Posts filed under ‘Entrepreneurship’
The Grameen Myth
| Peter Klein |
Jeff Tucker makes several interesting points today about Muhammed Yunus and the Grameen Bank. As you may know, microfinance in general, and Grameen in particular, have taken several hits here at O&M.
Some issues raised by Tucker and others he cites:
- The bulk of the wildly enthusiastic literature on Grameen — Tucker calls it “an echo chamber of hurrahs” — comes from the bank itself. Even the Nobel announcement cites not a single external source.
- The idea that the poor can best escape poverty through self-employment, rather than working for wages, goes against all historical experience. Rising living standards for the poor, in all other countries and historical episodes, has come from wage increases driven by increases in labor productivity.
- The claim that the binding constraint on entrepreneurial activity in countries like Bangladesh is credit, rather than management or entrepreneurship, has become a mantra that is asserted but never demonstrated.
- Yunus himself has founded 16 companies other than the Grameen Bank, all of which went bankrupt. Critics think he funds these projects via the Bank, siphoning off the huge government and philanthropic grants that fund the Bank’s activities. Because the bank does not publish audited financial statements, no one knows for sure.
- Bangladesh consistently ranks near the bottom of the standard indexes of economic freedom. The main obstacles to development in Bangladesh are high trade barriers, a vast array of state-owned enterprises, high taxes, corruption, political violence, etc. The claim that microfinance, rather than fundamental institutional reform, is the key to growth strains credulity.
More on Law and Entrepreneurship
| Peter Klein |
Our conception of “law and entrepreneurship” . . . encompasses positive law (including constitutions, statutes, and regulations), common law doctrines, and private ordering that relate to “the discovery and exploitation of profitable opportunities by new firms.” While much entrepreneurship research focuses on the characteristics of entrepreneurs or on the performance of entrepreneurial firms, law and entrepreneurship studies should focus on the legal structure and regulation of entrepreneurial firms.
Volleyball and Equilibrium
| Lasse Lien |
What exactly is the role of equilibrium in the competitive process? Believe it or not, I have found the answer. It plays the same role as gravity does in a volleyball match.
Think about it! The ball is continuously bounced in ways that direct it towards new states of rest (new equilibriums), but it hardly ever settles down in any of these, because it is subject to new bounces, sending it towards yet another equilibrium. Moreover, about half the time the ball is moving opposite of what gravity would dictate, i.e. it is moving upwards, but unless it is bounced again it will start falling downwards and settle in the position gravity dictates (operating on the last bounce). Of course, this never occurs because the ball is continuously bounced. So a theory of gravity alone would not provide a good prediction of where the ball is, nor where it is headed, or even how the game got started. But mind you, think about how absurd it would be to try to understand a game of volleyball without any notion of gravity!
US Moving to Ban Microcredit
| Peter Klein |
Larry White asks an important question: Given the near-universal enthusiasm for microcredit, why is its US equivalent — the payday loan — constantly under fire? Payday loans, cash advance loans, check advance loans, and the like are small, short-term, high-interest loans, typically offered to low-income, credit-constrained consumers. As Larry points out, the 2007 National Defense Authorization Act, signed last week by President Bush, includes a 36% interest-rate cap on payday loans made to military personnel; there are calls to extend such a cap to all payday loans in the US, which would effectively shut down much of the payday-loan industry.
Of course, the typical payday-loan consumer in the US is not an entrepreneur seeking capital to start a new venture, but a low-income consumer without savings or credit cards trying to pay the rent, make a car payment, or even buy groceries. Still, the basic principles are the same. Payday loans are high-risk, uncollateralized loans, and naturally carry higher interest rates than conventional secured debt. They provide credit to individuals who are otherwise unable to acquire funds. Grameen Bank defends its interest rates — typically 25 to 50 percent annually — on the grounds that the alternatives facing borrowers are even worse. Wouldn’t the same apply to payday lending?
Further Dissent on Grameen
| Peter Klein |
The econo-blogosphere continues to heap adulation on Nobel Laureate Muhammad Yunus and the Grameen Bank. I keep waiting for someone to join me in expressing reservations. Economists and bloggers alike excel at challenging the conventional wisdom, especially when press coverage of an individual or event is completely one-sided. But so far no takers.
Much of the information circulating about Grameen doesn’t pass the “smell test.” For instance, we’re told that 90 percent of Grameen’s borrowers are women. Yunus says poor Bangladeshi women are better credit risks than poor Bangladeshi men, and that such women are historically underserved by credit institutions. Fair enough, but 90 percent? If that number is accurate, then we’re talking about a political statement, not a development strategy.
The number that puzzles me the most, though, is Grameen’s repayment rate, variously described at 98 or 99 percent. To begin with, this is an odd statistic to tout. Banks do not measure their performance by the repayment rate, but by profitability or the efficiency with which deposits are converted into loans. OK, you say, Grameen is not chasing profits, but broader social objectives. Fine, but then the appropriate performance measure is the number of new businesses created with Grameen credit, the change in the poverty rate, or some other measure of social welfare.
In any case, the point is moot, because the number is bogus. As reported in the October 14 WSJ:
Mr. Yunus often says the bank has a loan-recovery rate as high as 98.5%. Yet that figure ignores the clients who are far behind in their loan payments. The bank reports a loan as overdue only if the borrower has missed 10 or more consecutive payments. And the bank has often provided new loans to allow borrowers to keep current on old ones. The problem came to a head early this decade, when 19% of Grameen loans were at least one year overdue.
Politically Incorrect Entrepreneur of the Year
| Peter Klein |
A German entrepreneur wants to create a nostalgic smokers’ haven above the clouds by starting a nicotine-friendly airline offering Cuban cigars, caviar and flight attendants in designer uniforms — as well as smoking allowed in every seat.
Thanks to Lew Rockwell for the link. Incidentally, starting in January 2007 smokers in my town of Columbia, Missouri, will be banned from all restaurants, bars, and even the most sacred space of any American college town — the football stadium.
Factions in Evolutionary Economics
| Nicolai Foss |
Evolutionary economics has emerged as the perhaps most successful modern heterodox approach. One possible reason for this relative success is that modern EE, in contrast to Austrian economics, old institutional economics, and (partly) post Keynesian economics, embraces formal model building and econometrics. Like the so-called orthodox economics that modern EE is a self-styled alternative to, EE is by no means monolithic. Although evolutionary economists go (roughly) to the same conferences and publish in pretty much the same journals, several factions are discernible within the overall EE community — such as
- the”Italo-Wharton-Columbia” faction (Dosi, Marengo, Malerba, Orsenigo, Levinthal, Winter, Nelson);
- the “old institutionalist-realist-evolutionists” (Hodgson, Lawson), mainly located in UK and US, and strong in economic geography; and
- the German evolutionists, nowadays primarily represented by Ulrich Witt, the Director of the Evolutionary Economics Group at the Max-Planck-Institut für Ökonomik in Jena.
One thing that differentiates the the third group from the two other ones is a stronger commitment to methodological individualism (at least the second group seems to explicitly reject MI). The overriding emphasis on routines and habits that characterizes groups 1) and 2) cannot be found in the works of the German evolutionists. Entrepreneurship is much more strongly emphasized here. There is a suspicion of biological analogies. Economic evolution is conceptualized in terms of the emergence and dissemination of novelty, rather than in terms of the evolutionary triad of variation, heredity and selection. It is an approach that is closer to Austrian economics; hence, here at O&M, we are sympathetic to German evolutionism. For a nice sampling, check out the Papers on Economics and Evolution series that is published by the MPI in Jena.
A Nobel for Entrepreneurship?
| Peter Klein |
This year’s Nobel Prize in economics didn’t go to William Baumol or Israel Kirzner, but the peace prize went to economist and banker Muhammad Yunus, founder of Bangladesh’s Grameen Bank. Yunus is a pioneer of microcredit — small, uncollateralized loans given to poor borrowers for starting small businesses. Microcredit is widely touted as a market-based, entrepreneurial solution to world poverty.
The econo-blogosphere is elated. Greg Mankiw calls it a “second Nobel” for economics. Tyler Cowen says it’s a “wonderful choice,” noting (correctly) that Yunus would never have been considered for the economics prize.
But how well does microcredit work? The evidence is mixed. A few studies claim to find substantial, beneficial effects on entrepreneurial activity and wealth, but these studies tend to come from the Grameen Bank itself, or from advocacy groups like the Microcredit Summit Campaign. Search SSRN or RePEc and the picture becomes much cloudier.
Call me a microcredit skeptic. Here’s why: (more…)
Phelps on Personal Knowledge
| Peter Klein |
I thought I had a scoop with this Phelps item on entrepreneurship, but he makes many of the same points in an essay, “Dynamic Capitalism,” on today’s WSJ editorial page. Here’s a passage of particular interest to O&M readers: (more…)
Phelps on Entrepreneurship
| Peter Klein |
Here is a short piece by Edmund Phelps on entrepreneurship (scroll down to page 26 of the pdf). Snippet:
In real-life entrepreneurial economies . . . entrepreneurs are like fighter pilots: they cannot explain completely their thinking and the decisions they make; the financiers can understand even less. In the modern theory, the entrepreneur-creators of projects and the financiers weighing the projects face radical uncertainty, and therefore do not all make the same valuations.
A usefully structured model would portray each financier as seeking to back the idea of an entrepreneur whose “thinking,” or model, seems like his — thinking with regard to which industry is the best bet, swinging for the fences or not, etc. The insight here, which originates with Hayek and M. Polanyi, is that everyone in a capitalist system carries around a sort of personal model of the economy — at any rate, some piece of it. Thus, the “capital market” is a sort of matching process that mates a financier to an entrepreneur, whom the former sees as having a model compatible with his own model. In such a theory, the heart of the capitalist system is a profusion of ideas represented as competing models of the economy (or a piece of it).
Economics Nobel
| Peter Klein |
The Nobel Prize in Economics goes to macroeconomist Edmund Phelps. No award this year for organizational economics (Williamson, Hart, Holmström, Milgrom, Alchian, Demsetz) or the economics of entrepreneurship (Baumol, Kirzner).
Reaction from the econo-blogosphere is generally favorable, but subdued. “A safe pick” is the modal comment. Lynne Kiesling adds a little sizzle: “For my money, the value of his work is in dialing down the hubris of the government policymaker who thought that monetary and fiscal policy were dials that they could twiddle to control and manage the economy. Phelps’ work helped to introduce some humility to counter that control-oriented exuberance.” And here’s Tyler Cowen on What It All Means:
The big questions still matter. Unemployment, economic growth, labor markets, capital accumulation, fairness, discrimination, and justice across the generations are indeed worthy of economic attention. Phelps contributed to all of those areas. Normative questions matter. Relevance and breadth triumph over narrow technical skill.
Problems over puzzles, in other words. Three cheers for that.
Russ Roberts provies this list of dead economists who should have won the Prize: Peter Bauer, Frank Knight, Fritz Machlup, Ludwig von Mises, Oskar Morgenstern, Joan Robinson, and Julian Simon.
Open Letter to a Technology Entrepreneur: No More Handouts
| Peter Klein |
Vinod Khosla is a co-founder of Sun Microsystems, general partner at Kleiner, Perkins, Caufield, and Byers, and one of the world’s top venture capitalists. He is also a strong advocate for ethanol and co-chair of the campaign for California’s Proposition 87, a ballot initiative to tax oil companies to subsidize research on alternative fuels. Shikha Dalmia castigates Khosla for relying on government, rather than the market, to pick winners in technology markets.
Inviting the government to meddle in the affairs of private business is never a good idea, and if anyone should understand this, it is you. You reportedly left your country because of its hostile business environment and thrived spectacularly in this land of (semi) free enterprise, co-founding Sun Microsystems — one of the most successful computer companies on the planet. . . . But, with all due respect, even a man of your stellar track record can’t simply will markets to do his bidding; an economy is not a machine that can be manipulated according to its maker’s grand designs. If it were, India’s central planners would have made rivers of energy flow into every Indian home. . . .
Some commentators have suggested that your support for Prop 87 is a rent-seeking move, meant to boost your recent investments in ethanol by debilitating competitors. I don’t buy that. Yet, the issue is, if ethanol has all the advantages you says it does — if it is renewable, cleaner, less volatile, more reliable, easily transportable etc. — surely you of all people could convince enough investors to cough up the $4 billion that Prop 87 would raise. Are you not turning to taxpayers because you don’t want to assume that kind of risk — and can’t convince fellow investors to either?
HT: Lynne Kiesling
Celebrating the Entrepreneur in Film
| Peter Klein |
Like other cutting-edge, deeply committed educational professionals, I use film clips in class wherever possible. When teaching entrepreneurship I show the courtroom scene at the end of Francis Ford Coppola’s fine 1985 film Tucker: The Man and His Dream. Jeff Bridges (as Preston Tucker) delivers a magnificent speech on the entrepreneur’s right to dream, to experiment, to take chances, and to be wrong. The scene moves me to tears. (Then again, so does the segment on the for-profit lifeguard in John Stossel’s “Greed” special.) In any case, Tucker, along with the 1951 Alec Guinness flick The Man in the White Suit, have been the only entrepreneurship films in my collection.
Now from Stephen Carson I learn of another film celebrating the entrepreneur: Boom Town (1940):
A marvelous and fun ode to entrepreneurship starring Clark Gable and Spencer Tracy as two wildcatters that take extreme risks hunting for oil in 1918 Texas. The roles of risk, capital and entrepreneurial insight are all portrayed wonderfully. The cherry on top is when competitors invoke the Sherman Antitrust Act to go after a company they can’t defeat fair and square in the marketplace (imagine that!)
The courtroom speech at the end includes an argument indicating how private owners of capital are motivated to wisely manage natural resources(!) and this wonderful tribute to entrepreneurs: “McMasters is a wildcatter. If it wasn’t for automobiles he’d be driving a covered wagon. It’s always been his breed that has opened up the country and made it what it is. So now, I’m wondering… Is it getting to be out of line in these Unites States for a man like him to make a million dollars with his brains and with his hands? Because if that’s true, then we’d better rewrite this land-of-opportunity stuff.” Did Hollywood really make this film? Wow!
It’s moving to the top of my Netflix queue.
University of Arizona Program on Law and Entrepreneurship
| Peter Klein |
The University of Arizona’s McGuire Center for Entrepreneurship and James E. Rogers School of Law have teamed up to create a joint program in law and entrepreneurship. The first project is a mock law firm, composed of students from the intellectual property, entrepreneurial law, corporate law, and tax law areas of the law school, that will advise business-student teams in the McGuire Center’s entrepreneurship program. Says law professor Darian Ibrahim: “There isn’t all that much interdisciplinary work in this area, but interest is building among scholars. I feel like we’re on the precipice of something that’s really about to take off.”
25 September 2006 at 11:29 am Peter G. Klein Leave a comment
First-Mover (Dis) Advantage
| Lasse Lien |
Whether you are interested in competitive advantage, entrepreneurship, innovation, regulation, or several other issues, the concept of first-mover (dis)advantage will probably be of considerable importance. The literature has, of course, supplied a number of important insights on what might account for both advantages and disadvantages from moving early. Nevertheless, browsing through this literature, I get a sneaking feeling that it tends to produce somewhat loosely structured lists of possible mechanisms. A possible avenue of attack for adding more structure to these insights might be to reduce the problem to the basic asymmetries between the first and later movers, and from there gradually introduce the effects of resource heterogeneity, asymmetric motivation, strategic interaction, etc. But what, then, might count as the basic asymmetries? (more…)
Nothing New Under the Sun
| Peter Klein |
Back when the “New Economy” was in vogue I enjoyed challenging the claim that the “new” phenomena were really new. Before the internet, there was the telegraph. Before the Yahoo! directory there was the telephone book. Before the personal computer there was electric service, the refrigerator, the washing machine, the telephone, and the VCR. In short, such breathlessly touted phenomena as network effects, the rapid diffusion of technological innovation, and highly valued intangible assets are nothing new.
Now comes an interesting paper in the current issue of Economic History Review by Jochen Streb, Jörg Baten, and Shuxi Yin, “Technological and Geographical Knowledge Spillover in the German Empire 1877-1918.” The authors use patent and geographic data to identify four distinct technological waves during this period, drive by innovation in railways, dyes, chemicals, and electrical engineering, respectively. The general claim is that “inter-industry knowledge spillovers between technologically, economically, and geographically related industries were a major source for innovative activities during German industrialization,” and that “technological change affected the geographical distribution of innovative regions.” A nice application of the modern literature on clusters, innovation, and knowledge spillovers to the recent past. Perhaps Ecclesiastes was right after all.
14 September 2006 at 10:44 am Peter G. Klein Leave a comment
Industrial Entrepreneurship in Early Modern China
| Peter Klein |
Coase, Williamson, and others have long called for comparative institutional analysis across countries and across time. How do various institutional arrangements perform under alternative institutional environments? We are only beginning to understand this question. (Important contributors to the literature include Witold Henisz, Tarun Khanna, Masahiko Aoki, and various members of the Centre ATOM, among others.) Can changes in the institutional environment be regarded as exogenous “shift parameters,” as Williamson has articulated the problem, or is there a more subtle, complex co-evolution among institutions and organizational form?
These issues are raised in Madeleine Zelin’s The Merchants of Zigong: Industrial Entrepreneurship in Early Modern China (Columbia University Press, 2006), reviewed here by Carol Shiue for EH.Net. Zelin’s new book traces the history of the salt merchants of western Sichuan province, who created one of the first, vertically integrated industrial enterprises in modern China. Though not explicitly a comparative study, Zelin’s volume provides a useful companion to the landmark studies by Chandler and others of the history of modern enterprise in the West. As Shiue observes, “A recurrent theme of the book is that the business arrangements seen in the Chinese salt industry belie not only previous perceptions about the predatory influence of the ‘feudal’ state on entrepreneurial incentives in China, but also the purported uniqueness of Western business practice.”
See also Shiue’s earlier review of Zelin, Ocko, and Gardella, eds., Contract and Property in Early Modern China (Stanford University Press, 2004).
Entrepreneurship and Uncertainty Bearing
| Peter Klein |
A further point about entrepreneurial judgment: The claim that the essence of entrepreneurship is uncertainty bearing, that the entrepreneur is the party to whom gains and losses accrue in a dynamic, evolving economy, does not imply any particular view about the psychological characteristics of those individuals who perform this function. The entrepreneurial function is to bear uncertainty, regardless of how entrepreneurs interpret their own behavior.
This issue comes out in “Entrepreneurial Risk and Market Entry” by Brian Wu and Anne Marie Knott, from the September 2006 issue of Management Science (working paper version here). This paper, which has generated a lot of buzz, argues that entrepreneurs (defined here as individuals who start new businesses) are just as risk averse as other agents in the economy, but systematically tend to overestimate their own abilities. In other words, entrepreneurs engage in risky behavior even though they don’t like uncertainty, because they don’t think the results of their own actions are uncertain. (more…)
Judgment versus Alertness
| Peter Klein |
Nicolai and I have written several papers on the Knightian concept of entrepreneurship as judgment (e.g., here, here, and here). We contrast the judgment view of entrepreneurship with several other approaches, including Israel Kirzner’s idea of entrepreneurship as “discovery” or alertness to profit opportunities.
Readers and seminar participants are often confused by the distinction between judgment and alertness. We describe the judgment approach as “Austrian,” associating it not only with Knight but also with Austrian and proto-Austrian economists Richard Cantillon, Frank Fetter, Ludwig von Mises, and Murray Rothbard. But, we are asked, isn’t Kirzner an Austrian? Isn’t Kirzner’s entrepreneurial-discovery approach “the” Austrian view?
Not necessarily. Here’s why. (more…)
Dissing Prahalad
| Peter Klein |
Management theory superstar C.K. Prahalad, having conquered the corporation in Competing for the Future, then turned his attention to global poverty. His plan urged firms to tap into the purchasing power of the world’s poorest consumers, creating large gains for both buyers and sellers. But there are doubters.
C.K. Prahalad’s theory on the purchasing power at the “bottom of the pyramid” (BOP) has a legion of enthusiastic supporters. The BOP argument that savvy multinationals will enrich themselves and the poor by selling to this market is “at best a harmless illusion and potentially a dangerous delusion,” according to Michigan professor Aneel Karnani. His new working paper, Fortune at the bottom of the pyramid: a mirage, is the strongest criticism I’ve seen of Prahalad and his devotees.
This is from Christine Bowers at the World Bank’s PSD Blog. Karani’s paper calls the BOP argument “seductively appealing, [but] riddled with fallacies.” Says Karani:
Not only is the BOP market quite small, it is unlikely to be very profitable, especially for a large company. The costs of serving the markets at the bottom of the pyramid are very high. The poor are often geographically dispersed (except for the urban poor concentrated into slums) and culturally heterogeneous. This increases distribution and marketing costs and makes it difficult to exploit economies of scale. Weak infrastructure (transportation, communication, media, and legal) further increases cost of doing business. Another factor leading to high costs is the small size of each transaction.
Read the paper here.
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