The Political Economy of Entrepreneurship

25 September 2007 at 10:33 pm 7 comments

| Peter Klein |

Entrepreneurship and political economy are two of the fastest-growing fields in applied economics, so it is only natural that they come together. Magnus Henrekson and Robin Douhan have a new volume coming out in the International Library of Entrepreneurship Series, The Political Economy of Entrepreneurship (Elgar, 2007). It contains reprints of classic and contemporary papers by Schumpeter, Kirzner, Baumol, Stigler, de Soto, Acemoglu, Lerner, and many others.

Henrekson and Douhan identify in their introduction (which you can read here) three key aspects of entrepreneurship as it relates to political economy:

(i) Entrepreneurship is dynamic in the sense that it adapts to the politically determined institutional framework within which it acts. Under propitious circumstances, it can be a powerful engine of growth, but it can also be channelled in unproductive and destructive directions.

(ii) Entrepreneurship enters directly into the political system. The close connection to property rights constitutes a link between entrepreneurship and private versus public ownership and redistribution. Under unfavourable institutional circumstances, rent-seeking and predatory entrepreneurship, via the political system, offer greater profit opportunities than the market.

(iii) A political economy approach is necessary in order to understand how the political system shapes the institutional setup. Here, it is emphasized that the distribution of political power is partly determined by economic wealth. Hence, it is relevant to broaden the analysis to the effects on wealth creation and wealth redistribution stemming from entrepreneurial activity.

One topic that doesn’t seem to be covered in the volume (though I could be mistaken) is political entrepreneurship — i.e., the analysis of politicians as profit-seeking or rent-seeking entrepreneurs. Randy Holcombe’s 2002 paper “Political Entrepreneurship and the Democratic Allocation of Economic Resources” provides a nice overview of this area.

Update: See also these remarks by Pete Boettke, which I had previously overlooked.

Entry filed under: - Klein -, Classical Liberalism, Entrepreneurship, Institutions.

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7 Comments Add your own

  • 1. Molly Burress  |  26 September 2007 at 4:49 pm

    Anybody know where Holcombe got his definition for political entrepreneurship? Is he simply using this term to refer to Baumol (1990)? His definition of political entrepreneurship is nothing what the original writers on political entrepreneurs had in mind (e.g. Wagner, Salisbury, Frolich, Oppenheimer, Young, Olson). These authors were looking at entrepreneurs who assembled unorganized groups to obtain collective goods.

    Any thoughts?

  • 2. Randy Holcombe  |  26 September 2007 at 5:37 pm

    I define political entrepreneurship along the lines of Kirznerian entrepreneurs who spot unexploited profit opportunities and act on them. Needless to say, there are a few things that differentiate political entrepreneurship from entrepreneurs in markets. One is that, typically, you can’t act by yourself. Entrepreneurs need to form coalitions to be effective.

    Political profit opportunities can be opportunities to allocate resources more efficiently, as in the market, but another difference is that in politics, entrepreneurs can use government to force some people to transfer resources to others. One could picture an imaginary state of affairs in which resources are allocated perfectly efficiently, leaving no entrepreneurial opportunities that could increase efficiency, but there will always be opportunities to use the coercive force of government to transfer resources from some people to others for political gain.

    I like Baumol’s idea that certain institutional structures channel entrepreneurship in productive ways while other institutions channel entrepreneurial activity toward predation quite a bit, so I don’t think my ideas are inconsistent with Baumol’s in this regard.

  • 3. Curt Doolittle  |  30 September 2007 at 2:57 pm

    As for the Kirznerian versus Baumolian definitions, there are two factors that would make any author position his definitions differently: the ‘ideal type’ dominant in the time he writes, and cultural approaches to decision makingn regarding capital at that time. But this difference is not a hollow preference. It has serious implications in the real world.

    A definition in support of Kirzner is perhaps more suited to contemporary Anglo capitalism because it tends to favor (as in the US) small businesses who effectively perform off-book reasearch and development, and often do so with little or speculative capital. These companies if successful are then acquired by larger companies. Whereas the european ideal type tends to favor on-book research programs under the assumption that such works are less speculative and wasteful.

    Secondly, Baumol writes as many economists still do, with a significantly 19th century “ideal type” of entrepreneur. In this view, the entrepreneur has greater decision power (at least in the abstract), works on longer time frames (maufacturing heavy goods) and is trying to efficiently and profitably turn out those goods. (I am not a solid student of Baumol, so I am making a hasty generalization in order to quickly suggest a way of undrestanding the differences.) As Holcomb suggests, the speculative 21st century entrepreneur doing off book research, considers the coalition that he has to built in order to concentrate capital on a complex research program the most substantive entrepreneurial hurdle, and (partly because we have by increases in production rendererd most resources so incredibly cheap) is far less concerned with efficient output than was his 19th and 20th century ancestory: one who represents an “ideal type” that no longer so suits the times that we live in.

    This difference in ideal types accounts for differences in definitions. I do NOT believe that there are any more substantive differences for members of the research program, since we all understand we are dealing with abstractions.

    But when POLITICIANS interpret these words and make policy decisions based on their interpretation of the ideal type, they then indirectly cause not the abstractions to come to life, but the ideal type to come to life as policy. In this sense it is farily important that in the anglo economy, academics use ideal types that reflect the normative structure of the entrepreneurial economy, instead of relying on ideal types that make synthesizing their ideas into the record of development of economic thought, and relying on past ideal types in order to facilitate comparison and clarity.

    Entrepreneurs today seek to be efficient with opportunities, and to build coalitions. These are their prescious commodities. Resources are costs, and usually they are very close to irrelevant costs. (Boeing versus Airbus for example) Competitively, the ability to offer speculative rewards to high performing employees who can take advantage of opportunities or build coalitions is far more important than material costs. (see the salaries of engineers versus marketers and fianceers) Too many economists still focus on the efficient use of resources, which, in real terms, produce metrics that we can use as a measurement of how well a set of entrepreneurs is doing at managing those resources, or how well they are doing the coalittion and opportunity building, but these measures are not an efficient end in itself. (Again, an exaggeration to illustrate the point.)

    Curt Doolittle

  • 4. Curt Doolittle  |  30 September 2007 at 3:05 pm

    BTW: I have tried to make this point to Peter a few times but probably under the wrong circumstances. I follow his work and am still troubled that the focus of the research program emphasizes far too much on efficient resource management (which in a globally competitive environment provides little competitive advantage to companies) instead of efficient opportunity management which favors the concentration of talent and capital and the means of organizing a business to allow the employees to exploit opportunities rather than to maximize the use of resources. This minor complaint aside, I have learned a great deal from him. -thanks -Curt

  • 5. Rafe Champion  |  1 October 2007 at 1:22 am

    On the topic of political entrepreneurs, there is a book on
    entrepreneurs Vanderbilt, Hill, Rockefeller etc making a distinction between market entrepreneurs who make their way by selling thing that other people want to buy, versus political enrepreneurs who do their best deals in the smoke-filled backrooms of political influence. Then there is another category of political entrepreneurs like FDR who have a genius for devising policies that have popular appeal (or at least to key interest groups).

    I will be very surprised if Baumol is the first to note the way that incentives influence behaviour. For an example of perverse incentives, imagine if footballers were awarded points for fouls.

  • 6. Peter Klein  |  1 October 2007 at 9:10 am

    Curt, I would be the last to deny the importance of organizing firms to facilitate entrepreneurship (see this). But I don’t see the tension between entrepreneurial human resource management and “maximizing the use of resources.” Given an appropriate definition of resources (i.e., recognizing that they are defined subjectively, that they have various attributes that must be created or discovered, etc.), making efficient use of them requires just what you describe.

    Rafe, I’m reminded of a passage from Mises’s Bureaucracy (1944) on entrepreneurial behavior in highly interventionist states:

    “In such an environment the entrepreneur must resort to two means: diplomacy and bribery. He must use these methods not only with regard to the ruling party, but no less with regard to the outlawed and persecuted opposition groups which one day may seize the reins. It is a dangerous kind of double-dealing; only men devoid of fear and inhibitions can last in this rotten milieu. Businessmen who have grown up under the conditions of a more liberal age have to leave and are replaced by adventurers.”

  • 7. Brian Pitt  |  1 October 2007 at 9:34 am


    I keep up w/Klein’s readings; and, methinks, that Pete’s focus on resource allocation is a by-product of his training as an economist (Not that there is anything wrong with that!!). Nevertheless, his emphasis on entreprenuership certainly suggests that he is not blind to the “real world” of talent recruitment and network building, which is probably the lion share of opportunity managment.

    The difficulty of a research focus on opportunity management is that Pete,and other economists, methinks, are looking to provide economics (and her sister human sciences) with a discursive theoretical concept in entreprenuership; similar to, e.g., consumers. They are not just looking to put forward an “ideal type” that services a research question.

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