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.

“Societal” Entrepreneurship?

Entrepreneurship has found its way as an important concept into most areas. We talk of entrepreneurship in the very general form as human action or judgment, and entrepreneurship in the more limited sense of self employment or firm startups; individual or collective entrepreneurship; or economic entrepreneurship as distinct from social, political, and public entrepreneurship. But perhaps we should also add entrepreneurship in the sense of creating new societies?

At least, this is the way I interpret this Economist article on the entrepreneurial projects attempting to establish new micro societies in the form of “free cities” in Honduran development regions. Say what you will about the philosophical attractiveness of these particular cities, but the concept of free cities has been tried before (see here and here). And the historical impact was neither negligible nor disadvantageous (economically or socially). It remains to be seen what possible impact these states might have, if realized.

GROE Workshop on Evolutionary Thinking and Capitalism

Last week, I attended a workshop organized by the Group for Research into Organizational Evolution (GROE) of the University of Hertfordshire in the UK.  A link to the workshop page is here, with further links to the GROE homepage. I was particularly pleased with two organizational elements of the workshop. First, the invited speakers presented uniformly thoughtful and thought-provoking presentations on exploiting evolutionary thinking in the economics and sociology of firms and markets. Secondly, each presenter was allotted about 3/4 of an hour for the prepared remarks, followed by equal time for discussion with the 30+ delegates in the room. As a consequence of these two elements, the quality of discourse in the formal sessions and during meals/tea was high.

I was joined in this venue by a colleague from the University of Missouri, André Ariew. He is philosopher of science, with particular expertise in evolutionary biology. We are contemplating joint work on entrepreneurship and organizational evolution. can you spot the philosopher in the photo?

GROE presenters and delegates

While none of the papers was specifically aimed at entrepreneurship, there was much subtext about the experimental nature of capitalistic economies that is grounded in Schumpeter, Hayek, and others for whom individual action is a matter of interest. Significant in this was Stan Metcalfe’s excellent presentation that made his excellent book, Evolutionary Economics and Creative Destruction, come alive for me. The book was written for/from a series of papers that Stan delivered as the Graz Schumpeter Lectures. His recent thinking on the inevitability of losers when entrepreneurs “win” extends and refines the lectures. Fun stuff. We will wait to see if the papers get posted to the GROE website or compiled in another form.

You can find an interview of the Director of GROE, Geoffrey Hodgson, by one of the invited speakers, the evolutionary biologist David Sloan Wilson at the This View of Life blogsite. DSW also interviewed another speaker, Eric Beinhocker, about his presentation about modeling complex economic phenomena using agent-based models of awe-inspiring scale and scope.

Bert Hoselitz on Entrepreneurship and Economic Development

A few posts and consequent conversations about Bert Hoselitz have appeared at Organizations and Markets in the last few years.

I discovered him when I found the reprint of his excellent piece on “The Early History of Entrepreneurial Theory”.

Others discovered him as the translators (with James Dingwall) of Menger’s Principles of Economics.

Hoselitz founded the journal Economic Development and Cultural Change and edited it for more than three decades. Indeed, economic development was his professional passion. He worked extensively in India and was part of the very active community of scholars from across the social sciences that were engaged in development projects supported by USAID, the UN, and the NGOs. One of his papers appears in a compendium of 45 articles on theory and practice of economic development that were gleaned from hundreds of papers presented at a conference in Geneva that marked the United Nations’ Decade of Development.

The paper by Hoselitz is similar to another he wrote for The American Journal of Economics and Sociology a decade earlier.

Both papers are built on the argument that economic progress in the post-colonial, post-WWII developing world can benefit from entrepreneurial activity in small- and medium-sized manufacturing companies if  (1) governments make sufficient investments in infrastructure, notably power and transportation; (2) there are stable institutions to support and protect contracts and market entry; and (3) governments do not embrace pan-economic central planning. He believes that mixed economies can work. Read more of this post

Should Entrepreneurship Be Taught as a Standalone Subject?

Here’s Columbia Business School Dean Glenn Hubbard on teaching business ethics:

WSJ: Weak ethical guidance has been mentioned as a factor in the financial crisis. How do you try to instill in your students a sense of right and wrong?

Mr. Hubbard: When I became dean there were a lot of schools doing this through standalone ethics classes. My view is students marginalize classes like that.

I don’t think students pay attention to it the way they do when it’s integrated into your marketing course, into your operations course, into your finance class.

We have cases that are woven through and outside speakers who come in to work with the students. What’s really important for young business-school students is to see this as a real problem, looking at a real business person confronted with this issue and how he or she dealt with it.

Kauffman Foundation President Carl Schramm often makes the same argument for entrepreneurship: rather than setting up specialized courses and degree programs in entrepreneurship, colleges and universities should infuse entrepreneurship throughout the entire curriculum. (“Mommy, why do we have an English Major and a Chemistry Major but no Entrepreneurship Major?” “Every major is Entrepreneurship Major!”)

I think there is a place for specialized entrepreneurship courses, programs, majors, etc. but Schramm has a point. The University of Missouri, like many other schools, designates certain courses as “writing intensive,” and requires so many writing-intensive credits for graduation. A proposal to add a “diversity-intensive” course requirement was recently voted down, but will surely reappear soon in a different form. What about making students take a certain number of “entrepreneurship-intensive” courses? Or urge faculty across disciplines to incorporate entrepreneurial concepts, where appropriate, into their syllabi? What do you think is most effective?

An Attempt at Academic Entrepreneurship

McQuinn Center for Entrepreneurial Leadership

Having a Facebook page is not overly entrepreneurial these days. Most people have one, and so do most corporations – and even products. But adopting a more narrow perspective, starting a Facebook page and Twitter feed as an academic research center – that could actually count as being quite entrepreneurial. At least for now.

Of course, what I’m trying to say is that the McQuinn Center is now on both Facebook and Twitter. Click this link to “Like” us on Facebook, or on Twitter @McQuinnCenter.

New Ventures / New Entrepreneurs

An organic product CSA

A chestnut mill

A rural artist retreat

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Today, a class of new entrepreneurs from The Entrepreneurship Project in Agriculture began making oral presentations — pitches — of new venture plans that they have put together over the course of the 4-month learning program. One of the measures of impact (performance) of the USDA grant that supports the Project is the number of new farm ventures that are in operation within 3 years of the training. I predict that more than half of the class will be engaged in their ventures by the end of the year. I’ll follow up on this prediction. Stay tuned.

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