McQuinn Center on the Hill

Yesterday I addressed the Subcommittee on Domestic Monetary Policy and Technology of the House Financial Services Committee on the structure and governance of the Federal Reserve System. My written and oral testimonies focused on the Fed as an organization — is it designed, operated, and monitored appropriately, given what we know from academic research and historical practice? I also described the influence of monetary policy, and other actions taken by the Fed since 2008, on entrepreneurship.

HBR Wants to Help You

“How can we help you, the entrepreneur?” asks the Harvard Business Review. Follow the link to take a short survey, and get rewarded with a free copy of Noam Wasserman’s “The Founder’s Dilemma.”

Of course, it would be nice if policymakers would construct a similar survey, so entrepreneurs could reply, “Get out of our way!”

A Sobering Look at Microcredit and Microenterprise

Randall Kempner, writing on the Harvard Business Review blog:

Development agencies have promoted microfinance — the provision of small financial loans to poor people — because it is supposed to help poor people move out of poverty. After a comprehensive review of existing studies, with particular focus on recent randomized control trials, [researcher David] Roodman says that just isn’t true. “On current evidence, the best estimate of the average impact of microcredit on the poverty of clients is zero,” he argues. . . .

Another reason for justifying microcredit is that it offers poor people, particularly women, greater control over their financial lives. Roodman says the evidence is mixed on that count too. Some women may have been empowered, but others have been forced to repay loans when it wasn’t best for them. Cross-collateralization groups become burdensome, not emancipating, and at their worst, they lead to situations where people rob from each other to pay off their debts.

The reference is to David Roodman’s 2011 book Due Diligence: An Impertinent Inquiry into Microfinance. I have written skeptically about microfinance in the past. While effective capital markets, including those for very small loans, are critical elements of a market economy, it is unclear that microlending per se matters much, and the current emphasis on microenterprise ignores the fact that, historically, economic development is typically driven by large-scale enterprise, capital accumulation, and scale economies, not indigenous small business.

Strom on the Value of Academic Entrepreneurship Research

Kauffman Research and Policy Director (and former MU economics professor) Bob Strom on the value of academic entrepreneurship research for public policy:

While the influence of academia on public policy is not often observed directly, academics studying entrepreneurship contribute practical information and real insights that shape and support policy discussions. At the most basic level, university research on entrepreneurship deepens policymakers’ understanding of the phenomenon and its importance, giving them the information they need to consider the effects of proposed legislation and existing policies on entrepreneurial activity.

Economists at universities, for example, have highlighted for policymakers the role of new businesses in job creation and economic growth; identified obstacles to new business creation; elucidated the economic and institutional environments in which entrepreneurship flourishes; and pointed to some unintended consequences of existing legislation for entrepreneurs.

But the academic influence on entrepreneurship policy goes beyond analysis and writing. Academics also are deeply involved in improving the sources of data for the study of entrepreneurship. In addition to finding flaws in government data collection and calling for better data collection efforts at the federal level, academics have played important roles in creating independent surveys of new businesses that will allow for more robust databases.

Rural Entrepreneurship During Recession

A new paper by three of our University of Missouri colleagues:

Rural Entrepreneurship in a Time of Recession

María Figueroa-Armijos, Brian Dabson, Thomas G. Johnson

Economic recessions increase costs, risk, stress, uncertainty, and business failures while decreasing the availability of employment. Individuals who seek to become self-employed in recessionary times, whether out of need or for opportunity reasons, face difficult and unique circumstances. We use cross-section repeated-measures rare events logistic regression to model the effects that living in rural America and changes in the economy have on the probability of individuals engaging in necessity or opportunity entrepreneurial activities both before the recession (2005–2007) and during the recession (2008–2010). Key findings indicate that before the recession, individuals living in rural metro and nonmetro counties were more likely to engage in opportunity-driven entrepreneurial activities when compared to individuals living in more urban counties. Positive employment growth rates before the recession also increased the probability that individuals in rural areas would engage in opportunity entrepreneurship. The recession marked a shift in the motivation of individuals in rural America to become self-employed. There is a clear decline in opportunity entrepreneurship and an increase in necessity entrepreneurship. In all rural and mixed-rural counties, college education positively predicts opportunity entrepreneurship, whereas individuals with incomes below $50,000 or working in a part-time job are more likely to engage in entrepreneurship driven by need.

The Great Successor and Political Entrepreneurship

North and South Korea "after" dark

North Korean communist dictator Kim Jong Il is dead. The State Media reports that he died Saturday morning at age 69 on his “private” train of a heart attack (see also CNN, Fox, CBS). The population has already been prepared for the successor – in fact, the “Great Successor” to take over after the “Dear Leader” – Kim Jong Un, the third generation of “leaders” in the dictator-family.

(Obviously, the North Koreans seem to quickly be running out of good names for their dictators: from the Great Leader to the Dear Leader to the… Great Successor? What’s next?)

Let us hope that this successor is alert to his great opportunity to make history through replacing dictatorship with something much less invasive. After all, North Korea is failing and their lack of market incentives and private property (and consequently, entrepreneurship) means they are consuming whatever is left of their built-up capital. In other words, they are regressing in terms of prosperity and wealth, as one would expect from non-market economies.

Kim Jong Un, if you are reading this, here’s your great chance to make a difference: North Korea would be much better off with some political entrepreneurship. How about a “new economic policy” for your starving population – and perhaps a little freedom too?

McQuinn in D.C.

Here’s McQuinn Center Director Peter G. Klein speaking to the House Financial Services Committee last Tuesday on business cycles and their effects on entrepreneurs. The talk was off the record and there is no written report, but yo can guess the tenor based on previous entries here at entrepreneurship@McQuinn.

Schumpeter’s Contemporary Relevance

McQuinn Center friend and Université d’Angers doctoral student Matt McCaffrey writes in today’s International Business Times on the relevance and importance of Schumpeter’s thinking on the entrepreneur.

From the article:

While he was by no means the perfect economist, he remains one of the most challenging and thought-provoking minds of the 20^th century. Schumpeter has been called the “prophet of innovation” because of his emphasis on the importance of the entrepreneur in driving the economy. Sometimes, however, he played the role of a sort of end-of-the-world prophet, predicting the decline of capitalist economies into socialism.

Matt goes on to talk about how Schumpeter’s thinking, developed and written down during the Great Depression, seems to be equally applicable on the current financial crisis. And he discusses how entrepreneurship is ultimately crippled by what economist Robert Higgs terms “regime uncertainty.” Interestingly, while some economists (Knight, Mises) define entrepreneurship as uncertainty bearing, the forceful changing of the rules of the game – regime uncertainty – distorts, undermines, and ultimately makes uncertainty bearing impossible.

“What Would Sir Richard Do?”

Branson: Shooting for the stars

While it may be futile to try to figure out a universal implicit behavioral rule of entrepreneurs that sets them apart from the non-entrepreneurial majority of the population, this Entrepreneur column by “serial entrepreneur” Matthew Toren suggests the importance of role models in entrepreneurship. His choice of role model might be somewhat arbitrary, but considering the achievements of Sir Richard Branson – Toren’s role model – Toren could have made a much, much worse choice. Branson, the founder of the many Virgin enterprises including space tourism and, most recently, entrepreneurial banking, is indeed an amazing entrepreneur.

In many respects, Branson is unmatched as a pioneer and innovator-entrepreneur. He is the market leader that shapes the structure of the future through products and services that revolutionize existing and create new markets. As such, he may be a great role models for those aspiring to entrepreneurial greatness.

But most entrepreneurs are not like Branson; they do not need to completely reshape the market through innovative investments. Instead, most of the very successful entrepreneurs who end up causing fundamental change to the market are revolutionary to much lesser degree. Think Steve Jobs and Bill Gates, who both have contributed greatly to our lives and the market – but who have done so primarily through tweaking and building off of already existing ideas.

Entrepreneurial Judgment: Steve Jobs and Herman Cain

Interesting article by John Chapman on entrepreneurial judgment, with applications to Steve Jobs and Herman Cain. John builds on ideas from, as Greg Mankiw might say, my favorite entrepreneurship scholar:

Seen in this “Kleinian” formulation, in which judgment about an uncertain future is the crucial focal point for analysis of entrepreneurship, several important conclusions follow:

• Ownership matters.  It is the command of resources — of capital — that empowers (and defines) successful entrepreneurs.   This in turns matters for (and implies a specific) policy formulation: the owners of capital or those tasked, in a derived sense, to control use of it, make decisions about the unknown future.  It is in their interest, and indeed they have every incentive, to economize on the use of this scarce capital, that is, to protect and grow it. They therefore have every incentive to understand and acquire knowledge, both through trial-and-error and through research, about future conditions in the market, in order to optimize their capital.  Government actors, by contrast, do not have the same incentive, nor the same ability, to acquire such useful and relevant knowledge.
• Uncertainty, and the imperative to exercise judgment, are irrevocable, in this world of space and time.  Much in the way of policy developed out of Washington, D.C. seeks to replace the vague unpredictability and uncertainty about the future with bureaucratic diktat that allegedly makes life easier for citizens.  Many elected officials will say their purpose is to remove, as it were, the uncertainty itself.  And the assumption is always implicit in Beltway-based action that the government actors – somehow — know more than citizens do, and that the course of action taken by government will turn out as they intend it to, and  will successfully improve conditions for the intended citizen beneficiaries.  Professor Klein’s extensive body of work shows that this is folly.  Radical uncertainty is a pervasive and permanent feature of life in this world; the operative question is how best to mitigate it.  Entrepreneurs, again, have every incentive to discern the best uses of current capital resources as applied against future prospective conditions, and to organize activity around profitable possibilities emanating from these future (currently unknown) conditions; government actors, conversely, whether elected or permanent civil service, have no such similar incentive.  And indeed, the knowledge the government actors have about what are often locally-based conditions — that is to say, from the vantage point of the government actor, geographically and contextually distant – is almost always inferior to that garnered by profit-seeking entrepreneurs who are responding to market signals. Further, for Klein, the trial and error process itself is what generates the knowledge that is useful, relevant, and indeed, critical, in order to make the best decisions about deployment of scarce capital to make the future conditions better than they are at present.  No amount of government resources or intervention can somehow supersede this knowledge-generating process by effectively abrogating the trial-and-error that is its critical essence.  And this trial-and-error process is none other than the market process itself; that is to say, the buying and selling that takes place in markets and generates useful price signals that are effectively co-opted by entrepreneurs, as primordial sources of information and insights about the uncertain future.
• Entrepreneurship, as the driving force of the market, is a necessary institutional condition for optimal economic growth.  Because radical uncertainty cannot be revoked, and because capital resources are both scarce and depreciating, action is required in order to maintain (and protect) one’s current standard of living, and achieve a higher standard of living in the future.  Entrepreneurship, which at its essence permits both the creation and salutary exploitation of knowledge about how to best employ  the scarce resources of society for profit — that is to say, for the creation of wealth — is absolutely criticalto economic growth and human progress.