The slow-motion collapse of American entrepreneurship: the experts tell us new business start-ups will save the American economy. So how come there are fewer and fewer of them?

• Author: Lynn, Barry C.
• Position: THE FUTURE OF SUCCESS

"For all its current economic woes," the Economist magazine recently asserted, "America remains a beacon of entrepreneurialism." That idea is at the heart of America's self-image. Both parties celebrate entrepreneurial small business as the fount of innovation and growth. Even if America no longer manufactures its own smartphones or computers, we cling to the idea that American entrepreneurs invent most of the new products and services that matter to the world.

Americans also view entrepreneurialism as a vital route to upward mobility--a way for average people to build wealth, in the form of a business venture that can be passed on to one's children or sold upon retirement. Whether it's the family farm or the local diner, small businesses have traditionally provided citizens not only with income but also with a place to teach kids the value of responsibility and hard work.

Then there's the role entrepreneurs play in creating jobs. One recent study by the Small Business Administration (SBA) showed that businesses with fewer than twenty employees were responsible for more than 97 percent of all new jobs between 1988 and 2004.

More broadly, Americans have traditionally seen entrepreneurship as a crucial measure of the nation's political vibrancy and liberty. We hold that the more independent citizens we have, the more widely power, responsibility, and voice will be distributed, and hence the stronger our democracy will be. The basic thinking here was best expressed by dames Madison more than 200 years ago, when he wrote that the "greater the proportion" of citizens who are their own masters, "the more free, the more independent, and the more happy must be society itself."

Yet how much does this faith in the vigor of American entrepreneurialism stand up to scrutiny? To a casual news consumer, it might seem that it has never been easier to launch and grow a new venture. One highly publicized study claimed that the United States leads all major industrial economies in the percentage of the adult population engaged in entrepreneurial activity. "We are in the midst of the largest entrepreneurial surge this country has ever seen," a CNNMoney article tells us. Or, as the Council on Competitiveness has observed, "One of the critical drivers of America's economic dynamism and flexibility has been the strength of its entrepreneurial economy."

Last summer, however, a report by the Ewing Marion Kauffman Foundation exposed a big crack at the base of this widely held belief. "Even before the overall economy started its most recent downturn," the authors noted, the number of business births had already "peaked." Worse, with the onset of the Great Recession these numbers began to "plummet," with the number of new independent employers dropping 27 percent in only three years.

This spring Kauffman followed with a second report that was in many ways even more dire. Compared to a generation ago, the report said, it is now much harder to start a business in America and keep it running. In 1980 "young firms"--those less than five years old--accounted for almost half of all going concerns. By 2010, their share of the total had collapsed to less than 35 percent. And as the Kauffman authors made clear, this doesn't only mean less opportunity for America's entrepreneurs. It also means millions fewer jobs every year, and much less economic growth.

Inspired by Kauffman's report last summer, we set out to examine for ourselves the health of America's entrepreneurial economy. What we discovered is that the decline in entrepreneurship is even bigger and more systemic in nature than was clear from Kaufmann's work. America really is undergoing a radical change in the structure of our...