Public Entrepreneurship

23 December 2009 at 2:49 pm 16 comments

| Peter Klein |

Joe Mahoney, Anita McGahan, Christos Pitelis, and I have written a paper, “Toward a Theory of Public Entrepreneurship,” exploring the application of concepts, theories, and approaches from the entrepreneurship literature to non-market behavior. We argue that governments, government agencies, social enterprises, charitable organizations, and other “public” actors can be described as being alert to opportunities for value creation and capture, exercising judgment over the deployment of resources under uncertainty, introducing technological and organizational innovations, and so on. These actors are, in a sense, “public entrepreneurs.” This characterization also helps highlight critical differences between private and public actors and organizations, differences relating to the definition and measurement of objectives, the ability to evaluate performance, the nature of external governance, and, of course, the role of coercion. The paper is very much an exploratory effort in this area, and we certainly welcome comments and suggestions.

Here’s the abstract:

This paper explores innovation, experimentation, and creativity in the public domain and in the public interest. Researchers in various disciplines have studied public entrepreneurship, but there is little work in management and economics on the nature, incentives, constraints and boundaries of entrepreneurship directed to public ends. We identify a framework for analyzing public entrepreneurship and its relationship to private entrepreneurial behavior. We submit that public and private entrepreneurship share essential features but differ critically regarding the definition and measurement of objectives, the nature of the selection environment, and the opportunities for rent-seeking. We describe four levels of analysis for studying public entrepreneurship, provide examples, and suggest new research directions.

Entry filed under: - Klein -, Entrepreneurship, Institutions, Public Policy / Political Economy. Tags: .

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16 Comments Add your own

  • 1. Cory Levy  |  23 December 2009 at 3:37 pm

    Sounds like a cool paper! The term “Public Entrepreneurship” is a neat term :). I will be reading this paper in full over my winter break.


  • 2. Shawn Ritenour  |  23 December 2009 at 7:06 pm

    While it is certainly helpful to distinguish between the entrepreneurial actions necessary for non-profit firms from for-profit firms, I have never liked using the terms “social entrepreneurship” or “public entrepreneurship” because of the leftist ideology they play into. It subtly affirms the fallacy that administrators of non-profit firms are social and benefit the public, whereas entrepreneurs who try to make a profit are anti-social and selfish, seeking only private gain (i. e. dirty capitalist pigs).

    In fact we know that all for-profit entrepreneurship is social in the sense that it deals with voluntary exchange and it contributes to the public good because the only way an entrepreneur reaps a profit is serving the public better then his competitor.

    I recognize that, by now, the vocabulary may be out of your hands due to conventional usage, but I would have been happier if the profession would simply have used the term “non-profit entrepreneur” instead.

  • 3. Peter Klein  |  24 December 2009 at 9:51 am

    Shawn, I understand your concern, and we are sensitive to this point. We try to explain in the paper that we do not use the term “public” to mean “provides benefits to the public or to society,” for then all voluntary market action would be public (a la Mandeville). Rather, we have in mind something closer to Mises’s (1944) distinction between private firms and bureaucracies. “Private,” in this context, means entrepreneurial actions designed to achieve a specific, narrowly defined, private agenda (e.g., profit maximization). “Public” entrepreneurs have an explicit “public” or “social” goal (e.g., eradicating poverty, providing so-called public goods, etc.. This doesn’t of course mean that “public entrepreneurs” are not purposeful actors with preference orderings, that “private entrepreneurs” benefit society, and so on. So the distinction we draw here wouldn’t make sense in all contexts, but seems a reasonable way to describe the particular phenomena we’re interested in. I certainly agree that these distinctions are problematic more generally.

    BTW we did think about other terms like “political entrepreneur,” “non-market entrepreneur,” “non-profit entrepreneur,” etc. but neither seemed exactly right (e.g., “non-profit” for most people means philanthropic, when we also wanted to include governmental, etc.).

  • 4. Shawn Ritenour  |  24 December 2009 at 10:31 am

    Peter, You are certainly right to make the distinction and I assumed that is how you and your fellow authors were using the terms. I didn’t mean to imply that you all were not sensitive to this point about the terminology, although that may be what my comment implied. I am probably just too sensitive to the rhetoric I hear these days coming from certain segments of the business ethics/stakeholders-not-shareholders crowd. Of course, it might be helpful for me to actually read the paper :).

    You make a good point also about the problems with the term “non-profit” connoting philanthropic activity and excluding the state. You also wouldn’t want to use “bureaucratic entrepreneur.” That is, I think, an oxymoron.

    Best wishes

  • 5. David Croson  |  24 December 2009 at 11:29 am

    This paper is going at the top of my holiday reading list! Maybe there can be a panel on the topic in Montreal?

    Just think about the revolution that occurred when formalized hierarchical management structures made the leap from state, church, and military organizations into the functional hierarchy of early businesses such as DuPont and General Motors.

    Possibly public entrepreneurship is the means by which activities that are ill-suited to the functional hierarchy can be re-planted back into government (and, dare I say, religion.) I think the military has already figured it out.

  • 6. srp  |  26 December 2009 at 5:28 am

    How about “rent seeker?”

  • 7. Joe Mahoney  |  26 December 2009 at 5:51 am

    We chose the term “public entrepreneurship” since we were highly influenced by Elinor Ostrom’s 1965 dissertation from UCLA (in which Harold Demsetz was a committee member) titled: Public Entrepreneurship: A Case Study in Ground Water Basin Management,

    At the October 2009 SMS Meetings in Washington D.C. on Sunday we presented our paper in which we concluded that the next generation of research in Strategy should join Williamson’s transaction costs governance literature with Elinor Ostrom’s property rights approach. That monday morning at SMS we all heard that Elinor Ostrom and Oliver Williamson were co-recipients of the Nobel prize in Economcis. We are apparently scholars who are “one day ahead of our time”

  • 8. Peter Klein  |  26 December 2009 at 10:59 am

    Joe, won’t that be a great story to tell at the banquet speech in Stockholm when we’re picking up our own Nobels?

    srp, I never liked that term, as it’s based on the confusing and hard-to-operationalize Marshallian concept of “rent,” while I prefer Fetter’s version.

  • 9. srp  |  27 December 2009 at 1:58 am

    I was trying to editorialize. But it really wasn’t fair since some of my favorite people are public entrepreneurs of a sort.

  • 10. David  |  30 December 2009 at 3:36 pm

    We argue that governments, government agencies, social enterprises, charitable organizations, and other “public” actors can be described as being alert to opportunities for value creation and capture, exercising judgment over the deployment of resources under uncertainty…

    I haven’t read the paper yet, but I wonder about conflating government agencies with charitable organizations as the later secures its capital through a market of free actors, while the former relies on taxation for its capital base? Within the government organization there may be uncertainty in the outcome of a particular deployment, for example, but little uncertainty concerning the source of additional capital for future deployments.

    As the government organization and the public actor do not have to incur some profit to initiate and sustain operations this would – I think – fundamentally alter the organization and the public entrepreneurs that work within it.

    … I’ll read the paper now.

  • 11. Peter Klein  |  30 December 2009 at 4:08 pm

    David, we agree that both distinctions you mention are important, and discuss them in detail the paper. Regarding capital supply, you are of course right that individual government agencies don’t raise funds in capital markets, but governments themselves do borrow, as well as tax, and in borrowing they compete with private borrowers (though of course their ability to tax and inflate to cover their losses allows them to raise capital on preferential terms). They typically compete with private firms in other factors markets too (e.g., labor).

  • [...] both academically and practically, integrates other concepts that cross sectors like privatization, public entrepreneurship, public-private partnership, and venture philanthropy.  The academic-practical integration has [...]

  • 13. Scott Bauer  |  12 November 2011 at 7:08 am

    Professor Klein,

    In your article Risk, Uncertainty, and Economic Organization, you discuss Mises’s argument against a socialist economy. You state that for Mises such an economy cannot by definition have entrepeneurs, because there are no monetary profits and losses defined as involving Misesian uncertainty.

    You also state that, per Mises, the directors of socialist enterprise, lacking profit/loss can only play market.

    What puzzles me is that now you appear to be defending a form of political entrepeneurship? If this is the case then does the bureaucrat or politician utilize tacit-knowledge/uncertainty in a profit-loss way? If so then doesn’t this undermine Misesian arguments that economic calculation makes socialism impossible?

    I’m a bit confused.

  • 14. Peter Klein  |  12 November 2011 at 5:31 pm

    Scott, I think it is useful in this context to distinguish between narrow and broad notions of entrepreneurship. Misesian entrepreneurship, in the narrow sense, requires private property, markets, and prices, so that entrepreneurs can engage in economic calculation. Following Mises, we might call this “catallactic” entrepreneurship. But we can also imagine a more general form of entrepreneurship — human action under uncertainty — which characterizes all human behavior, in a market context or not. We could say that your decision to read this blog post is entrepreneurial, in the sense that it requires some expenditure of resources (your time and attention, possibly some wear-and-tear on your computer, even money if your data connection is metered) and the benefits from reading it (enlightenment, entertainment, material for cocktail-party chatter) are uncertain. You’re acting as Knightian-Misesian entrepreneur in reading the post. But your “profits” and “losses” are purely subjective, and you don’t engage in calculation in the sense Mises has in mind in his 1920 article on socialism.

    Similarly, we can apply this broader, non-catallactic idea of entrepreneurship to many forms of non-market behavior (in the family, social club, nonprofit organization, or even government agency). Decision makers may have opportunities to exercise Knightian judgment, Kirznerian alertness, etc., even though (some) property is not privately owned, gains and losses can’t be measured in cardinal numbers (money), and so on. We discuss these differences in the paper.

    The point is that entrepreneurs in nonmarket settings often behave in ways that are analogous to “real,” market-based, money-profit-seeking entrepreneurship. It’s not entrepreneurship in the narrower, catallactic sense, but represents a kind of entrepreneurial behavior that we think can be illuminated using theories and concepts from the entrepreneurship literature.

  • 15. David  |  13 November 2011 at 9:54 am

    Though entrepreneurs (managers) representing public-state enterprises may, at times, behave in ways that appear similar to that of entrepreneurs outside the state enterprise, they cannot – in my opinion – be usefully thought of as entrepreneurs.

    Taken to its ‘logical’ conclusion – if state enterprise entrepreneurs are entrepreneurs like any other, and as the entrepreneur is an essential component of the market economy, then an economy dominated by state enterprises, functioning with monopoly power, should be as efficient in price discovery and value determination (the mundane economics) as any other. If the individual ownership of resources is only a component of a ‘narrow’ interpretation of the entrepreneur, if a more encompassing definition that includes the state as a market actor and entrepreneur is possible, then why should the entire economy not be the sole preserve of state entrepreneurs and state enterprises? If they behave as any other entrepreneur – seek knowledge, drive price discovery and transmit value judgments across the market – then it is not clear why the entire economy could not be predicated on this entrepreneurial activity unencumbered by non-state entrepreneurs.

    Socialist calculation, through this expanded definition of the entrepreneur, is possible despite the ownership of resources and factors of production remaining solely with the state. This state centered approach to market should be as efficient as any other form of value and price determination.

    But, of course, we know this is not true. Defining the entrepreneur may be a bit like defining pornography: difficult to precisely define in text, but you know it when you see it. The manager within a state enterprise is not an entrepreneur in any meaningful sense not only because the private ownership of resources is paramount to pricing and value determination, but because the state, unlike any other actor in an economy, has the power to create competition or dispense with it through regulation and law. The state can regulate to its advantage (whatever its agenda may be), and acts as a gatekeeper to the market. The state can also operate free of any profit imperative – all other market entities must secure revenue in excess of costs, but not the state due to its ability to tax society and enforce this taxation through the laws it also creates. The ‘entrepreneur’ in the state enterprise context is a manager driven by political directives which may or may not coincide with profit making (note: even the not-for-profit charity is involved in securing a revenue in excess of costs in order to fund whatever activities the charity is involved in). The state enterprise can invite or eliminate competition through laws and regulation. That the state enterprise manager may exhibit behaviors that at times seem consistent with those of the entrepreneur does not mean this manager can be defined as an entrepreneur in any meaningful way. It’s the slippery slope of relativism: A looks a bit like B, A acts in some ways congruent to B – so A is B. It’s a logical bridge too far in my estimation. To define the manager of a state enterprise as an entrepreneur like any other renders the definition so broad as to be of little use.

  • 16. Peter Klein  |  13 November 2011 at 11:54 am

    “[I]f state enterprise entrepreneurs are entrepreneurs like any other, and as the entrepreneur is an essential component of the market economy, then an economy dominated by state enterprises, functioning with monopoly power, should be as efficient in price discovery and value determination (the mundane economics) as any other. ”

    Not at all! If I’m shooting hoops in my driveway and make a move “like” one of Michael Jordan’s, does that make me as good as Michael Jordan?

    David, I think you’re missing the point of the exercise. If the goal is to compare the economic performance of capitalism and socialism, then I don’t think invoking the concept of public entrepreneurship is very useful. But there are many other questions of interest. How do state functionaries actually behave? How should they be incentivized and constrained to discourage rent-seeking and other forms of destructive behavior? What explains the establishment and growth of new bureaus and agencies, etc.?

    Remember that Mises wrote an entire book, Bureaucracy (1944), dealing largely with problems of public administration. This hardly means Mises thought socialism was just as good as capitalism!

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