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Article Type: Guest editorial From: Journal of Entrepreneurship and Public Policy, Volume 5, Issue 2.
1. Introduction to William Baumol’s “Entrepreneurship: Productive, Unproductive, and Destructive” symposium
The publication of “Entrepreneurship: productive, unproductive, and destructive” by William Baumol in the October 1990 issue of the Journal of Political Economy succeeded in bringing the entrepreneur back into the discussion of why some countries are rich and others are poor. Highlighting the importance of the entrepreneur was not a new thing for Baumol. For example, Baumol (1968) reminded the economics profession that while the entrepreneur was a central figure in the works of classical economists such as Adam Smith, Jean-Baptiste Say, or Richard Cantillon and in the works of early twentieth century neoclassical economists such as Joseph Schumpeter and Frank H. Knight, “the entrepreneur has been read out of the model” in contemporary neoclassical economic theory (Baumol, 1968, p. 67). In this earlier essay, Baumol (1968, p. 71) reminded us that “in a growth-conscious world […] that encouragement of the entrepreneur is the key to the stimulation of growth.” In the 1990 article, Baumol took his previous observation a step further. Not only can the entrepreneur be the key to economic development but she can also be the opposite, depending on the institutional conditions she faces.
In other words, in terms of wealth creation the entrepreneur can use her talents for “good” or “bad.” Whether the entrepreneur will use her talents to create wealth as opposed to consume or destroy wealth depends mostly on the incentives she faces. Therefore, Baumol tells us, to better understand how entrepreneurs affect economic development we must focus on the “rule of the game” and how they influence entrepreneurial behavior toward socially productive or unproductive activities. To put it more succinctly: institutions matter.
While Baumol’s insight was not new, the clarity with which he made his argument reminded economists of what they had once known. The classical economists from Adam Smith onward, as well as the Austrian school of economics, clearly emphasized the importance of institutions in providing incentives to individuals to cooperate peacefully with each other and to allocate their talents to productive activities. As Baumol (1968) highlighted, however, mainstream economics had forgotten about the entrepreneur. It therefore not be underestimated how significant Baumol’s paper has been to placing institutions and entrepreneurship back into the economics of growth and development. To give but one example of the importance of Baumol’s article on the entrepreneurship and growth literatures, Google Scholar has the article as having over 4,000 citations since its publication just over 25 years ago. While one can only speculate, it is highly doubtful that without Baumol’s (1990) seminar work, institutions and entrepreneurship would play such a prominent role in the economic development and growth literature as it does today. In many ways, the effect of Baumol’s paper on the economic profession is comparable to that of Ronald Coase (1960).
2. Entrepreneurship: productive, unproductive, and destructive – 25 years after
The papers in this special issue were originally presented at a mini-symposium that took place during the 85th Annual Meetings of the Southern Economic Association, 23-25 November, 2015 in New Orleans. The purpose of the symposium was to celebrate the 25th anniversary of the publication of Baumol (1990) by having a number of prominent scholars present new research further exploring the themes of Baumol’s seminal article. The papers you hold in your hand do just that – they honor, expand, and build on Baumol’s significant contribution to the literature examining the link between entrepreneurship, institutions, and development and economic growth.
The first paper by Peter J. Boettke and Ennio Piano show how Baumol’s seminal paper “forced the economic profession to pay closer attention to the institutional structure within which human action take places.” Boettke and Piano further argue that the “contemporary transitional political economists have failed to fully realized the implications of the institutional revolution” that Baumol initiated within the growth theory and development economics literature. They then proceed to demonstrate the powerfulness of Baumol’s work and apply it to the case of the Soviet Russia’s economic transition from a centrally planned to a free market economy.
Stephan F. Gohmann, Bradley K. Hobbs, and Myra J. McCrickard follow in the empirical footsteps of papers like Murphy et al. (1991) and Sobel (2008) that tried to empirically test the relationship between institutions and the allocation of entrepreneurial talent. Gohmann et al. empirically test Baumol’s theory of allocation of entrepreneurial talents by examining the link between the level of state institutional quality (as measured by a state economic freedom index) and state industry employment. An important implication of their work is to show that greater economic freedom reduces entrepreneurs’ incentives to use their talent toward seeking “special treatment from the government” via unproductive entrepreneurship.
Alexandre Padilla and Nicolás Cachanosky reexamine Baumol’s typology of entrepreneurship and introduce a subcategory: indirectly productive entrepreneurship. They argue that, while government regulation is often viewed as deterring productive entrepreneurship and encouraging unproductive entrepreneurship, sometimes it can prompt entrepreneurs to allocate indirectly their productive talents to mitigate the new costs market participants endure as a result of government regulation. To illustrate this, Padilla and Cachanosky use the case of cell phone storage outside New York City’s high schools.
Niklas Elert, Magnus Henrekson, and Joakim Wernberg build on their previous research on evasive entrepreneurship (Douhan and Henrekson, 2010; Elert and Henrekson, 2015) in the fourth paper of this special issue. Their previous work argues that Baumol’s typology was incomplete and did not account for entrepreneurs’ innovating through attempts to circumvent or to disrupt existing institutional arrangements. They argue that evasive entrepreneurs do not go unnoticed and often elicit a response from regulators and lawmakers, which can lead to an alteration of the institutional framework. They use the file-sharing platform The Pirate Bay as a case study to illustrate and “to improve our understanding of the relationship between policymaking and entrepreneurship in the digital age.”
Following Buchanan (1980), Raymond J. March, Adam G. Martin, Audrey Redford, argue that profit-seeking and rent-seeking entrepreneurships only differ in their substance, that is, their net impact on the economic pie – whether they increase or shrink it – but not their form, which is to capture a profit. Whether entrepreneurs engage in wealth-creating or wealth-destroying activities is largely dependent on the institutional environment in which they operate. When analyzing the contribution of the two leading experts in the economic literature on entrepreneurship, William Baumol and Israel Kirzner, Martin et al. argue that their contributions are complementary, “providing a more complete taxonomy of the substance of entrepreneurial activity.” They illustrate their analysis by identifying the various types of entrepreneurship we find in the legal and illegal drug markets and how they fit the Baumol-Kirzner’s typology of entrepreneurship.
Christopher J. Coyne, Courtney Michaluk, and Rachel Reese show how the rampant fraud, corruption, and resource wasting we observe during US interventions in Afghanistan and Iraq are examples of Baumol’s unproductive entrepreneurship. Following Baumol’s insights they show the best explanation for this type of behavior is “rule-based” and can be explained by the industrial organization of the US-military sector, whose existence is dependent on “continued government spending and funding”; therefore, “attracting and encouraging unproductive behaviors in both peacetime and wartime.”
In his seminal paper, Baumol (1990) focussed most of his analysis on productive and unproductive entrepreneurship but provided little analysis of the concept of destructive entrepreneurship mentioned in the paper’s title. Sameeksha Desai, who previously developed a more extensive analysis of destructive entrepreneurship and the conditions under which entrepreneurs allocate their talents to destructive activities via either misappropriation or raiding the resources (Desai and Acs, 2007; Desai et al., 2013), extends her analysis of destructive entrepreneurship to the context of security policy and counterinsurgency programs in conflict regions with a special focus on disarmament, demobilization, and reintegration (DDR) programmes. She concludes our special issue by showing how a good understanding of what is destructive entrepreneurship and under what conditions entrepreneurs allocate their talents to destructive activities is important when it comes to design DDR programmes within the context of counterinsurgency activities.
As these papers show, William Baumol’s insight on how different institutional arrangements provide different incentives for entrepreneurs to allocate their talents had a profound impact on researchers in economics and entrepreneurship. The common message communicated is that the insights of Baumol (1990) are far more powerful than might have been apparent in the early 1990s. There is a lot of more research to be done on the relationship between institutions – the rules of the game – and the role of entrepreneurs in the development process.
Baumol, W.J. (1968), “Entrepreneurship in economic theory”, American Economic Review, Vol. 58 No. 2, pp. 64-71
Baumol, W.J. (1990), “Entrepreneurship: productive, unproductive, and destructive”, Journal of Political Economy, Vol. 8 No. 5, pp. 893-921
Buchanan, J.M. (1980), “Rent seeking and profit seeking”, in Buchanan, J.M., Tollison, R.D. and Tullock, G. (Eds), Toward a Theory of the Rent-Seeking Society, Texas A&M University Press, College Station, TX, pp. 3-15
Coase, R.H. (1960), “The problem of social cost”, The Journal of Law & Economics, Vol. 3, pp. 1-44, available at: www.jstor.org.skyline.ucdenver.edu/stable/724810
Desai, S. and Acs, J.Z. (2007), “A theory of destructive entrepreneurship”, Jena Economic Research Papers, Working Paper No. 85, Friedrich-Schiller University and Max Planck Institute of Economics, Jena
Desai, S., Acs, Z.J. and Weitzel, U. (2013), “A model of destructive entrepreneurship: insight for conflict and postconflict recovery”, Journal of Conflict Resolution, Vol. 57 No. 1, pp. 20-40
Douhan, R. and Henrekson, M. (2010), “Entrepreneurship and second-best institutions: going beyond Baumol’s typology”, Journal of Evolutionary Economics, Vol. 20 No. 4, pp. 629-643
Elert, N. and Henrekson, M. (2015), “Evasive entrepreneurship and institutional change”, IFN Working Paper No. 1044, Research Institute of Industrial Economics, Stockholm
Murphy, K.M., Shleifer, A. and Vishny, R.W. (1991), “The allocation of talent: implications for growth”, Quarterly Journal of Economics, Vol. 106 No. 2, pp. 503-530
Sobel, R.S. (2008), “Testing Baumol: institutional quality and the productivity of entrepreneurship”, Journal of Business Venturing, Vol. 23 No. 6, pp. 641-655
About the Guest Editor
Dr Alexandre Padilla is an Associate Professor of Economics at the Metropolitan State University of Denver. He obtained his Bachelor, Master, and Doctorate in Economics from the University Paul Cézanne Aix-Marseille III in France. His primary research fields are law and economics, industrial economics, and the economics of vices. Dr Alexandre Padilla can be contacted at: mailto:email@example.com