Interview in eTalks

images (1)I am interviewed in the latest edition of Entrepreneurial Talks, better known as eTalks. “It’s a multi-disciplinary community of entrepreneurs, innovators and leaders who share a common denominator to create a better world with innovative entrepreneurial ideas.” Interviewer Niaz Uddin asks me about entrepreneurship in theory and practice, how economics and other academic disciplines fit into entrepreneurship education, the role of institutions and public policies in fostering entrepreneurship, and more.

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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.

Academic Entrepeneurship Quote of the Day

From T. W. Schultz, in his 1979 Kaldor Memorial Lecture, “Concept of Entrepreneurship and Agricultural Research”:

Within our universities, academic entrepreneurship is much more important than we realize. Show me a university that allocates its resources in a purely routine manner over any extended period and I will show you that that university is on a declining path. Presidents, deans, and directors of research are obviously academic entrepreneurs. So are heads of departments who are worthwhile having. Nor do I exclude the teaching and research functions of the faculty. The stock of knowledge and the theoretical opportunities in research are not fixed once and for all. Routine teachers are a liability and routine research workers, which contradicts the meaning of research, if nevertheless there are such, they are failures. Not least is the fact that consumption opportunities are also changing, and inasmuch as pure consumption also entails time, here too people are reallocating their own time in response to changing opportunities.

The thrust of my argument thus far is that over our respective life cycles all of us, as well as everybody else, given our dynamic society with special reference to the economy, is an entrepreneur. Whether a person is bad or good in performing this function is quite another matter.

For more on Schultz see this 2006 article by Mike Cook and myself.

The Knowledge Requirements of the Successful Entrepreneur

Hayek famously argued that prices embody information and that economic actors, responding to price changes, act as if they knew the underlying circumstances generating these changes. “[I]n a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan.” To economize, people don’t need “knowledge of the particular circumstances of time and place,” they only need access to prices. “The mere fact that there is one price for any commodity . . . brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.” Hayek illustrates with his famous example of the tin market: “All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply.”

Hayek offers a powerful argument against interference with the price mechanism. But we should remember that prices embody information about the past, and the entrepreneur’s job is to anticipate, or “appraise,” the future. Entrepreneurs, far from discovering and exploiting “gaps” in the existing structure of prices, deploy resources in anticipation of expected — but uncertain — profits generated by future prices. For this, they rely on what Mises called a “specific anticipative understanding of the conditions of the uncertain future,” an understanding that requires a lot of knowledge of particular circumstances of time and place!

The knowledge requirements of the successful entrepreneur or arbitrageur are vividly illustrated in this passage from Carsten Jensen’s magnificent novel, We the Drowned, in a passage about 19th-century ship brokers, entrepreneurs who own, lease, and manage ships and shipping contracts:

A ship broker needs to know how the Russo-Japanese War will hit the freight market. He doesn’t need to be interested in politics, but he has to pay attention to his skippers’ finances, so a knowledge of international conflict is essential. Opening up a newspaper — he’ll see a photograph of a head of state and if he’s bright enough, he’ll read his own future profits in the man’s face. He might not he interested in socialism, in fact he’ll swear he isn’t: he’s never heard such a load of starry-eyed nonsense. Until one day his crew lines up and demands higher wages, and he has to immerse himself in union issues and other newfangled notions about the future organization of society. A broker must keep up to date with the names of foreign heads of state, the political currents of the time, the various enmities between nations, and earthquakes in distant parts of the world. He makes money out of wars and disasters, but first and foremost he makes it because the world has become one big building site. Technology rearranges everything, and he needs to know its secrets, its latest inventions and discoveries. Saltpeter, divi-divi, soy cakes, pit props, soda, dyer’s broom — these aren’t just names to him. He’s neither touched saltpeter nor seen a swatch of dyer’s broom. He’s never tasted soy cake (for which he can count himself lucky), but he knows what it’s used for and where there’s a demand for it. He doesn’t want the world to stop changing. If it did, his office would have to close. He knows what a sailor is: an indispensable helper in the great workshop that technology has made of the world.

There was a time when all we ever carried was grain. We bought it in one place and sold it in another. Now we were circumnavigating the globe with a hold full of commodities whose names we had to learn to pronounce and whose use had to be explained to us. Our ships had become our schools. They were still powered by the wind in their sails, as they had been for thousands of years. But stacked in their holds lay the future.

[Cross-posted at Organizations and Markets]

The Continued Misuse of the “Opportunity” Construct

I’ve been sharply critical of the “opportunity discovery” perspective in entrepreneurship studies (e.g., here, here, and here). A post by Thomas Eisenmann on today’s Harvard Business Review’s Blog Network reminded me of these criticisms. The post elaborates on Howard Stevenson’s famous definition, entrepreneurship as “the pursuit of opportunity beyond resources controlled.” There are many problems with this definition, some discussed in an earlier post by Per. Much of the research literature, including not only my stuff but also important contributions from Sharon Alvarez and Jay Barney, Saras Sarasvathy, Per Davidsson, and others challenges the idea the profit opportunities exist, objectively, waiting to be discovered. Entrepreneurs don’t pursue “opportunities,” they pursue goals, plans, ideas, or visions, which require real resources to pursue, and which may or may not be realized.

Actually the HBS working definition of opportunities, as elaborated by Eisenmann, sounds much like the subjectively perceived goals I have in mind:

“Opportunity” implies an offering that is novel in one or more of four ways. The opportunity may entail: 1) pioneering a truly innovative product; 2) devising a new business model; 3) creating a better or cheaper version of an existing product; or 4) targeting an existing product to new sets of customers. These opportunity types are not mutually exclusive. For example, a new venture might employ a new business model for an innovative product. Likewise, the list above is not the collectively exhaustive set of opportunities available to organizations. Many profit improvement opportunities are not novel–and thus are not entrepreneurial–for example, raising a product’s price or, once a firm has a scalable sales strategy, hiring more reps.

These are just Schumpeter’s examples of innovation. They describe the entrepreneur’s plans, not anything in the objective environment. They certainly have little to do with the notion of opportunity emphasized by Israel Kirzner and adopted by Scott Shane.

Fine, you say, this is just a terminological quibble. When the HBS entrepreneurship group says “opportunities,” they mean business plans. But this is an awkward and confusing usage, one that lends itself easily to misunderstanding. Consider dictionary definitions of “opportunity.” Merriam-Webster gives us

  1. a favorable juncture of circumstances (the halt provided an opportunity for rest and refreshment)
  2. a good chance for advancement or progress

Or, if you prefer the Oxford English Dictionary, try this:

  1. a time or set of circumstances that makes it possible to do something (increased opportunities for export; the night drive gave us the opportunity of spotting rhinos)
  2. a chance for employment or promotion (career opportunities in our New York headquarters)

These definitions clearly describe outside circumstances, objective and external to the actor, not the actor’s personal, subjective beliefs. But the only reasonable meaning of entrepreneurial opportunities refers to the latter. In plain English, opportunities are not at all like “opportunities” as used by HBS.

Isn’t it time we dump the “opportunity” construct altogether?

Panel on Innovation and Opportunities in US Agriculture

I’ll be at the National Chamber Foundation Wednesday, December 19, for a one-day event on “Agriculture: Growing Innovation & Opportunities.” Keynote speakers include US Agriculture Secretary Tom Vilsack, Chamber of Commerce President  Tom Donohue, and Cargill CEO Gregory Page. I’m moderating a panel with industry and government representatives on innovation and US producers’ responses to growth opportunities. Agriculture in the US, as elsewhere in the developed world, faces a conundrum: Innovation and entrepreneurship are closely linked to uncertainty, experimentation, and what Joseph Schumpeter famously called “creative destruction,” the constant churn of products and firms rising and falling through competition. But agricultural policy is largely designed to maintain the status quo — e.g., “protecting the family farm.” Can these objectives be reconciled? We’ll see what the panelists have to say.

Creativity: Burst of Inspiration or Careful Research and Revision?

Keith Sawyer reminds us that much of what we think we know about artistic creativity is wrong:

You’ve probably heard lots of stories about famous creators who supposedly created an entire work in a fit of inspiration, generating something so perfect that they never modified it. Mozart is said to have composed in bursts of inspiration (you can see it in the movie Amadeus); the Romantic poet Samuel Coleridge has the same reputation. And guess what? These stories are just as false as the myths about Jackson Pollock.

  • Music historians have known since the 1960s that “Mozart’s creative process was controlled by a consistently practical approach to the business aspects of music” and that “his manuscripts show evidence of careful editing, revision, and hard work” (Explaining Creativity page 339).
  • Coleridge experts have known since the 1920s that he fabricated his own stories about writing poems in a fit of inspiration. The famous poem “Kubla Khan,” for example–which Coleridge claims to have written in a drug-induced haze–went through many revisions that still exist. Among his Romantic-era colleagues, Coleridge was so famous for making up false stories about inspiration, they would often tease him about it (Explaining Creativity page 322).

No great work ever emerges fully formed from the mind. People become known as “exceptional creators” not because of the power of their inspiration, but because of the intensity and dedication of their work process; because of their ability to stay focused through multiple revisions; and because of their ability to negotiate a zigzag path from the first glimmer of an idea to the final full-fledged work.

The same applies to entrepreneurial creativity. This relates to the challenges posed by the bricolage and effectuation approaches to the opportunity-discovery model that has dominated the entrepreneurship research literature. Ideas for projects, activities, and new firms may occur to us in a flash of insight, but they do not constitute “entrepreneurship” until the hard work of acquiring, deploying, and reconfiguring resources takes place.

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