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.

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.

Definition Begging Questions

A recent article in Inc. Magazine discusses what they term “the best entrepreneurship definition ever.” While the promise is perhaps overly cocky, entrepreneurship is a concept desperately in need of a definition. It seems applicable on almost everything, and comes in many shapes and colors and types: structural, occupational, functional or otherwise. This makes entrepreneurship about as suitable for scientific study as the Scarlet Pimpernel (you know, that “damned elusive” guy).

The “best ever” definition reads as follows:

Entrepreneurship is the pursuit of opportunity without regard to resources currently controlled.

While it is stated in the article that “people often need to say it out loud 50 or 100 times before they really understand what it means” – which admittedly this author has not – it seems to be a pseudo-Kirznerian definition, or at least a definition that heavily draws on Kirzner (1973, 1979). But just as Kirzner’s definition, it begs a number of questions about what it really means and how it is relevant to understanding the real economy.

Kirzner’s entrepreneur is not an owner of resources and therefore never puts them at risk, which to Rothbard makes such entrepreneurship “mere parlor games.” While the “best ever” definition is more ambiguous on whether the entrepreneur owns anything – here only the pursuit is made without regard to resources – the implication is the same. Does not an entrepreneur consider what he has at hand, what he might get his hands on, or what can be procured in the market? (Goodbye Frank Knight – your definition doesn’t cut it.)

But then where are all the entrepreneurs pursuing the opportunity to sell cheap 5-minute direct flights to all-inclusive beach resorts on the planet Mars? I, for one, would be a potential customer! Read more of this post

“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. Read more of this post

Knee-Jerking or Down-Sizing?

HBS Professor Teresa Amabile and psychologist Steve Kramer write on the HBR Blog Network how “knee-jerk downsizing” is a bad idea. The article responds to a recent WSJ article on how already lean companies are ready to cut even further to successfully ride out the hard economic times following the financial crisis. Based in established research, Amabile and Kramer point out that downsizing might not make the companies better off. For two reasons:

First, downsizing often leads to worse, not better, financial performance for firms […]

Second, downsizing can dramatically — and negatively — alter the work environment in the organization, diminishing the motivation and performance of remaining employees.

While these points are well taken, the more fundamental issue in business, as well as behind both these reasons, is mysteriously unnoticed. Granted, the article is about the psychological (negative) effects of downsizing rather than the phenomenon of downsizing per se. But it serves to illustrate a rather common oversight that is of more general interest to readers of this blog: the role of entrepreneurs and entrepreneurship within organizations. Read more of this post

Profits or Products?

James Allworth writes an interesting column at the HBR blog network on how Steve Jobs solved the Christensenian “innovator’s dilemma.” The latter is the conception of the innovator’s pure love for his innovation or product, but the (counter-acting) need to deliver it to the market profitably. Without profits, no product. Allworth plays on the popular notion of the necessity for profits as a burden for people and entrepreneurs alike – and turns it on its head.

Interestingly in the case of Steve Jobs, Apple turned profitable through throwing profit-focused product development out the window and instead focusing on heart. And by heart, I mean the love for great products – the focus on developing products one is passionate about, and doing so profitably is secondary.

While this story may seem to be at odds with the common understanding of market logic and perhaps provide a blow at the popular notion of cut-throat capitalism, I see it differently. While it is true that innovators have a passion for their products, this is generally true for entrepreneurs as well – they have a passion for their creation, whether it is a process, a product, an organization, or an imagined opportunity. And what they strive for is to realize this passion and, if possible, make a fortune while doing so. The inner motivation is key, and the pecuniary reward is nice but not the primary driver.

In fact, it is this view of the entrepreneur as a passionate judgmental creator of imaginative new means-ends frameworks that I place at the core of what is, what drives, and what defines a firm. (See e.g. here here or here.) In direct contrast to the popular notion, as played on by Allworth, passion is not the antithesis of profit. Rather, only the passionate entrepreneur can make real entrepreneurial profits, which are only within reach for someone who is willing to risk it all for the sake of his or her passion and the imagined opportunity.

There is no such thing as a routine entrepreneur. Entrepreneurship is revolutionary.

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