NBER Entrepreneurship Research Boot Camp

Here’s a great opportunity to learn more about entrepreneurship research for PhD students and young scholars/career academics. While the boot camp will hardly cover issues such as judgment and imagination, which we commonly research and talk about here at the McQuinn Center, it should provide a great overview of mainstream/mainline entrepreneurship research – particularly what Peter Klein (2008) calls the occupational and structural approaches.

Call for participants below the fold. Read more of this post

The New Coasean Entrepreneur

In a recent issue of Small Business Economics (Vol. 40, Issue 2), Siri Terjesen and Ning Wang interview Ronald Coase (gated copy here). One of the topics touched on is entrepreneurship, and Coase seems to “come out” as quite a Schumpeterian. In answer to the question of what entrepreneurship is, Coase states:

Entrepreneurship involves undertaking new business initiatives, such as setting up a new firm, creating a new market, inventing a new product, experimenting a new way of marketing, retailing, or organizing the production line, and bearing the related risks. These are all novel business endeavors, their outcomes cannot possibly be known in advance. Most of these attempts may fail, but the few successful ones help to introduce fundamental changes to the economy, keeping it innovative.

Interestingly, this entrepreneur is distinct from the “entrepreneur co-ordinator” found in his groundbreaking 1937 essay “The Nature of the Firm,” who is simply a manager who supplants the price mechanism in “directing” resources.

Coase further states that (his Schumpeterian-type) entrepreneurship is important, because it:

is the fountainhead of endogenous changes in the economy, bringing about technological, institutional, and organizational innovation and creating new knowledge. Entrepreneurship drives economic evolution, determining its speed and direction.

Coase also echoes Baumol’s (1968) view that entrepreneurship is absent from economics, for which economics suffers:

[It] is unfortunate … that economics remains detached from the ordinary business of life. … economics does not have much to say about entrepreneurship.

Interestingly, Coase emphasizes that entrepreneurship is primarily of indirect importance to economists, since entrepreneurship has a “lasting impact on the economy.” Coase here goes back to the origin of his ideas, which were spurred by Hayek’s lecture series on the structure of production and the business cycle at LSE in early 1931 – when Coase was an undergraduate business student. As Coase has stated elsewhere, Hayek’s view of capital and the structure of production “absorbed” both students and faculty at LSE for months.

Coase shows how his view on this has not changed, stating that “the structure of production provides a framework to understand entrepreneurship.” In fact, states he: “any trace entrepreneurship leaves on the economy can be found in the structure of production” and it is in this sense that entrepreneurship should be considered and perhaps included in the study of economics.

I have quite a few disagreements with Coase, especially the ideological presumption on which he seems to base his view of transaction costs (which I discuss in a paper currently under review for the Journal of the History of Economic Thought), but his views on entrepreneurship as expressed in this interview is right up my alley. In fact, it dovetails very nicely with my own work on the firm as an entrepreneurial vehicle to establish new structures of production.

Though Coase in his answers repeats some of which has already been made available in articles such as the three lectures published in 1988 (Vol. 4, Issue 1), the interview is a good read. The entrepreneurship part is perhaps that which is most interesting.

In Memoriam: James M. Buchanan (1919-2013)

James M. Buchanan (1919–2013)

It is almost two months since economist and Nobel Laureate James Buchanan passed away. There are really only two of Buchanan’s many works that ever made an impression on me: his Cost and Choice, and his and Gordon Tullock’s Calculus of Consent.

The former made an impression because it is very good (in my view Buchanan’s best work), clearly written, and takes a firm stand for economic (i.e., opportunity) cost as opposed to accounting cost. In this book, Buchanan comes across as being quitean Austrian. Or, perhaps, as standing firmly in the LSE tradition. To me, Buchanan on cost is as good as Kirzner on capital. Unfortunately, most of Buchanan’s other works mean as little to me as Kirzner’s. And that’s not much.

The Calculus of Consent was difficult to read while fairly assessing it. Don’t get me wrong – it is absolutely not hard to read. On the contrary! But this is a true classic, a cornerstone of public choice theory, and as such much of its great contributions have been iterated a billion times over in later works (often by less known but more modern scholars). So when I finally got to reading it (in 2008?), it was old news – I already knew pretty much all of it. It was a nice read, no doubt, and it made one heck of a difference when it was first published. But as so many classics, whether fiction or scholarly, you already know most of what’s between the covers before you actually pick it up and read it. (A bibliophile like me still thinks it is a thrill to read a classic just because it is a classic, and seeing how the ideas and/or plot originally unfolded – but it is hard to get excited about ideas that one already knows.)

The rest of Buchanan’s work? Never made much of an impression. I have read excerpts, individual chapters, essays, and several summaries of his works and legacy, yet – though his influence was undoubtedly great – I find it difficult to get excited by his work. I have a bunch of his books in my book case, but most of this collection remains unread. Perhaps one reason is that his thinking doesn’t appear to be radically different from many others’. His economics was not all that different from mainstreamers’ economics, but he made “radically” new applications of this theory.

This being said, it would be an unforgivable mistake to simply dismiss the Buchanan legacy.

Perhaps one thing that I always found a bit troubling with Buchanan, but that I was never able to pinpoint and therefore it remained hidden and implicit until very recently, is what David Levy and Sandra Peart summarize as Buchanan’s “ability to rethink a question from the foundations unencumbered by what he had written on the topic.” I realize this can (and perhaps was meant to) be interpreted as something positive in the sense of being willing to change one’s mind, reassess one’s findings, a sense of open-mindedness. But it can also be quite the opposite.

This “ability” of disregarding what one already knows is something that has always bothered me quite a bit with great scholars and thinkers such as F. A. Hayek and Ronald H. Coase. The former called himself a “puzzler” or “muddler” rather than a “master of his subject,” and the latter claimed his thinking was freer and better by not being constrained by [economic] education. One of course has to be able to reassess one’s conclusions when exposed to new data or better explanations. But this is hardly the same thing as (constantly?) rethinking one’s work and “reinventing the wheel.”

In fact, I would be inclined to think scholars occupied doing the latter have failed in their undertaking. Rethinking should often turn out to be a result of poor original thinking, subpar theorizing, and flawed logic, rather than honest open-mindedness and curiosity. This is not to say stubbornness is an important and unfailing quality; but being stubborn when one is right is not a vice, it is a virtue.

Nevertheless, James Buchanan is one of the great economists and scholars of the 20th century. He should be remembered as such.

Freedom and Entrepreneurship?

The relationship between institutions and economic development has been studied in numerous papers, and the findings are rather well aligned: institutions supporting the freedom of individuals to make private choices have a positive effect on economic growth and entrepreneurship. Institutions that are core to so-called liberal democracies, such as protection of property rights, the rule of law, and procedural/formal equality, are often found to be directly and positively correlated with the creation of economic wealth.

This already established relationship is further studied in a new study from the Mercatus Center at George Mason University, which takes a broader approach and studies the effect of freedom in general on entrepreneurship (measured as startup growth) and, hence, economic growth and prosperity. The study, Freedom and Entrepreneurship: New Evidence from the 50 States authored by Joshua C. Hall, John Pulito, and Benjamin VanMetre, finds that there is indeed a positive, empirical and significant relationship between freedom and entrepreneurship. But disaggregating the composite measure of “freedom” into “personal freedom” and the more commonly studied “economic freedom,” they find that the latter is the driver of this relationship. Hence, personal freedom is not a significant factor in entrepreneurship.

This finding is very interesting and raises quite a few questions. For instance, what does this mean in terms of policy and the attempts to help the developing world “catch up” with the developed ditto? And what does this tell us about the People’s Republic of China, which combines (limited and regional) economic freedom with personal unfreedom? (It would also be interesting to relate this finding to e.g. the thesis in Ronald Coase’s latest book, How China Became Capitalist.)

Interesting research questions such as these are, of course, in addition to the moral or ethical dimension of the policy suggestions that can be derived from these findings. What are the possible implications of learning that entrepreneurship and economic growth and prosperity result from economic but not personal freedoms?

From a McQuinn Center point of view, however, other questions emerge as potentially more interesting. If a quantitative measure of startups is positively related to economic but not personal freedom, where does entrepreneurship as judgment come in? Entrepreneurial judgment is not necessarily solely economic, but has a distinct personal or social flavor to it.

The sound entrepreneurial imagining of future opportunities under Knightian uncertainty may be derived partly from the experience of economic action (and the understanding of economic causal relationships), but the lack of personal freedom should also have an effect the entrepreneurial abilities of would-be judgmental entrepreneurs. It seems likely that personal unfreedom should affect entrepreneurially minded people’s scope of thinking and their judgmental ability. A related question: what is the role of personal freedom to such types of free-thinking that causes innovation? And do innovation and entrepreneurial judgment therefore call for re-aggregation of the freedom measure?

The implications of this study’s contribution, especially the research questions the findings give rise to, are potentially enormous. The study’s “mere” extension of the existing literature opens up for a lot of very interesting research questions.

Global Entrepreneurship Week in Missouri

Next week is Global Entrepreneurship Week, a Kauffman Foundation-led celebration of entrepreneurship worldwide. In fact, the “GEW” is

the world’s largest celebration of the innovators and job creators who launch startups that bring ideas to life, drive economic growth and expand human welfare

Not only is the world-renowned Kauffman Foundation located in Missouri (Kansas City, Mo., to be precise), but the GEW is celebrated with plentiful activities all over the state: in KC, all along the I-70 through Columbia (with the esteemed McQuinn Center) to St. Louis, as well as in the southwest and southeast corners of the state. These activities all serve to “inspire young people to embrace innovation, imagination and creativity”. Missouri is thereby well represented in the GEW’s participating 120 countries with 40,000 events worldwide.

In addition, Columbia, Mo., is turning into an entrepreneurial powerhouse bound for international impact. This little town, hometown of the University of Missouri and the McQuinn Center, has quite an entrepreneurial community. The town is home to awesome entrepreneurs Brant Bukowsky (twice on the inc500 list) and Brent Beshore (with inc500-listed AdVentures – #28 in 2011), the Museao building for entrepreneurial events such as the very successful Startup Weekend, the recently launched downtown incubator, the MU Incubator, the Entrepreneurship Alliance, the MU Entrepreneurship Minor, the Small Business and Technology Development Center, the Business Research and Information Development Group (BRIDG), and local investors such as the angel investors’ network the Centennial Investors.

From an entrepreneurial point of view, “CoMo” may very well be the place to be. But first, let’s celebrate the Gobal Entrepreneurship Week.

Dan Spulber’s Entrepreneur

ImageThe last couple of weeks I’ve spent time to go through most of Dan Spulber‘s Theory of the Firm: Microeconomics with Endogenous Entrepreneurs, Firms, Markets, and Organizations. Spulber here makes an interesting attempt at incorporating the entrepreneur in the economic theory of the firm through providing clear boundaries of what is entrepreneurship and how it is related to firm creation. Entrepreneurs, Spulber writes, are “the prime movers—the makers of firms.”

What he manages to do is offer an entrepreneurial aspect of the common consumer, who at any time can become an entrepreneur through founding a firm. This is what Spulber denotes the “foundational shift” into entrepreneurship, and the entrepreneurial stage continues as long as the firm’s objectives are identical to the founder’s. In other words, entrepreneurship becomes the phase from starting a firm (i.e., the establishing of the firm) to the firm becoming its own entity with a set of objectives that in some way deviates from the objectives of the person who founded the firm. 

This way, Spulber limits the entrepreneurial phase in time and identifies a clear starting point as well as a clear end-point for what is termed entrepreneurship. While this may not be easily measured empirically, the framework is specific enough for theoretical enquiry. And, for this reason, the contribution should be of value to those of us theorizing on entrepreneurship and the firm. What the field needs is structure in the sense of boundaries and theoretical frameworks to support a standard set of research, and Spulber certainly helps in providing this.

The purpose of the firm is intermediated exchange such that exchange between consumers (the starting point population in Spulber’s theory) is carried out indirectly through a firm. Firms therefore pop up where it is cheaper/more efficient with intermediated exchange than direct exchange between consumers, i.e. where consumers are better off coordinating their transactions through organization.

Spulber defines the firm as “a transaction institution whose objectives differ from those of its owners” (p. 63). While this definition may be helpful, it seems a bit circular: It only raises the question of what this institution whose objectives differ is – saying that it has differing objectives doesn’t say much about its nature. While seemingly insufficient, Spulber’s definition is much in line with other definitions of firms in the literature. Like Grossman and Hart’s definition of the firm “as being composed of the assets (e.g., machines, inventories) that it owns” (1986, p. 692). What exactly is this “it” that owns assets?

Spulber also mirrors Coase’s original article (1937) when saying that the firm is what exists if it is more efficient (cheaper) than not existing. And just like Coase, it is a bit too obvious – and not very helpful. The fact that a firm, if it exists, is more efficient than if it would not exist seems to follow directly from economic theory, and doesn’t offer much explanation for what it is or how it is organized.

Please note the emphasis on “what” and “how.” The “why” has already been discussed by Coase, Williamson, Spulber and others; the problems that remain are the definition of the firm (what is it – is it just a legal entity?) and how it comes to be. Coase does not get into asking (and even less answering) the question of how firms emerge from the theoretical starting point of the “atomistic” market. This is the much more interesting question, and explaining how necessarily also provides guidance as to what it is and why it is founded.

This, incidentally, is what I do in a couple of my own papers currently under review.

While Spulber doesn’t move much further into answering the question of how or gets more specific as to the question of “what,” the book is an interesting read for anyone interested in entrepreneurship and the firm. It is a contribution to both fields, especially where they intersect, and provides a nice framework for further study. I highly recommend it, even though theorists of entrepreneurship and the firm without inclinations for economic theory may find it a bit tedious due to the mathematical notation.

There is no doubt that this book is an important contribution to the literature and that it deserves much more attention. Spulber’s book provides much of the rigor needed for the study of entrepreneurship and the firm.

Entrepreneurs Do It Themselves

Sometimes a topic opportunity emerges that is simply too good to overlook. This is the case with President Obama’s latest gaffe, which has turned into quite an Internet storm of “memes.” Said the president:

If you’ve got a business, you didn’t build that. Somebody else made that happen

Of course, it is easy to understand what this can mean: without customers there can be no business; without employees there can be no firms; without suppliers there can be no end-products; and so on. These are all true. The interpretation that no businesses are successful without government, often found on liberal blogs, is far more of a stretch. Businesses may transport their goods on public roads, but do they have an alternative? And more importantly: if government didn’t supply roads, would it be impossible to run a business firm? Obviously not. There would be other, non-governmental, means of transportation. Such as private roads.

But if we look closer at the president’s statement, it is obvious that he has no understanding for what Mises calls “the driving force of the market”: the entrepreneur. If a business firm is simply putting different inputs together, then obviously what you do is not unique, novel, pioneering – or independent of the actions of others. In fact, “anyone” could do the same thing and, in fact, “anyone” probably would: why should we expect people not to act on an obvious opportunity to make money?

The problem is that for a generous interpretation of the president’s statement to be true, it must be as entrepreneurless as neoclassical economic theory. As Baumol (1968, p. 66) stated it:

The theoretical firm is entrepreneurless – the Prince of Denmark has been expunged from the discussion of Hamlet.

The president’s view of the market (and the firm) is just as entrepreneurless; there is no Prince of Denmark in the federal government’s Hamlet.

The entrepreneur is the innovator, the organizer, and the one exercising superior judgment to produce value for consumers. Entrepreneurship is hardly just combining existing pieces according to already existing blueprints – it is about creating new pieces, fitting them in new ways, and creating something new. It is about independent and pioneering vision – and taking the step from dream to reality through action. In this sense, an entrepreneurial creation is unique and something we have not seen before. It is consciously aimed for and created, even if it utilizes (previously undiscovered) strengths of others.

So, Mr. President, the fact is: the entrepreneur did build that.

Price Stability and Entrepreneurship

Monetary economists tend to fall into one or both of two categories: they are proponents of either price stability or inflation. Some, like University of Chicago’s Luigi Zingales, proposes a government entity to guard us from inflation. Others, like Princeton’s Paul Krugman, seems to see only problems with price stability – but sees only good things come out of inflation.

Interestingly, there is little talk about entrepreneurship when monetary theorists talk. An exception is the 20th century economist Ludwig von Mises, an economics system builder who developed a subjective theory of money as well as connected it to the market’s structure of production, entrepreneurship, and linked them all in a theory of business cycles.

Whether or not we adopt Mises’s views, it is fascinating to adopt an entrepreneurial perspective when discussing monetary theory and policy. What is the role of entrepreneurship and how does entrepreneurship fare under or affect market prices?

Well, let’s imagine an entrepreneur is either alert to arbitrage opportunities (as in Kirzner, 1973), is an innovator that creates new combinations of resources (as in Schumpeter, 1911), or exercises superior judgment in bearing uncertainty in productive enterprises for profit (as in Knight, 1921). Then imagine that this entrepreneur acts under any conceivable monetary regime. What is the effect of entrepreneurship on market prices? Read more of this post

Bypass Entrepreneurship

FOX News writes about the recent accident at Heart Attack Grill in Las Vegas, NV. A male guest to the restaurant, who had ordered a “triple bypass burger,” suffered cardiac arrest while attempting to beat the burger. An ambulance was called to transport the man to a nearby hospital.

This is of course a tragedy for the man (whom we’re told survived and is in relatively good health considering the circumstances). But it is nevertheless an event that raises a number of questions about the responsibility of entrepreneurs. These questions were immediately bypassed (pun intended) and an “obvious” answer assumed as politicians, government agencies, and lobbying groups supposedly looking after our health call out for regulation. But for the not-so-quick-to-jump-the-gun when something happens, the questions still need answering. Regulation of what?

In this particular case, the guest to the restaurant ordered the “heart stopper” despite its name (“triple-bypass burger” – and the fries are called “flatline fries”) as well as signs on the door saying the food is hazardous to your health. Does the entrepreneur’s responsibility go further than declaring what he’s selling (and selling what he’s declaring)? And if it does, how far does this responsibility go? And what is the responsibility of the authorities?

But these questions lead back to the implied yet fundamental question that must first be answered: what is the responsibility of the consumer? If, as in this case, the consumer is fully informed (as in economic models) yet suffers adverse effects from his choice. Do we have a right to take this freedom and responsibility away from him (whether for his own good or not)?

From a scientific point of view, the important question is what are the effects on the functioning of the market. If we transfer responsibility for actions to someone who is not the actor – what are some far-reaching economic consequences? And this raises the question: how is entrepreneurship (using whatever definition) affected? Regulating “bypass” burgers could very well bypass entrepreneurship, and the consequences in terms of economic growth may be devastating. This means: devastating to people’s health, since without innovation, invention, and new approaches – that is, entrepreneurship – we may not make the advances in health or health care that we otherwise would.

The problem, of course, that we cannot see these effects. We cannot even imagine them, since what the future brings is what entrepreneurs themselves imagine. So how can we tell? Do we dare to regulate?

via Russ Coff’s Facebook post

Market “Solutions” as Social Engineering

In an article on the HBR Blog Network yesterday, The Market needs a Market Maker, Tammy Johns writes about the competency mismatch in the labor market. This is correct observation: there is at the same time a great surplus and a great shortage of labor. The reason for this is that the existing labor does not have the skills and competencies that employers seek, which causes both unemployment and suboptimal production. The labor market simply isn’t functioning.

Johns offers a Grand Idea for how to solve the problem: a centralized labor market maker, “a team that proactively manages supply and demand.” While this may intuitively seem like supplying a force of which the market seems short, it is quite a Soviet-style solution. And it completely disregards the question of why the labor market isn’t functioning, and what we may learn from the “strange” present state of it. In other words, to solve the problem, shouldn’t we first ask why there is too much supply and too much demand at the same time?

So why doesn’t Johns ask this question? We don’t know. But we can answer it. Rather than appointing a “maker” to force supply and demand to equilibrium (a point toward which one would expect market forces to lead), it can easily be shown that the problem in the market is due to the boom-bust cycle. The available, employable labor is educated according to the misguided structures of production during the boom – which in retrospect were unsustainable. We are therefore currently in a situation where we know that there is a huge social malinvestment in skill and education.

This is actually what also happened during the Great Depression. While we read about very high unemployment during the depression, what we do not often hear is that unemployment was very high for some and not at all high for others. They experienced then what we experience now: a structural malinvestment in skill that comes crushing down in need of correction as the true market demand for products and services is finally revealed.

Nobody is interested in hiring coachmen in the age of automobiles. But this is in itself not a problem, since society doesn’t instantaneously shift from horse-and-carriage to automobiles. The shift is gradual, so while there is unemployment for some individuals it is not a structural problem. And we wouldn’t expect a whole generation to seek apprenticeships to be coachmen while society is tending toward automobiles. We have a structural problem if, for whatever reason, supply of coachmen is artificially kept way above the market rate.

Johns’s is here to, when the problem becomes apparent, institute a resourceful (and omniscient?) government team to reeducate the apprentices and make everybody into automobile mechanics. But is this a prudent solution? It doesn’t address the cause but only attempts to do away with the symptom, and who knows what problems we might face after driving a whole generation into becoming Ford Model T mechanics? Perhaps we find ourselves in a situation where we have further progress and innovation so that the Model T is replaced with a new car – with a whole generation of Model T mechanics but nobody to deal with the new types of automobiles.

A “labor market maker” is but a kind of theoretical political entrepreneurship that amounts to nothing less than social engineering. And there is much evidence that the current problem in the labor market is not a problem of the market – but of politics and social engineering. Is more of the same thing really a solution to the problem? Probably not. To solve the problem we must understand what caused it, which means we must turn to economic theories of what caused the boom – and what caused the bust.

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