Austrian Economics and Entrepreneurship Studies

Henrik Berglund, Steffen Korsgaard, Todd Chiles, and I organized a Professional Development Workshop on “Austrian Economics and Entrepreneurship Studies” at the recent Academy of Management conference. Here’s Peter Lewin’s report at O&M. Now we can share the slides: my opening remarks on the origins and development of the Austrian school, Henrik’s discussion of Israel Kirzner and his influence on entrepreneurship scholarship, and Todd’s presentation on Ludwig Lachmann’s unique approach. Comments and questions welcome!

Failures of Steve Jobs

Nick Schultz has a nice piece on Steve Jobs’s greatest failures — and how they contributed to his success. Failure, as we’ve noted before, is an essential part of entrepreneurial experimentation. Unfortunately, today’s political culture emphasizes bailouts, subsidies, and other forms of protection against failure. As Nick puts it:

There’s a moral here for a Washington culture that fears failure too much. In today’s Washington, large banks aren’t permitted to fail; nor are large auto firms. Next up will be too-big-to-fail hospital systems. Steve Jobs is a reminder that failure is a good and necessary thing. And that sometimes the greatest glories are born of catastrophe.

At the Firm’s Rudder: the Entrepreneur

What is the role of the entrepreneur in the firm? Or, put differently – and perhaps more interestingly – what function does the firm provide to the entrepreneur? A simpler version of this question would be: why do entrepreneurs start firms? And what are the market effects of entrepreneurs starting firms? These questions are all discussed in my paper published today in the second issue of the 14th volume of The Quarterly Journal of Austrian Economics. The abstract:

This paper reviews Austrian approaches to the firm and drafts a theory that emphasizes the firm as a market phenomenon. Here the firm is a vehicle for imaginative entrepreneurs to create artificially high factor density, thereby increasing its internal “extent of the market” to support specialization of factors beyond the general level of division of labor in the market. The firm therefore becomes a product of, and prospective catalyst for progressing the market’s overall division of labor, and the firm emerges as an entrepreneur-generated means toward increased efficiency and more roundabout production. It consequently may play a crucial role in the evolution of market structure and, by extension, the development of civilization.

The article is called “The Division of Labor and the Firm: An Austrian Attempt at Explaining the Firm in the Market” and is available for download here.

Columbia Entrepreneurship – Top 30 in Growth

AdVenture: extreme growth

The next issue of Inc. magazine features their annual listing (since 1982) of the 500 fastest growing private companies in the United States. Columbia-based AdVenture, an extremely fast-growing company that holds entities such as the League of Innovators, Museao, pure etc., hits the 2011 list on #28. Obviously, the McQuinn Center congratulates the great entrepreneurship carried out by owner-founder Brent Beshore and his great team.

One should not underestimate this accomplishment. Even though we’re suffering the “worst recession since the Great Depression,” the list is extremely competitive and it is no small feat to become one of the 500 – not to speak of the top 30. Today, just like during the Great Depression, a number of businesses and industries seem to be alive and well and some even experience high and (one assumes) sustainable growth, while others are suffering.

This may be the case due to the severe malinvestments in the market place during the boom, which ultimately leads to a bust. These malinvestments have primarily been made in the “bubble” industries (such as IT in the 1990’s and the recent housing and finance bubbles) that eventually burst and then cause temporary downturns in the markets during the correction. And, of course, this causes political panic. Judging from AdVenture’s growth and profitability in recent years, with one of its main entities pure offering services that corporations historically cut first in recessions, and the fact that we already had a communications and technology bubble well over a decade ago, this may very well be an example of sound and sustainable growth.

In any case, congratulations to the playful people at AdVenture and entities!

AoM Entrepreneurship Doctoral Consortium

The Academy of Management conference has begun, and today Sharon Alvarez and I facilitated the theory workshop for the Entrepreneurship Division Doctoral Consortium. For your viewing pleasure, here are my slides. Lots of interesting discussion followed about the opportunities and challenges for theoretical research in entrepreneurship. An exciting field to be in!

The Crime of Risk-Taking

Franz Oppenheimer (from Wikipedia)

Dan Pallotta writes about a social aspect of risk on the HBR Blog Network. His point is well taken: taking risks is not unethical or immoral. In fact, risk-taking is a natural part of life and as such is not an ethical concept at all. It is something we always have to do; it is a necessary part of acting. (However, Frank Knight would probably be more than a little upset with Pallotta’s column, since it does not distinguish between risk and uncertainty – and actually confuses uncertainty for risk…)

Yet entrepreneurs and innovators are often portrayed or treated as crooks when they fail in their undertakings. Undoubtedly, there is a loss of money and perhaps jobs as a business goes bankrupt. But this does not mean those jobs would exist were it not for this (failing) entrepreneur. Could the shunning of innovators simply be a result of public reasoning falling victim to the broken window fallacy? We simply cannot see what would have been had there not been entrepreneurs and innovators willing to risk their time, money, and lives in the pursuit of profit.

But there is another dimension to the morality of risk-taking that potentially taints people’s perception. It has nothing to do with risk-taking in the market, but has everything to do with risk-taking in government. As it is, risk-taking in the market place is fundamentally voluntary; nobody is forced to take losses on behalf of the entrepreneur when innovative ventures fail. If you invest your money, time, or skills in a venture (whether as owner or employee, both being risky endeavors), then you should know it may fail. In this sense, Pallotta is right: there is no moral or ethical dimension to the economic means (to use Oppenheimer’s term) since they are simply the practical extensions of voluntarism, itself an ethical concept.

However, one must take care to specify under what conditions this holds true. The economic means are possible only in a context of voluntarism and private ownership; in any other setting, failed risk-taking implies the distribution of losses unto (presumably “innocent”) others. Risk-taking therefore becomes immoral and unethical since it entails suffering (financial or otherwise) involuntarily. In any zero-sum setting losses are necessarily unethical since they afflict those who chose not to take risks. Hence the need to be strictly conservative in such settings and refrain from both risk and innovation; zero-sum is at best static and unchanging. With the Oppenheimerian “political” means, less is more – and no action is best, since it preserves the little wealth there is.

Perhaps the shunning of failing entrepreneurs is based on a deeper misconception than not seeing what is not there; perhaps it is a result of confusing the nature of economic and political means – and their respective implications.