Session 1
Entrepreneurship: Productive,
unproductive, and destructive.
Baumol, W. J. (1996). Journal of Business Venturing , 11(1), 3-22.
This paper: entrepreneurs are always with us and always play some
substantial role (various roles that entrepreneur’s efforts can be
reallocated) how an entrepreneur acts depends on the rules of the
game (the economy).
Hypothesis: It is the set of rules and not the supply of entrepreneurs or
the nature of their objectives that undergoes significant changes from one
period to another and helps to dedicate the ultimate effect on the
economy via the allocation of entrepreneurial resources.
On the historical character of the evidence
The Schumpeterian model extended: allocation of entrepreneurship
Schumpeterian: innovations take various forms besides mere
improvements in technology
1. The introduction of a new good or new quality of a good
2. The introduction of a new method of production
3. The opening of a new market
4. The conquest of a new source of supply of raw materials or half-
manufactured goods
5. The carrying out of the new organization of any industry
Limitation: shortage of insight on policy that emerge from it
If the rules of the game change, it may not be the same individual who
switched their activities to these rules.
Allocation of entrepreneurs among activities: “it is the solution of a jigsaw
puzzle in which the pieces are each fitted into the places selected for
them by the concentration of pertinent circumstances”.
Entrepreneurship, productive and unproductive: the rules do change
Central hypothesis: the exercise of entrepreneurship can sometimes be
unproductive or even destructive, and that whether it takes one of these
directions or one that is more benign (goedaardig) depends heavily on the
structure of payoffs in the economy – the rules of the game.
, 1. The rules of the game that determine the relative payoffs to
different entrepreneurial activities do change dramatically from one
time and place to another
2. Entrepreneurial behaviour changes direction from one economy to
another in a manner that corresponds to the variations in the rules
of the game
Ancient Rome
Three primary and acceptable sources of income:
- Landholding (grondbezit)
- Usury (lending money at unreasonably high interest rates)
- Political payments
Manly freedmen (former slaves) operated in commerce and industry
There was a clear divorce between science and practice the inventor
turned to the emperor for a reward, instead of turning to an investor for
capital with which to out his invention into production.
Conclusion: the roman rewets system offsets gains though the attendant
loss is prestige. Economic effort was neither the way to wealth nor its
purpose.
Medieval China
Monarch commonly claimed possession of all property in his
territories sovereign was in financial straits people with
resources avoided investing in them obstacle for economic
expansion
China reserved its most substantial rewards for those who climbed
the ladder of imperial examinations (e.g. Confucian philosophy and
calligraphy).
rules of the game seem to have been heavily biased against the
acquisition if wealth and position though productive entrepreneurship.
Overlap with Romans: corruption
The Earlier Middle Ages
Wealth and power were pursued primarily through military activities
Warfare, which was of course pursued fir a variety of reasons, was
also undertaken as a primary source of economic gain
These violent economic activities inspired frequent and profound
innovation more sophisticated armour, weaponry, and tactics and
strategies
innovations can be interpreted as contributions of military
entrepreneurs undertakes at least partly in pursuit of private economic
gains
,The Later Middle Ages
Comeback of the towns that acquired privileges (protection from
arbitrary taxation and confiscation and the creation if labour force
by granting freedom to runaway serfs)
Free-enterprise turbulence was limited by the church pacification
efforts
Other kinds of entrepreneurs: e.g. architect-engineers
Water-driven mills were build, taken over by monks and improved
and they build others reduce/eliminate manual labour in order to
maximize the time available for the less onerous religious labours
14th century
Mainly military entrepreneurship (100-year war between France
and England)
rules of the game had changes, to the disadvantage of productive
entrepreneurship
Early Rent Seeking
Rent seeking (manipulating public policy or economic conditions as a
strategy for increasing profits) is a form of unproductive entrepreneurship
replaced military activity as prime source of wealth and power
Does the allocation between productive and unproductive
entrepreneurship matter much?
Third proposition: the allocation of entrepreneurship between
productive and unproductive activities can have a profound effect on the
innovativeness of the economy and the degree if dissemination of its
technological discoveries.
On unproductive avenues for today’s entrepreneur: a
delicate balance
Unproductive entrepreneurship nowadays; rent seeking, tax evasions,
avoidance efforts
Taxes can serve to redirect entrepreneurial efforts: the problem with
high-tax societies is not that it is impossible to become rich there,
but that it is difficult to do so by way of productive effort in the
ordinary production system
Threats of takeovers are sometimes used as a means to extract
“greenmail” and that recourse to the courts as a means to seek to
perverse rents through legally imposed impediments to competition
does indeed occur becomes attraction for entrepreneurial talent
whose efforts are thereby channeled into unproductive directions
, Changes in the rules and changes in entrepreneurial
goals
If reallocation of entrepreneurial effort is adopted as an objective of
society, it is far more easily achieved through changes in the rules that
determine relative rewards than via modification of the goals of the
entrepreneurs and prospective entrepreneurs themselves.
Concluding remarks
The rules of the game that specify the relative payoffs to different
entrepreneurial activities play a key role in determining whether
entrepreneurship will be allocated in productive or unproductive directions
and that this can significantly affect the vigor of the economy’s
productivity growth.
Entrepreneurship: Productive,
unproductive, and destructive.
Baumol, W. J. (1996). Journal of Business Venturing , 11(1), 3-22.
This paper: entrepreneurs are always with us and always play some
substantial role (various roles that entrepreneur’s efforts can be
reallocated) how an entrepreneur acts depends on the rules of the
game (the economy).
Hypothesis: It is the set of rules and not the supply of entrepreneurs or
the nature of their objectives that undergoes significant changes from one
period to another and helps to dedicate the ultimate effect on the
economy via the allocation of entrepreneurial resources.
On the historical character of the evidence
The Schumpeterian model extended: allocation of entrepreneurship
Schumpeterian: innovations take various forms besides mere
improvements in technology
1. The introduction of a new good or new quality of a good
2. The introduction of a new method of production
3. The opening of a new market
4. The conquest of a new source of supply of raw materials or half-
manufactured goods
5. The carrying out of the new organization of any industry
Limitation: shortage of insight on policy that emerge from it
If the rules of the game change, it may not be the same individual who
switched their activities to these rules.
Allocation of entrepreneurs among activities: “it is the solution of a jigsaw
puzzle in which the pieces are each fitted into the places selected for
them by the concentration of pertinent circumstances”.
Entrepreneurship, productive and unproductive: the rules do change
Central hypothesis: the exercise of entrepreneurship can sometimes be
unproductive or even destructive, and that whether it takes one of these
directions or one that is more benign (goedaardig) depends heavily on the
structure of payoffs in the economy – the rules of the game.
, 1. The rules of the game that determine the relative payoffs to
different entrepreneurial activities do change dramatically from one
time and place to another
2. Entrepreneurial behaviour changes direction from one economy to
another in a manner that corresponds to the variations in the rules
of the game
Ancient Rome
Three primary and acceptable sources of income:
- Landholding (grondbezit)
- Usury (lending money at unreasonably high interest rates)
- Political payments
Manly freedmen (former slaves) operated in commerce and industry
There was a clear divorce between science and practice the inventor
turned to the emperor for a reward, instead of turning to an investor for
capital with which to out his invention into production.
Conclusion: the roman rewets system offsets gains though the attendant
loss is prestige. Economic effort was neither the way to wealth nor its
purpose.
Medieval China
Monarch commonly claimed possession of all property in his
territories sovereign was in financial straits people with
resources avoided investing in them obstacle for economic
expansion
China reserved its most substantial rewards for those who climbed
the ladder of imperial examinations (e.g. Confucian philosophy and
calligraphy).
rules of the game seem to have been heavily biased against the
acquisition if wealth and position though productive entrepreneurship.
Overlap with Romans: corruption
The Earlier Middle Ages
Wealth and power were pursued primarily through military activities
Warfare, which was of course pursued fir a variety of reasons, was
also undertaken as a primary source of economic gain
These violent economic activities inspired frequent and profound
innovation more sophisticated armour, weaponry, and tactics and
strategies
innovations can be interpreted as contributions of military
entrepreneurs undertakes at least partly in pursuit of private economic
gains
,The Later Middle Ages
Comeback of the towns that acquired privileges (protection from
arbitrary taxation and confiscation and the creation if labour force
by granting freedom to runaway serfs)
Free-enterprise turbulence was limited by the church pacification
efforts
Other kinds of entrepreneurs: e.g. architect-engineers
Water-driven mills were build, taken over by monks and improved
and they build others reduce/eliminate manual labour in order to
maximize the time available for the less onerous religious labours
14th century
Mainly military entrepreneurship (100-year war between France
and England)
rules of the game had changes, to the disadvantage of productive
entrepreneurship
Early Rent Seeking
Rent seeking (manipulating public policy or economic conditions as a
strategy for increasing profits) is a form of unproductive entrepreneurship
replaced military activity as prime source of wealth and power
Does the allocation between productive and unproductive
entrepreneurship matter much?
Third proposition: the allocation of entrepreneurship between
productive and unproductive activities can have a profound effect on the
innovativeness of the economy and the degree if dissemination of its
technological discoveries.
On unproductive avenues for today’s entrepreneur: a
delicate balance
Unproductive entrepreneurship nowadays; rent seeking, tax evasions,
avoidance efforts
Taxes can serve to redirect entrepreneurial efforts: the problem with
high-tax societies is not that it is impossible to become rich there,
but that it is difficult to do so by way of productive effort in the
ordinary production system
Threats of takeovers are sometimes used as a means to extract
“greenmail” and that recourse to the courts as a means to seek to
perverse rents through legally imposed impediments to competition
does indeed occur becomes attraction for entrepreneurial talent
whose efforts are thereby channeled into unproductive directions
, Changes in the rules and changes in entrepreneurial
goals
If reallocation of entrepreneurial effort is adopted as an objective of
society, it is far more easily achieved through changes in the rules that
determine relative rewards than via modification of the goals of the
entrepreneurs and prospective entrepreneurs themselves.
Concluding remarks
The rules of the game that specify the relative payoffs to different
entrepreneurial activities play a key role in determining whether
entrepreneurship will be allocated in productive or unproductive directions
and that this can significantly affect the vigor of the economy’s
productivity growth.
