Posts filed under ‘Entrepreneurship’
| Peter Klein |
Two interesting new papers on entrepreneurship. The first deals with financial capital — specifically, the degree to which entrepreneurship (defined as self-employment) is constrained by credit availability. As regular readers know, I’ve been crusading against the idea that entrepreneurship consists of recognizing opportunities, in favor of the alternative idea that entrepreneurship involves putting assets at risk. The latter view directs our attention to how entrepreneurial activities are funded; rather than assuming that all positive-NPV opportunities are exploited, we should focus on the investor’s decision to allocate risk capital to one or another potential project. Put simply, “entrepreneurship is exercised not only by founders, but by funders.”
Funders care about collateral, which suggests that self-employment is constrained by the availability of durable personal assets like housing. In a new NBER working paper, “Housing Collateral and Entrepreneurship,” Martin Schmalz, David Sraer, and David Thesmar find a strong correlation between self-employment and house prices. “Our empirical strategy uses variations in local house prices as shocks to the value of collateral available to individuals owning a house and controls for local demand shocks by comparing entrepreneurial activity of homeowners and renters operating in the same region. We find that an increase in collateral value leads to a higher probability of becoming an entrepreneur. Conditional on entry, entrepreneurs with access to more valuable collateral create larger firms and more value added, and are more likely to survive, even in the long run.”
My Missouri colleague Colleen Heflin, along with Seok-Woo Kwon and Martin Ruef, have a new paper in the American Sociological Review on social capital and self-employment. Many papers have examined how an individual’s “social capital” — defined as networks of social and professional relationships — affects various economic outcomes, including the propensity to start a firm. Colleen and her colleagues focus at the community level and find that “individuals in communities with high levels of social trust are more likely to be self-employed compared to individuals in communities with lower levels of social trust. Additionally, membership in organizations connected to the larger community is associated with higher levels of self-employment, but membership in isolated organizations that lack connections to the larger community is associated with lower levels of self-employment.”
Of course, self-employment is only a crude proxy for entrepreneurship in the functional sense, but it is a widely used proxy in the empirical literature. I suppose entrepreneurship researchers, like other social scientists, resemble the drunk looking for his car keys under the lamppost. Who am I to complain?
| Peter Klein |
Kudos to Richard Ebeling for a nice piece on Herbert J. Davenport, one of the most American economists of the early twentieth century, mostly forgotten today. (One exception: Daveport was the founding Dean of the University of Missouri’s business school, which named its donor society after him.) Davenport, one of Frank Knight’s teachers, was an early adopter of the subjective theory of value introduced by Carl Menger and, along with Philip Wicksteed and Frank Fetter, helped to spread the marginal revolution in the English-speaking world.
Davenport was also a contributor to the economic theory of entrepreneurship, as noted by Ebeling:
Here was the mechanism by which the logical causality between demands and supplies was brought into actual implementation in the complexity of market activities. The entrepreneur stood, Davenport argued, “as the intermediary in the case, representing in his hiring and buying of productive factors, the demand of the purchasing public, and representing in his cost computations, the degree of scarcity of the productive factors relative to the demand for their products.”
On the one hand, it was “the entrepreneurs who furnished the demand for all . . . the things which are called production goods,” he explained. On the other hand, it was “the competition of the entrepreneurs of each industry with the other entrepreneurs of the same industry, and the competition of the entrepreneurs of each industry with those of other industries” that brought about the emergence of factor prices. All the money outlays, the objectified market “costs” that an entrepreneur had to incur, all traced back to the demand for other things as reflected in the bids of competing entrepreneurs. . . .
“The various markets in which he [the entrepreneur] must hire and buy are fluctuating in their prices,” he said. “And the price at which he will finally market his product is uncertain . . . His alternative lines of activities, also, are subject to uncertainties.” All of the entrepreneur’s calculations, therefore, were expectiational.
His computations of “costs of production,” Davenport went on, “appears to be backward-looking computation,” but in reality was “only a basis for a further and forward-looking computation.” The entrepreneur’s glance was turned towards those future – uncertain – opportunities that still lie before him, and from which he would have to choose the one that he believed offered the greatest net advantages.
Ultimately, then, the entrepreneur’s “cost” of production was reducible to his individual judgments,
Ebeling is quoting Davenport’s 1913 book The Economics of Enterprise, which hints at the “judgment-based view” of entrepreneurship elucidated more fully by Knight.
| Peter Klein |
Following up my earlier post on artistic collaboration, and its relationship to entrepreneurial collaboration, here’s a quote from Paul Cantor on his new book, The Invisible Hand in Popular Culture: Liberty vs. Authority in American Film and TV:
Many people who condemn pop culture and dismiss it as artistically worthless dwell on the fact that films and television shows are almost never the products of a single artist working on his own. It is therefore important to show that many of the great works of high culture grew out of a collaborative process too. There is nothing about cooperation in artistic creation that precludes high quality. Too many cooks may spoil the broth, but they may also each add a distinctive flavor and work together to bring the recipe to perfection. The processes of synergy and feedback work in popular culture just the way they do in other areas of human endeavor. This is all part of my defense of popular culture — to demonstrate that the conditions of production in film and television are not necessarily incompatible with artistic as well as commercial success.
Likewise, entrepreneurship and innovation are collaborative media — which is easy to see once you realize that entrepreneurship is not about recognizing “opportunities,” but acquiring and controlling resources that are used in production.
| Peter Klein |
This week’s Academy of Management conference was fun and interesting, if overwhelming (over 12,000 nerds graced the Disney World resort hotels with their presence). A few post-conference links, thoughts, etc.
- Twitter was a big deal. Check out the #AOM2013 hashtag for the stream. There was even an officially sponsored Tweet Up. I enjoyed playing along (as @petergklein) but am not totally clear how such a tool is best used during a conference.
- I really enjoyed a Saturday morning session on “Opportunities: The State of the Debate” with me, Sharon Alvarez, Jay Barney, Dimo Dimov, Mike Wright, Devereaux Jennings, and Roy Suddaby. I was the odd man out, giving my usual shtick about how the concept of “opportunities” should be eliminated altogether — perhaps a bit cheeky given the session title, but YOLO, right? (My slides are here, though they make less sense without the accompanying patter.) Jay Barney started the session by stating that all the panelists, except me, agree that opportunities should be the unit of analysis in entrepreneurship research but that opportunities should not (necessarily) be regarded as “discovered,” but also created. By the end of the session, it seemed that all but one panelist rejected the discovery concept altogether, and most grudgingly admitted that maybe we could talk about entrepreneurs creating products and services, rather than creating “opportunities.” Anyway, a good time was had by all.
- There were lots of other interesting sessions, too many to mention. Some have already been described below. The session on “Myths and Realities of Capitalism” was particularly, well, controversial.
- Here’s a report on a session (that I missed) on translating research results into practice by engaging the media (via Dave Ketchen).
| Peter Klein |
There are too many good AoM sessions to mention them all — there’s even a Tweet Up for social-media freaks (hey, where’s the Insta-Slam?) — but I’ll mention two more Professional Development Workshops of interest:
Myths and Realities of Capitalism: Micro and Macro Perspectives
Session #609, Sunday, Aug 11 2013 4:30PM – 7:30PM at WDW Dolphin Resort in Asia 3
Organizer: Rajshree Agarwal, U. of Maryland
Speaker: John Allison, Cato Institute
Speaker: Yaron Brook, Ayn Rand Institute
Speaker: Paul Green, Morning Star
Speaker: Jay B Barney, Eccles School, U. of Utah
Speaker: Doug Kirkpatrick, Morning Star Institute
Speaker: Peter G Klein, U. of Missouri
Speaker: Edwin A. Locke, U. of Maryland, College Park
Speaker: John Sullivan, Center for International Private Enterprise
Organizer: Hildy Teegen, U. of South Carolina
Speaker: Paul E. Tesluk, U. of Buffalo
The theme of the 2013 Academy of Management Meetings is based on a call into question of the efficacy and merits of capitalism—and the free enterprise system that it entails. However, all of the economic systems in the world today represent varying degrees of free enterprise and government intervention. This PDW addresses the call of examining micro and macro perspectives on some of the myths and realities of capitalism. A critical and informed examination of perhaps the most foundational underpinning of business and management —voluntary trade among producers based on the premise of human rights to life, liberty and pursuit of happiness—is urgently called for. The PDW brings together micro and macro scholars within the Academy, along with leading businessmen and spokespersons from policy institutes. The format of the PDW allows for an articulation of premises that guide both micro individual behavior and macro institutional factors that are required for value creation under a capitalist system, and a discussion of the alleged virtues and vices of capitalism. The workshop is designed in four parts and is structured to provide workshop participants with the opportunity to learn from experts and each other and to co-develop relevant implications for management faculty around the world.
Entrepreneurial Opportunity—The State of the Debate and The Linkages to Management
Session #258, Saturday, Aug 10 2013 10:00AM – 12:00PM at WDW Swan Resort in Mockingbird 1
Chair: Robert Joseph Wuebker, U. of Utah
Discussant: Roy R Suddaby, U. of Alberta
Presenter: Jay B Barney, Eccles School, U. of Utah
Participant: David Audretsch, Indiana U., Bloomington
Presenter: Dimo Dimov, U. of Bath
Presenter: Sharon Alvarez, The Ohio State U.
Presenter: Peter G Klein, U. of Missouri
Presenter: Mike Wright, Imperial College London
Presenter: P. Devereaux Jennings, U. of Alberta
For more than two decades, the field of entrepreneurship has struggled to converge on a definition of a core distinction in the field—entrepreneurial opportunity. The recent publication of a series of reflection papers in the Academy of Management—along with the published reactions, comments on the reactions, and meta-commentary—highlight both the importance of this dialogue to the field and illuminate the competing and mutually exclusive perspectives on (1) the nature of entrepreneurial opportunity and (2) the importance of the debate itself. This workshop offers a structured discussion about the status of entrepreneurial opportunity with the individuals who are at the “sharp end” of the debate, and framed by the journal editors that are directly involved in promoting, framing, and shaping it. We accomplish this through a panel format in which we curate representative positions on the question of entrepreneurial opportunity. Each panelist will reflect on the historical and theoretical roots of their position; note key assumptions and important priors; and elucidate the consequences of each position on the research and teaching program for the field. Following our panel, editors from Academy of Management Journal and Organization Science will offer their perspective and lead a Q&A session between panelists and participants.
| Peter Klein |
Welles was perhaps the greatest auteur of cinema and modern theater, so it’s no surprise that he comes out in favor of flatter hierarchies:
OW: [Irving] Thalberg was the biggest single villain in the history of Hollywood. Before him, an producer made the least contribution, by necessity. The producer didn’t direct, he didn’t act, he didn’t write — so, therefore, all he could do was either (A) mess it up, which he didn’t do very often, or (B) tenderly caress it. Support it. Producers would only go to the set to see that you were on budget, and that you didn’t burn down the scenery. But [Louis B.] Mayer made way for the producer system. He created the fellow who decides, who makes the directors’ decisions, which had never existed before.
HJ: Didn’t the other studio heads interfere with their directors?
OW: None of the old hustlers did that much harm. If they saw somebody good, they hired him. They tried to screw it up afterwards, but there was still a kind of dialogue between talent and the fellow up there in the front office. They had that old Russian-Jewish respect for the artist. All they did was say what they liked, and what they didn’t like, and argue with you. That’s easy to deal with. And sometimes the talent won. But once you got the educated producers, he has a desk, he’s gotta have a function, he’s gotta do something. He’s not running the studio and counting the money — he’s gotta be creative. That was Thalberg. The director became the fellow whose only job was to day, “Action” and “Cut.” Suddenly, you were “just a director” on a “Thalberg production.” Don’t you see? A role had been created in the world. Just as there used to be no conductor of symphonies.
HJ: There was no conductor?
OW: No. The konzertmeister, first violinist, gave the beat. The conductor’s job was invented. Like the theater director, a role that is only 150, 200 years old. Nobody directed plays before then. The stage manager said, “Walk left on that line.” The German, what’s his name, Saxe-Meiningen, invented directing in the theater. And Thalberg invented producing in movies. He persuaded all the writers that they couldn’t write without him, because he as he great man.
Clearly Orson would not agree with my take on entrepreneurship and ultimate responsibility, as applied to the arts. Or do well in a restaurant kitchen. I have to admit, though, that Welles has a certain credibility on the subject of creativity.
| Peter Klein |
Quote of the day, from Peter Gumbel’s France’s Got Talent: The Woeful Consequences of French Elitism, an interesting first-person account of the French educational system:
[T]he patterns of behavior established at [French] school appear to continue in later life, reproducing themselves most obviously in the workplace. If you learn from an early age that volunteering answers at school may prompt humiliating put-downs from your teachers, how active a participant will you be in office strategy discussions in the presence of an authoritarian boss? If working together in groups was discouraged as a child, how good a team player will you be as a grown-up? If you are made to believe as a 10-year-old that it’s worse to give a wrong answer than to give no answer at all, how will that influence your inclination to take risks?
I won’t repeat the apocryphal George W. Bush quote that “the problem with France’s economy is that the French have no word for entrepreneur,” but I will say that I have found French university students to be less aggressive than their US or Scandinavian equivalents. To be fair, when I’ve taught in France it has been in English, and I initially attributed the students’ reluctance to speak up, to answer questions, and to challenge the instructor to worries about English proficiency. But talking to French colleagues, and reading accounts like Gumbel’s (based on his experiences teaching at Sciences Po), I think the problem is largely cultural. The French system tends to favor conformity and memorization over creativity and spontaneity, which may or may not have a harmful effect on the performance of French organizations and French attitudes toward entrepreneurship and innovation.
I’m curious to know what our French readers think (but don’t hammer me with Bourdieu or Crozier references, please).
| Peter Klein |
I am wary of adding yet another conceptual margin for entrepreneurial action but I highly recommend a new (and for the moment, ungated) paper in the Scandinavian Economic History Review by the distinguished economic historian Joel Mokyr on “cultural entrepreneurship.” Starting from a broadly Schumpeterian perspective, Mokyr focuses on individuals who introduce and disseminate novel ideas:
[E]ach individual makes cultural choices taking as given what others believe. It is not a priori obvious how that affects one’s choices. It may affect them positively because conformism implies that there is some social cost associated with deviancy, or because people may reason that if the majority believes a certain thing, there may be wisdom in it (thus saving on information costs). But there can be a reverse reaction as well, with non-conformists perversely rebelling against existing beliefs. What matters for my purposes is that for a small number of individuals, the beliefs of others are not given but can be changed. I shall refer to those people as cultural entrepreneurs. Their function is much like entrepreneurs in the realm of production: individuals who refuse to take the existing technology or market structure as given and try to change it and, of course, benefit personally in the process. Much like other entrepreneurs, the vast bulk of them make fairly marginal changes in our cultural menus, but a few stand out as having affected them in substantial and palpable ways.
Succinctly expressed: “cultural entrepreneurs are the creators of epistemic focal points that people can coordinate their beliefs on.”
Mokyr’s focus, like Schumpeter’s, is not entrepreneurship per se, but its effects, particularly on long-run economic growth, and his entrepreneurship construct is somewhat undertheorized. But he provides fascinating examples, ranging from Mohammed and Luther to Francis Bacon, Isaac Newton, and Adam Smith. He focuses in particular on Bacon and Newton, describing Bacon’s work as “the coordination device which served as the point of departure for thinkers and experimentalists for two centuries to come. The economic effects of these changes remained latent and subterranean for many decades, but eventually they erupted in the Industrial Revolution and the subsequent processes of technological change.” Newton and the Royal Society “raise[d] the social standing of scientists and researchers as people who should be respected and supported and [provided] them with a comfortable material existence.” (Mostly good.)
I’m not an expert on cultural theory or history and am not sure how much the “cultural entrepreneur” construct ads to our understanding of cultural change (other than relabeling, a frequent worry in entrepreneurship studies). But the paper is a great read, highly provocative and informative, and addresses big questions. Check it out.
| Peter Klein |
Microfinance and microenterprise have been touted as a new model for economic development, a way to encourage investment, innovation, and business creation and raise living standards without having to go through large-scale industrialization. We’ve tended to be skeptical, however, particularly about the most touted microfinance providers such as the Grameen Bank. Theoretically, the kinds of repayment plays that make microfinance feasible (high interest rates, strong peer monitoring) seem to limit its scope; besides, not everyone wants to be a business owner. The empirical evidence has not been encouraging — microfinance may achieve some social goals, like a sense of empowerment among microenterprise owners, but does not seem to have much impact on overall economic activity. It may not be possible to jump from a largely rural, agrarian society to an entrepreneurial capitalist one without going through a period of large-scale industrial development.
These musings are inspired by a new NBER working paper from the J-PAL group which uses a randomized controlled trial to study the effects of microfinance in an urban Indian setting. The results confirm the suspicions above: access to microfinance brings about some changes in behavior, but has no noticeable effect on standards of living or overall economic performance. Here’s the info:
The Miracle of Microfinance? Evidence from a Randomized Evaluation
Esther Duflo, Abhijit Banerjee, Rachel Glennerster, Cynthia G. Kinnan
NBER Working Paper No. 18950, May 2013
This paper reports on the first randomized evaluation of the impact of introducing the standard microcredit group-based lending product in a new market. In 2005, half of 104 slums in Hyderabad, India were randomly selected for opening of a branch of a particular microfinance institution (Spandana) while the remainder were not, although other MFIs were free to enter those slums. Fifteen to 18 months after Spandana began lending in treated areas, households were 8.8 percentage points more likely to have a microcredit loan. They were no more likely to start any new business, although they were more likely to start several at once, and they invested more in their existing businesses. There was no effect on average monthly expenditure per capita. Expenditure on durable goods increased in treated areas, while expenditures on “temptation goods” declined. Three to four years after the initial expansion (after many of the control slums had started getting credit from Spandana and other MFIs ), the probability of borrowing from an MFI in treatment and comparison slums was the same, but on average households in treatment slums had been borrowing for longer and in larger amounts. Consumption was still no different in treatment areas, and the average business was still no more profitable, although we find an increase in profits at the top end. We found no changes in any of the development outcomes that are often believed to be affected by microfinance, including health, education, and women’s empowerment. The results of this study are largely consistent with those of four other evaluations of similar programs in different contexts.
| Peter Klein |
That’s the title of a new review paper by Aaron Chatterji, Ed Glaeser, and William Kerr (a gated NBER working paper, unfortunately). Agglomeration has been a huge issue in the entrepreneurship, technology strategy, innovation policy, and economic growth literatures and it’s nice to have an up-to-date, not-very-technical review paper. (Hopefully there is an ungated copy out there somewhere.)
Clusters of Entrepreneurship and Innovation
Aaron Chatterji, Edward L. Glaeser, William R. Kerr
NBER Working Paper No. 19013, May 2013
This paper reviews recent academic work on the spatial concentration of entrepreneurship and innovation in the United States. We discuss rationales for the agglomeration of these activities and the economic consequences of clusters. We identify and discuss policies that are being pursued in the United States to encourage local entrepreneurship and innovation. While arguments exist for and against policy support of entrepreneurial clusters, our understanding of what works and how it works is quite limited. The best path forward involves extensive experimentation and careful evaluation.
Update: ungated version here.
| Peter Klein |
The new issue of the Academy of Management Perspectives features a symposium, edited by Mike Wright, on “Private Equity: Managerial and Policy Implications.” The symposium includes “Private Equity, HRM, and Employment” by Mike with Nick Bacon, Rod Ball, and Miguel Meuleman; “The Evolution and Strategic Positioning of Private Equity Firms” by Robert E. Hoskisson, Wei Shi, Xiwei Yi, and Jing Jin; and “Private Equity and Entrepreneurial Governance: Time for a Balanced View” by John L. Chapman, Mario P. Mondelli, and me. The symposium came out very nicely, if I may say so, covering a variety of strategic, entrepreneurial, and organizational issues related to private equity firms and companies receiving private equity finance.
In his introduction Mike highlights five main contributions:
First, the papers address the need to consider the systematic evidence on the managerial and strategic aspects of PE, in relation to both portfolio firms and PE firms, which has been largely fragmented if not nonexistent. Second, the papers analyze the impact of PE during economic downturns and demonstrate the underlying resilience of PE-backed portfolio firms. Third, the symposium provides an opportunity to develop insights that compare the managerial impact of PE with different forms of ownership and governance. Fourth, the articles in this symposium highlight the heterogeneity of the private equity phenomenon. Finally, in the context of continuing public attention to PE, which has been heightened by the U.S. presidential race and the global recession, the evidence presented in this symposium paints a rather more positive view than the hyperbole of some of the industry’s critics would suggest. Taken together, these contributions indicate a need for caution in attempts to tighten the regulation of PE lest the economic, financial, and social benefits be lost.
| Peter Klein |
Peter Lewin blogged earlier on the ten-year retrospectives by Scott Shane and Venkataraman et al. on the influential 2000 Shane and Venkataraman paper, “The Promise of Entrepreneurship as a Field of Research.” As Peter mentioned, Shane acknowledges critics of the opportunity construct such as Sharon Alvarez, Jay Barney, Per Davidsson, and me, but dismisses our concerns as trivial or irrelevant.
The January 2013 issue of AMR includes a formal response by Alvarez and Barney, as well as rejoinders by Shane (with Jon Eckhardt) and Venkataraman (with Saras Sarasvathy, Nick Dew, and William Forster). The dialogue is well worth reading. I didn’t participate in the symposium but do have a brief response to Shane.
My critique of Shane’s work, and the opportunity-discovery perspective more generally, is that the scientific understanding of entrepreneurship has been held back by the focus on opportunities. The basic idea is simple: ”opportunities” do not exist objectively, but are only only subjective images, or conjectures, about future possibilities. They exist in the mind of the entrepreneur, who takes actions to try to bring them about. The very concept of opportunity makes sense only ex post, after actions have been taken and future outcomes realized, leading to realized profits and losses. Under uncertainty, there are no opportunities, only entrepreneurial forecasts, which may turn out to be correct or incorrect. (My critique is slightly different from that of Alvarez and Barney, who argue that some opportunities are “discovered,” but others are “created.” My position is that the whole idea of opportunity is at best redundant, and at worst misleading and harmful.) I maintain that the unit of analysis in entrepreneurship research should be action (investment) under uncertainty, not the discovery (or creation) of profit opportunities.
These arguments are laid out in my 2008 SEJ article and in the Foss-Klein 2012 book. They also came to the fore in a recent exchange with Israel Kirzner, the intellectual father of the opportunity construct. (more…)
| Peter Klein |
I haven’t been following the Cato Unbound debate on US copyright law, but Adam Mossoff directs me to Mark Schultz’s post, “Where are the Creators? Consider Creators in Copyright Reform.” Mark thinks current debates over copyright law neglect the role of creativity: “Too often, the modern copyright debate overlooks the fact that copyright concerns creative works made by real people, and that the creation and commercialization of these works requires entrepreneurial risk taking. A debate that overlooks these facts is factually, morally, and economically deficient. Any reform that arises from such a context is likely to be both unjust and economically harmful.” Adam thinks Mark’s position “calls out the cramped, reductionist view of copyright policy that leads some libertarians and conservatives to castigate this property right as ‘regulation’ or as ‘monopoly.’”
As one of those libertarians critical of copyright law, but also an enthusiast for the fundamental creativity of the entrepreneurial act, let me respond briefly. Mark is certainly right that creative works are created by individuals (not, “discovered,” as some of the entrepreneurship literature might lead you to believe). But I don’t see the implications for copyright law. The legal issue is not the ontology of creative works, but the legal rights of others to use their own justly owned property in relation to these creative works. Copyright law is, after all, about delineating property rights, and whether legal protection should be extended to X does not follow directly from the fact that X was “created” instead of “discovered.”
Mark uses the language of entrepreneurship, and I think this argues against his conclusion. Property law protects the property of the entrepreneur, and the ventures he creates, not the stream of income accruing to those ventures. Suppose Mark has the brilliant insight to open a Brooklyn-style deli on a street corner here in Columbia, Missouri, makes lots of money, and then I open a similar shop across the street, cutting into his revenues. No one would argue that I’ve violated Mark’s property rights; the law rightly protects the physical integrity of Mark’s shop, such that I can’t break in and steal his equipment, but doesn’t protect him against pecuniary externalities. The fact that Mark’s restaurant wouldn’t have existed if he hadn’t created it — that “real people make this stuff,” as he puts it — has no bearing on the legality of my opening up a competing restaurant, even though this harms him economically.
| Peter Klein |
Northwestern’s Searle Center, headed by Dan Spulber, is holding its sixth annual conference on innovation and entrepreneurship 6-7 June 2013. I have attended before and the papers and discussion are typically very high quality. Proposals are due 15 February. The full call for papers is here and below the fold. (more…)
| Peter Klein |
The Strategic Management Society conference has just wrapped up from the lovely city of Prague. Three-fourths of the O&M team,along with several former guest bloggers, enjoyed the festivities. There were many excellent papers, panels, workshops, and social events. Too many to summarize here, but I’ll mention a few highlights:
- A panel organized by good-twin Teppo Felin, “What Are the Big Questions in Strategy?” More on this soon from one of the participants, who used the opportunity to plug his new book shamelessly.
- The Dan and Mary Lou Schendel Best Paper Prize, “to honor substantial work published in the SMJ,” at least five years prior to the award, to Oliver Williamson for his 1991 paper “Strategizing, Economizing, and Economic Organization.”
- A panel on teaching strategic entrepreneurship at the undergraduate, MBA, and PhD levels. I covered the third of these; my slides are here.
- A “common ground” session on “Austrian Economics and Creative Destruction,” demonstrating the growing interest in the Austrian school among management and organizational scholars.
I also participated in a pre-conference workshop on career strategy, and was asked to talk about social media. Should PhD students and untenured assistant professors blog, tweet, share professional information on Facebook, etc.? I said I could see no evidence that a social media presence had hurt any young scholar; quite the contrary, blogs (like this one) and other, appropriate, uses of social media, can enhance a scholar’s presence and reputation. I argued that it’s a mistake to view these as competing with serious research; after all, it’s not like someone’s going to say, “I was going to complete a major research article today, but decided to send a tweet instead.” Rather, judicious use of blogs, Facebook, Twitter, etc. is a complement to serious research. I think of it as water-cooler or lunch-table chatter with colleagues. You learn about people’s broader interests, their sense of the field, what topics they think are particularly interesting, what they’re reading, etc. Professionals like to know this about each other. Learning these sorts of things about colleagues certainly doesn’t make you think less of them!
There’s much more to report — including an episode of me impersonating a female colleague — but that will have to wait for a future post.
| Peter Klein |
Does entrepreneurship cause economic growth, or do high growth rates stimulate entrepreneurship? Ed Glaeser, Sari Pekkala Kerr, and William Kerr have an interesting new paper that uses the presence of heavy industry to instrument for the population of potential entrepreneurs (using startups as the proxy for entrepreneurship).
Entrepreneurship and Urban Growth: An Empirical Assessment with Historical Mines
Edward L. Glaeser, Sari Pekkala Kerr, William R. Kerr
NBER Working Paper No. 18333, August 2012
Measures of entrepreneurship, such as average establishment size and the prevalence of start-ups, correlate strongly with employment growth across and within metropolitan areas, but the endogeneity of these measures bedevils interpretation. Chinitz (1961) hypothesized that coal mines near Pittsburgh led that city to specialization in industries, like steel, with significant scale economies and that those big firms led to a dearth of entrepreneurial human capital across several generations. We test this idea by looking at the spatial location of past mines across the United States: proximity to historical mining deposits is associated with bigger firms and fewer start-ups in the middle of the 20th century. We use mines as an instrument for our entrepreneurship measures and find a persistent link between entrepreneurship and city employment growth; this connection works primarily through lower employment growth of start-ups in cities that are closer to mines. These effects hold in cold and warm regions alike and in industries that are not directly related to mining, such as trade, finance and services. We use quantile instrumental variable regression techniques and identify mostly homogeneous effects throughout the conditional city growth distribution.
To honor Julia Child on her 100th birthday, Lynne Kiesling writes a nice post combining three of my favorite things: cooking, entrepreneurship theory, and Austrian economics. Good cooking is about the combination of heterogeneous resources, it requires experimentation and creativity, and it either works or it doesn’t. Most important:
A system that will yield the most valuable and pleasing combinations of entrepreneurial economic or cooking activities will have low entry barriers (anyone can try to cook!) and a robust feedback-based system of error correction. Low entry barriers facilitate creativity in discovering new useful products from the raw elements, as well as enabling new value creation when some of those raw elements change. Error correction, whether a “yuck, that’s gross!” at home or a lack of profits due to low repeat business at a restaurant, is most effective and valuable when there are feedback loops that can inform the cook-producer about the value that the consumer did or did not get from the dish.
This emphasis on error correction highlights one of my differences with Kirzner’s approach to entrepreneurship. In Kirzner’s system, which emphasizes entrepreneurship as a coordinating agency, the entrepreneur is modeled as “piercing the fog” of uncertainty — hence the familiar metaphor of entrepreneurship as the discovery of preexisting profit opportunities. My approach focuses on action, not discovery, and gives a larger role to uncertainty. What generates coordination, in this approach, is the entrepreneurial selection process, not the “correctness” of entrepreneurial decisions.
Incidentally, Saras Sarasvathy often uses cooking to illustrate her “effectual” approach to entrepreneurial decision-making (i.e., cooks don’t always follow a recipe to produce a known dish, but use the ingredients they have in a sequential, experimental process). And for more on food, see here and here.
| Peter Klein |
President Obama’s gaffe about business creation — “If you’ve got a business, you didn’t build that. Somebody else made that happen” — has been met with the usual reactions. Defenders claim he simply used infelicitous language to describe the vital role of government in providing essential goods, while critics point out, for instance, that he didn’t even get it right on the Golden Gate Bridge (which received no federal money). I actually feel sorry for the guy. It was an pretty dumb thing to say, politically, and may end up hurting him more than Romney’s role in “exporting American jobs” (gag) hurts the challenger.
The idea that no one builds a business on his own, without help from other people, is in once sense trivially true, as Leonard Read never tired of explaining. No one person knows how to make a pencil, let alone a microprocessor. As a defense of government spending on infrastructure (not only roads and bridges, but things like the internet), it falls completely flat. Of course some entrepreneurs profit from government spending on infrastructure — not just directly (e.g., road contractors, engineering companies hired by ARPA, etc.) but indirectly (from lower transportation or transmission cost, net of tax payments). But such anecdotes do not at all “justify” the expenditures. As I once wrote about the internet:
[E]nthusiasts tend to forget the fallacy of the broken window. We see the internet. We see its uses. We see the benefits it brings. We surf the web and check our email and download our music. But we will never see the technologies that weren’t developed because the resources that would have been used to develop them were confiscated by the Defense Department and given to Stanford engineers. Likewise, I may admire the majesty and grandeur of an Egyptian pyramid, a TVA dam, or a Saturn V rocket, but it doesn’t follow that I think they should have been created, let alone at taxpayer expense.
A gross benefit to particular entrepreneurs from a government program does not, by itself, demonstrate net benefits to the taxpaying community. Vague references to spillovers and multipliers may sound good in a press conference, but are no substitute for serious analysis.
| Peter Klein |
Joe Salerno’s post at Circle Bastiat, “There’s No Such Thing as a Free Cloud,” could have been an entry in our nothing new under the sun series. Joe highlights a recent HBR blog piece on the physical footprint and energy requirements of server farms, showing that success in the digital age depends, for some players, on access to tangible capital assets and energy. There are important implications:
The notion of a world without scarcity is thus usually propagated by leftist social theorists–but not always. There were some libertarian futurists around in the early 1970s. But lately many libertarians are among the vanguard of those who, dazzled by the marvels of the Digital Age, argue that many goods have become costlessly and, therefore, infinitely producible. Without government interference, they contend, humankind will be able to satisfy more and more of their wants using the resources freely available inside the Cloud.
Our Post-Scarcity libertarians should tell this to the owners of the 500,000 data centers, which contain the hundreds of millions of servers worldwide that constitute the real and indispensable infrastructure of the Cloud.
There are also the wires, cables, switches, cell towers, and client machines (PCs, smartphones, tablets, etc., not to mention smart refrigerators, cars with OnStar, thermostats, and more) that give us access to the cloud. To be sure, Moore’s law allows us to consume this hardware as never before. But software without hardware is like, hmmmm, peanut butter without jelly, Sonny without Cher, a Tim Burton movie without Johnny Depp. Notes Joe: “Once again, common sense observation of the real world reveals the ceaseless struggle of human actors to economize on the use of resources and vindicates the old and true economics of scarcity.”
| Peter Klein |
I’ve been reading Jack Mathews’ The Battle of Brazil: Terry Gilliam v. Universal Pictures in the Fight to the Final Cut, a fascinating — if absurdly one-sided — look at director Terry Gilliam’s struggle to get his 1985 film Brazil distributed in the US. Mathews tells the story as a noble crusade by a brilliant, iconoclastic, visionary filmmaker against the evil studio system, run by corporate toadies who care only about making money, even if it means destroying the artistic unity of the filmmaker’s creative vision. Gilliam had “final cut” rights for a version released in Europe, but his US distributor, Universal, demanded substantial edits, which Gilliam refused to make. Universal, led by Sid Sheinberg (who comes across heroically in documentaries about Steven Spielberg’s Jaws), was completely within its contractual rights to insist on these changes, but the result was a very different film that has been lampooned by critics. (The Sheinberg version was canned and an alternate Gilliam version eventually shown in the US after a long, ugly, public battle between Gilliam and the studio.)
It’s great reading for those interested in movies and the business of making movies. But there’s an interesting entrepreneurship angle as well. Most film critics, including author Mathews, accept the auteur theory of cinema, which sees movies as the highly personal products of a director’s creative vision. The studio approach, which treats moviemaking as a collaborative enterprise designed to make money, is anathema to the auteurs. The case is usually made with familiar anecdotes: 24-year-old Orson Welles had final control over Citizen Kane and created one of the medium’s great masterpieces, while RKO destroyed the follow-up Magnificent Ambersons (and all of Welles’s subsequent films). The studios thought Star Wars would flop, and after George Lucas made his zillions he decided to finance and produce his subsequent films on his own, without studio interference — the dream of every auteur. American art-house darlings like Robert Altman, Peter Bogdonavich, Quentin Tarantino, Jim Jarmusch, etc. are always portrayed as fighting to keep Hollywood from turning their edgy, original films into bland, corporate drivel pitched at suburban soccer moms.
As Paul Cantor and others have explained, however, the auteur theory is bunk. Moviemaking is, in fact, a collaborative venture, and many of the best films are studio pictures created by large teams — the best example being Casablanca, which was essentially written by committee. Or, as Cantor puts it: “Just three words: Francis Ford Coppola.” (The Godfather films were studio pictures; virtually everything Coppola did since, with the partial exception of Apocalypse Now, has been a disaster.) And take George Lucas: Does anybody think the problem with the prequel trilogy was too many people standing around saying, “George, you can’t do that”?
Consider the parallels with entrepreneurship. (more…)