Context Matters: Institutions and Entrepreneurship

Citation

Hall, J. (2012), "Context Matters: Institutions and Entrepreneurship", Journal of Entrepreneurship and Public Policy, Vol. 1 No. 1, pp. 96-97. https://doi.org/10.1108/20452101211208380

One of the frustrating things about studying entrepreneurship is how little scholars look at the effect of institutions on entrepreneurship. When I say institutions, I mean institutions in the Douglass North sense of the term – the formal and informal rules that govern human action. This short monograph by George Mason University economists Peter Boettke and Christopher Coyne goes a long way toward rectifying the current situation.

Their book has seven chapters with the first chapter a short introduction. The second chapter begins where a volume like this should – with a definition of institutions. Here Boettke and Coyne make it clear that they mean institutions in the Douglas North sense and this section is an extremely nice overview of the study of institutions historically. In particular, the authors have an nice discussion of the four views of the emergence of institutions: the efficient institutions view of Demsetz, the group‐conflict view, the Weberian ideology‐based view of institutions, and finally the spontaneous order view.

Boettke and Coyne correctly note that there has been some recent empirical research on the effect of institutions on growth, such as Daron Acemoglu's work. Other than a brief sketching of this research, they do not go into it too heavily. This makes sense, given that the volume is about institutions and entrepreneurship, and very little of the recent empirical work focusses on the effect of institutions on entrepreneurship. (Hence the need for the journal that is in your hands.) The empirical literature needs a theoretical basis, however, and Boettke and Coyne sketch out in Chapter 3 some of the way that economic institutions (such as measured by the Economic Freedom of the World (EFW) annual report of which I am a co‐author) matter for economic outcomes.

Building off the work of William Baumol, the authors explain how institutional improvements can shift out the production possibilities frontier. As Baumol points out, one can assume that entrepreneurial energies are constant over space and what varies are institutions. Some institutions channel individual behavior toward “good” economic outcomes like small business start‐ups, and some channel behavior toward “bad” economic outcomes for society like rent‐seeking. They conclude with a history lesson on the importance of institutions to outcomes with a brief summary of the socialist calculation debate.

Chapters 4 and 5 sketch out social and political entrepreneurship, respectively. Boettke and Coyne note that both of these areas of entrepreneurship research, while increasingly popular, suffer from a lack of consensus on what exactly constitutes entrepreneurship. While the authors do not (and cannot) bring forth a consensus, they do a nice job of summarizing and synthesizing the literature in these two areas. What is really nice, however, is that they tie back their discussion of social and political entrepreneurship to their discussion from Chapter 3 on how institutions matter for economic outcomes. The way that the authors consistently return to earlier points is a very nice thing about this volume and is, in my mind, a sign of careful scholarship.

Before concluding with some thoughts on areas for future research, Boettke and Coyne summarize in Chapter 6 the limited research that has been conducted on institutional entrepreneurship. Not surprisingly, given the focus of the Austrian school of economics on entrepreneurship, many of the papers discussed here are by followers of the Austrian school. While not empirical in nature, the papers discussed in this chapter serves as a nice background to recent empirical work focused on the long run sources of economic freedom. (For examples of work in this area, see the papers in Section 4 of my edited book with Robert Lawson, Economic Freedom: Causes and Consequences.)

Boettke and Coyne do a lot in this little volume. If I were teaching about entrepreneurship in a graduate economic development class in a policy school, this would be a nice text to use. There is only one way in which it could be considered to be incomplete and that is that they devote almost no time to how institutions or entrepreneurship are typically operationalized in the empirical literature. For example, over 400 papers use the EFW annual report to proxy for institutional quality. Personally, I would have liked to have heard the authors’ views on using the EFW as a measure of institutions, as well as providing the practicing economist an idea of how they might go out and use this knowledge of institutions in a paper. That is but a minor quibble, however, and does not take away from the fact that this book should be in the library holdings of every serious academic library.