and manage debts when the economy is back to normal. It is, in short, the Keynesian view, named for economist John Maynard Keynes and widely held by congressional Democrats. And there's some truth to it. Massive government spending can cushion the blow when an economy shrinks as severely and as quickly as this one has. But imagining that a fiscal stimulus, however outsized, can compensate for indebted consumers hell-bent on saving their way back to (relative) solvency is high-definition dreaming.

The other policy perspective is that greater government spending only leads to higher tax rates, hence to declining incentives for investors to take risks. Better, in this view, to allow the economic crisis run its course, permit large firms to collapse, and let entrepreneurs pick up the pieces and create new companies, jobs, and wealth. This is the "Hayekian" view (a la Austrian economist Friedrich von Hayek), widely held by congressional Republicans, and there's some truth in it, too. Higher tax rates will, at some point, undermine investment incentives (though the evidence suggests that we're not very close to that point yet). Downturns--especially severe ones--do disrupt markets and provide opportunities for innovators. Microsoft, Allstate, Morgan Stanley, and many other companies rose from the wreckage of economic downturns. Small companies have been the primary source of job creation in the United States over the last few decades. Unless you expect that trend to change, start-ups and small companies must, by definition, play a major role in any meaningful recovery.

But the purist Hayekian view is as misguided as the purist Keynesian one. For one thing, downturns are just as hard on entrepreneurs as they are on the rest of us. There is less investment capital available for start-ups, prospective customers are less willing to spend money, and fewer people and companies want to take chances buying from "risky" start-ups and small companies. All of these issues cannot be simply brushed aside with a wave of a laissez-faire wand. More broadly, the followers of Hayek tend to ignore the vital role government has played in opening up new entrepreneurial opportunities, from Thomas Jefferson's Louisiana Purchase, which made land available to generations of frontiersmen, to the Defense Department's creation of...