Archive for entrepreneurship

The Right Way to View Entrepreneurship

6814Mises Daily Weekend by Peter Klein and Nicolai Foss:

Much of the existing research on entrepreneurship focuses only on start-ups and small business. But entrepreneurship is a much broader topic and entrepreneurs appear everywhere as drivers of greater wealth and economic growth. Peter Klein and Nicolai Foss discuss new ways to study this phenomenon.

IKEA’s “Minimum Wage”

200px-Ikea_logo.svgIKEA has announced it will be raising the “minimum wage” of its US employees to $10.76 per hour, an increase of about 17% from the current minimum. The news comes in the midst of another “national discussion” (often code for anti-economic hysteria) about minimum wage “reform” (always code for an increase).

Economic criticisms of the public minimum wage are readily available, but IKEA’s decision is different. It does have some interesting economic implications, but there are a lot of other issues in this story worth discussing, not the least of which is the language used to report it. That is, I have to wonder why people use the term “minimum wage” to refer to the internal policy of a private firm. Maybe it’s just a convenience of language, but regardless of its true cause, this usage gives a rhetorical advantage to proponents of government-mandated minimum wages.

That is, using “minimum wage” to describe both entrepreneurs’ decisions and government regulation obscures the distinction between them, i.e. that one is chosen by employers and the other forced on them under penalty of law (often through the influence of larger competitors). Using the same term opens the door to falsely conflating policies, making it seem like private and political decision making are the same or similar. If private firms declare their own minimum wages, a government minimum wage loses its distinctiveness, and seems like just another benign entry on a long list of possible wage policies. It’s all too easy—as news outlets reporting this story demonstrate—to compare IKEA’s minimum wage to the federal minimum wage, as if each is just a different but harmless way to improve people’s welfare.

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Do Video Games Teach Economics?

GalagaMany teachers know that encouraging interest in the dismal science can be difficult because students often find economics abstract and, well, dismal. It’s basically a truism then that if economists want to engage students, we should use interesting and relatable examples. And more often than not, this means mining pop culture for teaching moments from music, TV, and film. Along these lines, I suggest economists begin to look to video games for inspiration as well.

In the last few years, there has been an explosion of interest in the economics of the video game industry, and especially in the digital economies that emerge within games. Whether we look at social interaction and trade, or money and inflation, it’s obvious that as games become more complex, they increasingly illustrate the principles of economics. The most common examples come from Massively Multiplayer Online (MMO) titles like World of Warcraft and EVE Online, but I think games incorporate economic ideas in more fundamental ways as well.

I’ve discussed in a recent article how games imply economic behavior, and how making decisions within a game highlights the fundamentals of human action. The basic idea is that virtual worlds, like the real world, present us with a series of choices. Games impose digital scarcity, obliging players to weigh the benefits of different courses of action, make tradeoffs, and incur costs.

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“But Who Will Build the Roads?”

solar-roadway-bike-pathAs always, the market comes to the rescue through innovative entrepreneurship. And in this case, not only do these entrepreneurs promise to build roads – they will use the roads to generate electricity for sale on the market. So they solve two problems at once. Nay, three – the roads use part of the generated power to keep snow and ice off the surface, thereby making them safe even in cold weather. Wait, four – the roads can display lights to warn drivers of danger ahead such as wild animals.

The venture, called Solar Roadwaysis fully crowd-funded (closing in on double what they requested) but is looking to ”improve” existing government roads (which shouldn’t be all that hard) rather than lay their own. Too bad government doesn’t allow competition.

Video: Peter Klein Explains How Entrepreneurs Help Shape Our Economy

In this excerpt from his recent “Liberty on the Rocks” interview with Justin Longo, Peter Klein explains the importance of entrepreneurship.

Lean Startups and Capital Ownership

6719452305_78383ce4e3_zIn the last few years, there has been a big emphasis in entrepreneurship on “lean” startups. Being lean basically means avoiding unnecessary costs early in the development of a new venture, thus minimizing waste and reducing the negative effects of uncertainty. For example, a common lean strategy involves using consumers to test a limited run of an unfinished product in order to furnish data before going to market. This allows the firm to gauge the likelihood of success before committing resources to full-scale production, which is expensive and uncertain.

The conventional wisdom, which in some ways is just economic common sense, is that a new firm should stay lean for as long as possible. Yet one implication that is sometimes drawn from the lean approach is that capital ownership is a negative for early-stage entrepreneurs, because in some ways owning capital narrows a firm’s strategic options, both economically and geographically. Lean ideas are especially popular in high-tech industries (where they originated), which are more likely to be driven by ideas and lines of code than intensive investment in plant and equipment.

The lean philosophy may then hint at some interesting questions for Austrian economists. For instance, if it is true, as many Austrians have emphasized, that entrepreneurship requires resources (and especially capital goods), how would economists respond to the claim that successful entrepreneurship doesn’t or shouldn’t require capital assets (at least in its early stages)?

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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?

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Entrepreneurship: The Driving Force of the Economy

6717Peter Klein writes in today’s Mises Daily:

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.

Video: The Present State of Entrepreneurship Research

The Murray N. Rothbard Memorial Lecture, sponsored by Hélio Beltrão. Recorded at the 2014 Austrian Economics Research Conference in Auburn, Alabama, on 21 March 2014.

Audio: Peter Klein Examines ‘The Present State of Entrepreneurship Research’

MP3 Audio.

“The Present State of Entrepreneurship Research” by Peter G. Klein. The Murray N. Rothbard Memorial Lecture, sponsored by Hélio Beltrão. Recorded at the 2014 Austrian Economics Research Conference in Auburn, Alabama, on 21 March 2014.

Intellectual Property and Entrepreneurship in March’s ‘The Free Market’

marfmThe March issue of The Free Market is now online featuring David Gordon’s new review of Butler Shaffer’s A Libertarian Critique of Intellectual Property:

Butler Shaffer’s superb new monograph offers an easy way to unravel the IP puzzles. He starts from a fundamental prin­ciple basic to libertarianism and explains how the implications of this principle shed light on IP issues.

What is this principle? It is that rights stem from “the informal processes by which men and women accord to each other a respect for the inviolability of their lives”… In adopting this stance, Shaffer puts himself at odds with much that passes in our day for wisdom among professors of law.

And Peter Klein discusses how the entrepreneur is at the center of what drives economic growth:

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.

Also in this month’s issue is a wide variety of scholar and alumni notes, and news from the Mises Institute including Gary North’s donation of his 10,000 books, and more.

 

Entrepreneurship without Romance

3279740532_d4105eb4fa_oJames Buchanan’s work on the economics of public choice has been called “politics without romance,” because it looks beneath the glossy exterior of government and reveals the underlying reality of political behavior. Unfortunately, the “romantic” view of politics is shared by supporters of all types of political power, who seem to don rose-colored hazmat suits in order to promote their particular candidates, parties, or ideologies. As I’ve mentioned elsewhere, from the perspective of economics, politics looks less like romance and more like an abusive marriage.

Entrepreneurship also attracts a kind of mistaken romanticism, although in a different way than politics. A couple of weeks ago, Isaac Morehouse wrote an insightful post on the Praxis blog warning that we should take care to avoid glamorizing creativity too much. His point is that creative success, especially in entrepreneurship, can derive from relatively straightforward decision making. Creativity is often simply an attempt to solve a problem while avoiding harm to oneself, as opposed to the flashy, dramatic, and heroic struggle against the odds we sometimes imagine it to be.

In other words, we often place undue emphasis on the personal magnetism and economic “heroism” of entrepreneurs. Yet despite being the “driving force of the market,” entrepreneurship is often quite mundane. Taking a romantic view can be misleading if we end up thinking in terms of only the most dramatic cases of disruptive innovation or personal entrepreneurial charisma (or lack thereof!), and less on the pervasive and vital role of entrepreneurial calculation and judgment.

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Science Fiction, Fantasy, and Entrepreneurial Alertness

downloadFor fans of the science fiction and fantasy genres, Stephen R. Donaldson probably needs no introduction. For those not so familiar, Donaldson has penned numerous novels and short stories, many to critical acclaim, and is the author of the recently-concluded Chronicles of Thomas Covenant, widely regarded as one of the best fantasy series of the last forty years.

I’m currently reading Donaldson’s novel The Real Story, which is the first of five volumes in his sci-fi epic The Gap Cycle. In an afterword to the book, Donaldson explains in great detail how the idea for The Gap Cycle was conceived and, through various twists and turns, eventually completed. What strikes me most is the way Donaldson describes the writer’s creative process:

Most writers hate the question, “Where do you get your ideas?”

This is because the answer tends to be at once ineffably mysterious and excruciatingly mundane. We are all in love with the magic of the imagination—otherwise we wouldn’t be able to survive as creative artists—but none of us can explain how it works. In a sense, writers don’t get ideas: ideas get writers. They happen to us. If we don’t submit to their power, we lose them; so by trying to control or censor them we can make the negative choice of encouraging them to leave us alone. But we can never force ourselves to be truly creative. The best we can do is to teach ourselves receptiveness—and trust that ideas will come…

For some reason, a fair number of my best stories arise, not from one idea, but from two. In these cases, one idea comes first; it excites me enough to stay with me; yet despite its apparent (to me) potential, it stubbornly refuses to grow. Rather than expanding to take on character, event, and context, it simply sits in my head—often for many years—saying over and over again, “Look at me, you idiot.” If you just looked at me, you would know what to do with me. Well, I do look; but I can’t see what I need—until the first idea is intersected by the second.

What I find intriguing about this passage is that in describing his inspirations, Donaldson seems to capture the essence of Israel Kirzner’s theory of entrepreneurship as alertness to opportunities. The key feature of Kirzner’s theory is that opportunities tend to be discovered spontaneously by entrepreneurs who are not actively looking for them. Instead, the lure of a pure profit opportunity creates a special incentive for entrepreneurs that causes them to notice the opportunity. I read Donaldson as taking very much the same approach; he even goes so far as to say that when he actively looks at ideas (searching for meaning) they end up revealing nothing. For him then, artistic creativity is also spontaneous.
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Conflicting Views of the Entrepreneur in Turn-of-the-Century Vienna

A recent publication in the History of Economics Review by Matt McCaffrey:

McCaffrey, Matthew
History of Economics Review;
Summer 2013; 58; ABI/INFORM Global pg. 27

Bridging the Gap between Entrepreneurship Teaching and Economics

Starting with Menger, Böhm-Bawerk, and Wieser, Austrians have always emphasized the importance of the entrepreneur in economics. The role of entrepreneurship also featured prominently in the works of earlier economists such as the French liberals, and Chris Brown and Mark Thornton have even argued that the notion of the entrepreneur was a key to the founding of modern economics. At the same time though, Austrians (along with other scholars such as William Baumol) have also lamented the serious neglect of the entrepreneur in contemporary economics, which has led, among other things, to an underestimation of the welfare-enhancing power of markets, and an undue faith in the power of governments and regulators to tinker with the market process.

It should come as welcome news then that entrepreneurship studies is one of the fastest-growing fields among the business disciplines (along with related fields such as strategic management and strategic entrepreneurship). But sadly, these fields have sparked less attention than they probably should. One possible reason is that there is often a gap between the economic theory of the entrepreneur and the business practice of entrepreneurship. One way to think about it is that business research tends to focus on the practical aspects of new venture creation, whereas economists are usually interested in the economic function of entrepreneurship—the underlying (or perhaps overarching) economic and social significance of entrepreneurs. (Peter Klein makes this point by distinguishing between “occupational entrepreneurship” and “functional entrepreneurship.” Business scholars and practitioners focus mainly on the former, economists on the latter.)

A problem then is to bridge this gap and to bring economic insight to the field of practical business. This is especially important in teaching courses in entrepreneurship, which often focus so much on the business trees that they miss the economic forest. It’s true that entrepreneurship textbooks usually include something about Schumpeterian “creative destruction,” and repeat some well-worn facts about the importance of small business in the economy. But beyond these brief nods to economic ideas, many entrepreneurship courses don’t have much to say about the bigger picture of entrepreneurial behavior. The unfortunate result is that a lot of the richness of the economic point of view gets lost amongst (nevertheless important) details of new venture creation.

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Luck vs. Entrepreneurial Judgment at the Horse Track

1926WhyBeUnluckyMany readers might have missed HBO’s short-lived series Luck, which debuted in 2012. It was a project of David Milch, creator of the brilliant Deadwood, another show unfortunately abandoned in its prime. Despite an all-star cast and A-list directing, Luck was cancelled after only one season due to concerns about animal safety. Short as it is though, it’s still a pretty riveting cross-section of the hidden world of horse racing, shining a spotlight on everyone from the Mafioso owners of the horse track down to the stable boys.

What interests me though is the eponymous theme of luck running through the show. One of my current research projects involves exploring the role luck plays in entrepreneurial success. There are some thorny issues involved in conceptualizing luck and making it operational within economic theory, but there are also some interesting problems in entrepreneurship that we may be able to answer by doing so. For instance, one criticism that has been raised against Israel Kirzner’s theory of entrepreneurship is that the idea of entrepreneurial alertness can be reduced to good luck. If this is true, then the entrepreneurial alertness to opportunities doesn’t explain much about how entrepreneurship happens in the real world. But if entrepreneurship is about more than just luck, then we can in fact think about why entrepreneurs succeed and fail.

One of the few economists to think about luck and entrepreneurship in detail is Frank Fetter. Fetter makes an important point about how prescient entrepreneurial judgment is very often mistaken for simple luck:

Chance therefore has its part [in determining profits]; but the temptation is to exaggerate its importance. Many cases said to be due to chance are found on closer knowledge to be due to superior judgment. They result from the union of happy chance with deliberate choice. The adventurer who, on the discovery of gold, goes at once to California or to Alaska, may stumble upon a gold-mine. It is luck; but he has gone to a place where gold-mines are comparatively plentiful. If he stays at home it is more likely that he will stumble over an ash-heap. Throughout life there is constant opportunity, but it must be sought. One who has the good judgment to be ever at the right time at the place where he has the best chance of finding a good thing, usually gets the advantage, and men call it luck. The more the causes of success in general are studied, the larger is found the element of choice, the smaller that of luck. (Fetter, 1915, p. 360)

In other words, it’s easy to observe a good outcome (such as the profit of an entrepreneur) and dismiss it simply as luck. But any such good fortune can always be thought of in terms of judgmental decision making. “Luck” doesn’t just happen: there is always an element of choice in creating the conditions for what we call good fortune.

Returning to the track, I think it provides an intriguing illustration of the idea that “luck” is often a reflection of entrepreneurial judgment; that is, speculative decision making about the use of valuable resources in the face of uncertainty. Sure, everyone at the track wants good luck, meaning the ability to correctly anticipate the winning horses. But everyone also understands that their own decisions partly determine the meaning of the outcome for them. What matters is effective judgment about the uncertain future: horse owners can hire the wrong trainers or jockeys, bettors can rely on the wrong touts, and even the owners of the track have to be careful to bribe the right officials to keep the track running smoothly. All of these decisions intertwine or conflict as different individuals try to adjust their behavior to the expected outcome. And each plays a significant role in determining the profits and losses of those involved, which are about far more than the mysterious notion of luck. As Fetter points out, it’s only when we look deeper that we see the true causes of success and failure in the economy.

Maybe the best way to put it is to quote the words of Professor Kenobi: “In my experience, there’s no such thing as luck.”

Taxpayer-Funded Mercenaries Are Not the ‘Private Sector’

prince-198x300Austrian economics has finally reached that point where people who aren’t Austrian at all claim to be Austrians. A case in point is the fact that Erik Prince, founder of Blackwater (aka Xe Services, aka Academi) counts among his main influences Austrian economics and libertarianism. In a recent column at Forbes, the author writes:

Prince got his entrepreneurial insights from his father and the classroom. He had the wisdom to choose a college, Hillsdale, where the economics department recognizes that creative role of the entrepreneur. As he writes, “The thing that truly appealed to me about Hillsdale was its focus on libertarian, free-market economics.” It was there that, as an economics and political science minor, Prince learned the economics of the Austrian School which, in his words, “lionizes long-term laissez-faire policies without government intervention.” Hillsdale, like Grove City College, which also teaches Austrian economics, is one of the few colleges which does not accept government money.

Prince seems to be under the impression that he is some kind of market entrepreneur. In reality he is just a political entrepreneur. That is, his business model is based on getting the government to steal money from the taxpayers and then hand it over to his company. It’s ironic that Hillsdale College, which takes no government money, is mentioned, since Prince and Blackwater survive almost totally on government money.

Blackwater is a “security firm” that provides soldiers, firepower, surveillance, and a variety of other military services to governments. Among their biggest clients are the US military and the CIA, although Blackwater appears to work with local governments as well. Blackwater is privately owned, of course, but its revenues do not come through markets. They come from government institutions.

Whether or not Blackwater receives revenue is based on whether they can effectively lobby important people in the government to continue paying Blackwater for services. The money that goes to Blackwater, however, is not the money of the people Blackwater seeks to please. The money belongs to the taxpayers, who have no power to withdraw their financial support from Blackwater if a politician decides otherwise.

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Looking at Entrepreneurship From a Theoretical Perspective

6631Peter Klein is interviewed by Steve Mariotti in today’s Mises Daily: 

SM: Are there particular government policies that are hurting entrepreneurship?

PK: Our current monetary regime, with hyperactive central banks that create booms and busts, creates a terrible climate for entrepreneurs. Artificially low interest rates distort market incentives, leading to what Mises and Hayek called “malinvestment.” Taxes and regulations make it harder to start and to run companies, favor some companies at the expense of others, and hamper bargaining between firms, financiers, employees, and customers. Think of the uncertainty caused by the Affordable Care Act or the heavy reporting burdens imposed by Dodd-Frank. Mises once wrote that in an economy such as ours where the state plays a huge role in all aspects of business, entrepreneurship degenerates into “bribery and diplomacy.” Instead of focusing on creating value for customers, entrepreneurs spend their time lobbying for favors or to avoid penalties, trying to discern the government’s next move, anticipating or adapting to the newest regulations.

SM: Have you experienced any obstacles in your career related to these challenges?

PK: Business entrepreneurrship is the kind that drives the market economy but, in a sense, we are all entrepreneurs — life is uncertain, and we are always investing our time, energy, and reputation in search of one outcome or another. I’ve been entrepreneurial in that my perspective on entrepreneurship is not the “mainstream” one, in economics or management, and that my work blends insights from Oliver Williamson’s transaction cost economics, the “Austrian” School of Mises,F. A. HayekMurray Rothbard, and Israel Kirzner, and other scholars. It’s sometimes been a tough sell — despite the popular image of the university as an open, tolerant, and innovative place, academia is actually very conservative, and ideas that don’t fit within the dominant paradigm — as Thomas Kuhn famously explained — are often marginalized.

We Cannot Predict the Many Ways Freedom Will Improve Our Lives

6612Gary Galles writes in today’s Mises Daily:

But how do we know that freedom’s results will be improvements when “anything could happen?” First, self-interest — the desire to improve the circumstances we currently face — means that improvements are sought. Second, when people’s rights are protected, the need to get others’ voluntary agreement means no one can force worse results on others, but leaves plenty of room for results to be not only better, but unimaginably better. Neither is assured under government’s heavy hand…

In addition, no politician who oversees, or bureaucrat who administers, one of the many government enterprises that have grown to surround us could have met the same burden of proof when the government overrides voluntary arrangements with their dictates. Moreover, questions posed to the government of “what would happen” in the face of some new proposed government program, such as Obamacare, are often tossed aside with impunity.

New Austrian Article in ‘Managerial and Decision Economics’

Associated Scholar Per Bylund writes:

I just got a paper accepted for publication in the journal Managerial and Decision Economics.

“Explaining Firm Emergence: Specialization, Transaction Costs, and the Integration Process”

Abstract:
This article explains firm emergence and the role of firms in the market structure using the productive power of specialization. Based on productivity efficiencies through technological specialization, a model for firm emergence is drafted alongside Coasean transaction cost theory. I find that transaction costs cannot explain firm emergence but the entrepreneurial specialization perspective here adopted provides a promising approach to understanding the firm’s function to the entrepreneur and its internal organization and capabilities. It suggests a foundational framework for studying the creation of capabilities and the interplay between markets, firms, and entrepreneurs.

Note to Mises Scholars and Alums: send news of your own publications, awards, and related news to rwmcmaken@mises.org.