Extended Version of Peter Klein’s Interview on Entrepreneurship

eTalks1[After reading Peter Klein's interview in Mises Daily today, you're probably thinking to yourself: "I would love to read more on this, and I want to do it right now." So, here is the full 3,000-word original version of the interview, thanks to eTalks. -ed]

Editor’s Note: Peter G. Klein, is Executive Director and Carl Menger Research Fellow of the Mises Institute and Associate Professor in the Division of Applied Social Sciences at the University of Missouri. At Missouri he also directs the McQuinn Center for Entrepreneurial Leadership, and he holds adjunct faculty positions with the Truman School of Public Affairs and the Norwegian School of Economics. His research focuses on the economics of organization, entrepreneurship, and corporate strategy, with applications to diversification, innovation, food and agriculture, economic growth, and vertical coordination. Klein has authored or edited five books and has published over 70 academic articles, chapters, and reviews.

He taught previously at the University of California, Berkeley, the University of Georgia, and the Copenhagen Business School, and served as a Senior Economist with the Council of Economic Advisers. He is also a former Associate Editor of The Collected Works of F. A. Hayek. He lectures regularly at the Mises University and other Mises Institute events.

Klein received his Ph.D. in economics from the University of California, Berkeley and his B.A. from the University of North Carolina-Chapel Hill. He co-founded the popular management blog Organizations and Markets.

To learn more about him, check out this this this this and this.

eTalk’s Niaz Uddin has interviewed Peter Klein recently to gain insights about entrepreneurship, economics and education which is given below.

Niaz: Dear Peter, thank you so much for joining us in the midst of your busy schedule. We are very thrilled and honored to have you at eTalks.

Peter: It’s my pleasure to participate!

Niaz: You are the prominent researcher, speaker, author, analyst and think tank in the field of entrepreneurship, innovation, economics, and education. At the very beginning of our interview can you please tell us about Entrepreneurship? What is entrepreneurship to you? What are the different contexts of entrepreneurship?

Peter: The terms “entrepreneur,” “entrepreneurship,” and “entrepreneurial” are used in many ways, not always consistently! On the one hand, entrepreneurship is often used to mean self-employment: an entrepreneur is a person who starts or operates a small business. On the other hand, we also use the term “entrepreneurial” to refer to something broader, a mindset or way of thinking that emphasizes novelty, creativity, and initiative. Obviously one can be entrepreneurial in this sense without being a small-business owner.

In the academic literature, things get even more confusing. Originally the word entrepreneur was identified with decision-making, risk-bearing, and responsibility: entrepreneurs were the business people who organized production, transforming resources into valuable products and services for consumers. That usage goes back to the 18th century. More recently, scholars have identified entrepreneurship with narrower activities or functions such as alertness to profit opportunities or the introduction of new goods and services or new ways to make existing products. In my academic writing I adopt the concept developed by the American economist Frank Knight and the Austrian economist Ludwig von Mises which emphasizes judgmental decision-making under uncertainty.

This variety of concepts and definitions causes problems, both in academic and in popular discussions. I sometimes think it would be better if we avoided the language of entrepreneurship altogether! As an exercise, I require my PhD students writing about entrepreneurship to describe their dissertation topics without using the word entrepreneurship or any of its cognates. If a student is writing about venture capital and IPOs, then call it “new-venture funding,” not entrepreneurship. If she is studying how people evaluate and compare new business models, then call it “business-model evaluation,” not entrepreneurship. I typically find that if people struggle to explain a particular phenomenon or research question without using the language or entrepreneurship, they probably don’t really understand what they’re doing!

Niaz: Can you please define what an entrepreneur is?

Peter: As discussed above, there are many definitions floating around in the academic and practitioner literature. I prefer to define entrepreneurship as judgment, the act of combining and recombining heterogeneous resources under conditions of uncertainty. But arguing about definitions is often counterproductive. I prefer to think in terms of the research question to be answered, or the practical problem to be solved. Defining entrepreneurship as self-employment or technological innovation or opportunity recognition may be useful in some contexts, but not others. Let’s focus on the phenomena and relationships of interest, even if we disagree about the labels!

Niaz: Why do you think entrepreneurship is the fundamental stand of understanding economics? And how?

Peter: Unfortunately, most people see economics as a dry, technical subject that involves poring over charts and graphs and writing equations to describe the “equilibrium” behavior of hypothetical actors. But economics is a logical, deductive, human science about real people acting in the real world, with all the dynamism, unpredictability, and creativity that entails. Markets aren’t static, lifeless mathematical constructs but lively, vigorous spaces where people interact and coordinate. Firms, markets, and industries don’t just come into existence by themselves, they have to be created and operated by real people with real responsibility. These people are entrepreneurs, what Mises called the “driving force” of the market economy. That’s one reason I’m attracted to the “Austrian” approach to economics, which has always placed the entrepreneur at the front and center of production and exchange—not an incidental actor who steps in to introduce novelty then fades into the background as the “normal” market process resumes. Entrepreneurship, as decisive action under uncertain conditions, is at the very heart of a market economy.

Niaz: At eTalks, we believe entrepreneurship is a great tool that helps building sustainable economy. We also believe entrepreneurs are the rock starts those who work to keep economy growing. Both entrepreneurship and entrepreneurs are the driving forces and instrumentals to build strong economy. Now, how do you connect these three dots: entrepreneurship, economic growth, and development of a country?

Peter: If we think of entrepreneurship is the broad sense of judgment under uncertainty, then economic development and growth can not exist without entrepreneurship! It is the entrepreneurs who invest the capital necessary for productivity growth, who organize production into firms and industries, who compete and cooperate to create and distribute goods and services to consumers in the most efficient and profitable manner. If we think of entrepreneurship more narrowly, as small business or startups or venture funding, then the story is more complex. To be sure, smaller and newer firms are often disproportionately responsible for employment growth and, in some contexts, the introduction of new products and new technologies. At the same time, large enterprises can also be innovative, and capital accumulation is often critical to achieving economies of scale and scope, even in today’s “knowledge economy.” And not every individual wants to be responsible for owning and operating a small business. Unfortunately, large firms are typically more adept at securing for themselves special political privileges and protection against competitors, though small firms play this game as well. Ultimately, I am agnostic about what mix of small and large, new and mature, and high-tech and low-tech firms is best for economic growth; I prefer to let competition in free markets sort it out.

Niaz: As you know, America is a great country having being built all big and great corporations. In the last two decades we have seen the structural and revolutionary contribution of the most exciting companies like Apple, Microsoft, Google, Facebook, and Amazon in American economy. But things are not happening in the same ways throughout the world. In some points, things are happening more devastatingly. Some countries are taking optimum advantages of cutting age technologies, disruptive innovation, and digital economy. On the other hand, most countries are lacking behind and economic condition is becoming worse. According to you what drives entrepreneurs to build great organizations? And what are the role of culture and entrepreneurial environments in that endeavors?

Peter: Clearly culture and environment are critical for the success of entrepreneurs, however defined. Unfortunately, there is little consensus in the research literature about the precise mechanisms by which culture, including social norms and beliefs, affects economic behavior. We have a general sense that cultures in which experimentation and creativity are rewarded, and failure is tolerated, are more conducive to the kind of risk-taking that entrepreneurship requires. At the same time, there are plenty of counterexamples—the Nordic countries, for example, are relatively egalitarian and homogeneous, while still being highly entrepreneurial.

When it comes to the legal and political environment, the evidence is clearer. Countries with strong property-rights protection, a well-functioning monetary system, and minimal government intervention in the economy provide the best environment for entrepreneurship and economic growth. There is a strong temptation among many government planners to try to micro-manage entrepreneurial activity through targeted subsidies, infrastructure spending, tax and regulatory codes that favor one type of firm or location over another, and other attempts to create geographic or industrial clusters of innovation. Everyone wants the next Silicon Valley in his country or region. But entrepreneurial clusters like Silicon Valley emerge, endogenously, from the bottom up; they cannot be established from the top down. To be sure, strong “anchor” entities like research universities and established companies are important for kick-starting local entrepreneurial activity. But most attempts by government planners to target particular areas or activities for an entrepreneurial boost have fallen flat. The policy environment should also allow the “freedom to fail”—no bailouts and subsidies for unsuccessful ventures! Monetary and fiscal policies designed to “stimulate” the economy are also harmful, as they tend to generate asset bubbles and other forms of price inflation that make it more difficult for entrepreneurs to plan and invest.

Niaz: Why don’t we see big organizations getting formed in other countries? What are their core challenges?

Peter: Well, we do see large-scale enterprise around the world, but it often takes different forms such as diversified business groups, keiretsu, chaebols, and the like. Often these large groups are nominally private, but closely connected to the state, which tends to extend them special privileges that make it more difficult for them to innovate and compete internationally. Size is great when it results from superior performance on the market, but not so good when it comes from subsidies and political connections.

Niaz: How can they overcome those challenges?

Peter: Newer and smaller organizations looking for sustained growth have to find a balance between doing the things that made them successful in the first place—acting with boldness and imagination, being willing to experiment, finding the right niche—and developing routines and capabilities that keep it going. Often there is a change in mindset; in the early stages, founders feel like outsiders, Young Turks shaking up the establishment with little to lose.  Over time, the competitive landscape changes, and the outsider becomes the incumbent. This creates two problems: the team may still be in startup mode, still fighting the old battles, or it may become complacent, unaware of the potential competitor around the corner.

Complacency is a common problem for any successful organization. Clay Christensen has shown how large companies—and, I’d add, other large organizations like universities—struggle to adapt the newest and latest technologies. They are often too successful at what they already do, too effective at serving their existing customers using existing methods, too reluctant to disrupt their existing revenue streams. Of course, large and successful companies can also be innovative, typically by delegating decision authority to subunits, providing strong incentives for performance-enhancing innovations, setting up “skunk works” and internal corporate ventures, and other strategies. But it is not easy, and many large firms fail to adapt to changing circumstances.

Niaz: What other countries can learn from Silicon Valley and from its culture, environment, attitude, and innovativeness?

Peter: As noted above, Silicon Valley is a unique case and difficult to duplicate. What we see there, as in other successful innovative clusters, is strong anchor entities (e.g., StanfordUniversity, Fairchild Semiconductor in the 1950s and 1960s, Hewlett-Packard in the 1970s and 1980s), a concentration of highly skilled and highly mobile workers, local venture funding, and a dose of serendipity. Economists have been studying agglomeration—the benefits of locating similar or complementary activities in geographic proximity—since Alfred Marshall’s work in the 1890s. Paul Krugman’s academic reputation rests partly on his elaboration of Marshall’s insights (not, incidentally, for anything Krugman wrote on macroeconomics!). Once a cluster emerges, it can exploit economies of scale: skilled workers, attractive firms, and aggressive funders want to be located close to each other. The trick is to get the cluster started in the first place. Nobody knows exactly how—otherwise we’d have SiliconValleys all over the place.

However, it’s also important to recognize another force, what we might call economies of diversity. The late Jane Jacobs masterfully demonstrated that the growth and vitality of cities stems not from the way they cluster similar or complementary people and activities, but how they bring together a wide variety of dissimilar, and seemingly unrelated ones. Exposure to new ideas and new ways of thinking is more likely in a diverse, heterogeneous environment. So maybe we should care less about same-industry clusters, and think more about how to encourage interactions among firms and industries doing radically different things.

Niaz: In this information age, now we seriously need to redefine, rebuild, and redesign our Higher Education to help us in pursuing entrepreneurial, actionable, and effective knowledge to learn, grow, and work to contribute in global economy. What are your suggestions to change and build an effective education system?

Peter: That’s a huge question. I can’t speak authoritatively on primary and secondary education but I have strong opinions on the structure of the higher-education industry in the US and Europe. Basically, the established universities are the privileged incumbents who tend to be swept away by the disruptive innovation Christensen talks about. Most are highly inefficient, slow to embrace new technology, and highly dependent on public subsidy. Technology has encouraged many new entrants, mostly at the low-quality end of the market. The incumbent universities have responded by discouraging people from consuming these entry-level products—“Those online, for-profit universities are fly-by-night organizations, they don’t offer real degrees like we do!”—but I do not think this strategy can succeed in the long run. At present the established universities are coasting on their reputation for quality. Reputation lags are long, so it may take time for consumers to begin voting with their dollars and feet for more innovative, lower-cost competitors.

In short, the higher-education industry is poised for a new generation of entrepreneurs, in both the for-profit and non-profit spaces, to experiment with new forms of educational content, new production and delivery methods, new ways to package information, and a range of further innovations we cannot yet foresee. MOOCs are but one highly visible manifestation of this. I find it ironic that the established universities are struggling to embrace the MOOC, seeing it as a way for them to leverage their brands and extend their market shares. They assume that, in the future, students in the developing world will be taking online courses from Yale or Illinois. I think it’s more likely that students in New Haven or Urbana-Champaign will take courses from some brilliant and articulate lecturer in Bangalore.

Niaz: To me a great entrepreneur is someone who understands economics, can see the big picture, and analyzes the things globally. He is also an economist, a research scientist, and a remarkable doer. What are the core things of economics and globalization should entrepreneurs be master at? 

Peter: I think everyone should understand basic economics—say, by reading Henry Hazlitt’s classicEconomics in One Lesson. Most of economic principles are common sense: there’s no such thing as a free lunch, benefits and costs should be compared at the margin, voluntary exchange is mutually beneficial, actions often have unintended consequences, and so on. Basic knowledge about globalization—the radical drop in communication and transportation costs, the often-surprising differences in legal, political, and social rules and customs around the world—is important too. But I don’t think a deep theoretical knowledge of economics or international trade is a prerequisite to successful entrepreneurship. Intuition and experience are typically more here valuable than “book learning.” (And I say that as a university professor!)

Niaz: What are your advices and suggestions to entrepreneurs to find big and complex problems, to build actionable business model to work to solve those problems, and to make this world a better place to live in?

 

Peter: The most important advice is not to listen to people like me. Seriously, one can fill a large library with books about entrepreneurship, innovation, competition, and business success, most written by scholars or journalists or policymakers without any experience or expertise with actual entrepreneurship. Thinking conceptually about entrepreneurship, and studying the great entrepreneurs of the past, can be useful and informative. Knowing basic accounting, finance, and marketing is important. But these things are neither necessary nor sufficient for entrepreneurial success. Entrepreneurial judgment, as Mises put it, “defies any rules and systematization. It can be neither taught nor learned.”

From a social or policy point of view, I think we need an environment in which those who wish to experiment with entrepreneurship can do so. Many people are attracted to “wicked problems,” for the intrinsic satisfaction of solving them as well as for financial gain, and we should allow people young and old, novice and experienced, to try their hands, knowing that they can reap the rewards if they succeed, but will have to bear the costs if they fail.

Niaz: Last but not least, if you could send a message about the benefits of entrepreneurship, what would it be?

Peter: As educators, I think it’s critical to remind people who are not entrepreneurs—I’m looking at you, politicians and journalists—that entrepreneurship is the driving force of a market economy, and that entrepreneurs need property rights, the rule of law, sound money, and free and open competition to be successful.

Niaz: Dear Peter, thank you so much for your valuable time and sharing us your invaluable idea,experience, and knowledge which will help us to pursue entrepreneurial excellence.  We are wishing you very good luck for your good health and for all of your upcoming endeavors.

Peter: Thanks for the great questions, and I look forward to reading future entries in your series!

 

 

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