by Adam Thierer & Trace Mitchell
[originally published on The Bridge on August 30, 2018.]
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What is an entrepreneur?
While it may seem straightforward, this question is deceptively complex. The term can be used in many different ways to describe a variety of individuals who engage in economic, political, or even social activities. Entrepreneurs affect almost every aspect of modern society. While most people probably have a general sense of what is meant when they hear the term entrepreneur, it can be difficult to provide a precise definition. This is due in no small part to the fact that some of the primary thinkers who have given substance to the term have placed their focus on different aspects of entrepreneurialism.
How Economists Talk About Entrepreneurs
Austrian economist Joseph Schumpeter thought that the purpose of an entrepreneur was “to reform or revolutionize the pattern of production by exploiting an invention.” Schumpeterian entrepreneurs are highly creative, disruptive innovators who challenge the status quo in order to bring about new economic opportunities. American economist Israel Kirzner viewed the defining characteristic of entrepreneurs as “alertness.” Kirznerian entrepreneurs are individuals who are able to identify the ways in which a market could be moved closer to its equilibrium, such as recognizing a gap in knowledge between different economic actors.
In the time since Schumpeter and Kirzner helped lay the groundwork, a number of George Mason University-affiliated scholars have made major contributions to our understanding of entrepreneurialism. Don Boudreaux, Jerry Ellig and Daniel Lin, and Virgil Storr, Stefanie Haeffele and Laura Grube, have offered a merged view of Schumpeterian and Kirznerian entrepreneurialism, showing the significant overlap between the two approaches.
In this new way of looking at the issue, entrepreneurs are crucial to innovation, economic growth, and societal change. They are dynamic actors who respond to incentives and market signals. “Greater discovery and innovation are the benchmarks of dynamic competition,” note Ellig and Lin, “not the driving down of price to marginal cost.”
Productive and Unproductive Entrepreneurs
But are all of these dynamic entrepreneurs good for society? Among modern economists and political scientists, there is a general consensus that Schumpeterian-Kirznerian entrepreneurs are individuals who either find or create value within society. In recent decades, therefore, scholars have focused on applying those insights more broadly and developing a more robust way to categorize different types of entrepreneurial activity.
Another American economist, William Baumol, drew an important distinction between productive and unproductive entrepreneurs. He described productive entrepreneurs as people engaged in enterprising activity that generates value within society, such as the creation of new and innovative technologies. However, he also found that entrepreneurs could be unproductive if they did not create value or actively harmful if they destroyed value. “Indeed, at times the entrepreneur may even lead a parasitical existence that is actually damaging to the economy.” For Baumol, entrepreneurs are not defined as individuals who develop new methods of creating value but rather “persons who are ingenious and creative in finding ways that add to their own wealth, power, and prestige.”
Entrepreneurs in the Political Arena
An individual who is highly skilled at lobbying a particular governmental agency might be considered an entrepreneur, but that does not mean they are necessarily contributing value to society overall. Some scholars refer to this as political entrepreneurialism. Economists Peter Boettke and Christopher Coyne define political entrepreneurs as, “individuals who operate in political institutions and who are alert to profit opportunities created by those institutions.” Utah State University professors Randy Simmons, Ryan Yonk and Diana Thomas observe how such entrepreneurs seek specific rewards or privileges from political institutions and interactions through “alertness to previously unnoticed rent-seeking opportunities.” ‘Rent-seeking’ is an economic concept where one person or group is able to derive certain benefits from a particular institutional arrangement without actually creating value for others.
Our Mercatus Center colleague Matthew Mitchell has documented the “long list of privileges that governments occasionally bestow upon particular firms or particular industries.” Mitchell offers a taxonomy of the sort of privileges that political entrepreneurs seek. They include: “monopoly status, favorable regulations, subsidies, bailouts, loan guarantees, targeted tax breaks, protection from foreign competition, and noncompetitive contracts.”
All of these privileges could qualify as a form of Baumol’s “unproductive entrepreneurship” or, in the extreme, what he called destructive entrepreneurialism. Professors Sameeksha Desai, Zoltan Acs and Utz Weitzel define destructive entrepreneurship as “wealth-destroying (such as the destruction of inputs for production activities).” Whereas unproductive entrepreneurship “seeks to redistribute from one individual to another individual,” Boettke and Coyne note, “destructive entrepreneurship reduces the total surplus in an attempt by the entrepreneur to increase his own wealth.” Outright theft and violent conflict over resources are examples of destructive entrepreneurship.
When policymakers reward political destructive or unproductive entrepreneurs, it has profound effects on the well-being of ordinary people and entire nations.
Evasive and Regulatory Entrepreneurs
Not all political entrepreneurs are necessarily out to gain privileges from government at the expense of others, however. Some entrepreneurs are more interested in simply gaining greater freedom to innovate. Scholars have used the terms evasive entrepreneurs or regulatory entrepreneurs to describe such actors. Researchers Niklas Elert and Magnus Henrekson define evasive entrepreneurialism as “profit-driven business activity in the market aimed at circumventing the existing institutional framework by using innovations to exploit contradictions in that framework.” GMU economists Christopher Coyne and Peter Leeson argue that “[e]vasive activities include the expenditure of resources and efforts in evading the legal system or in avoiding the unproductive activities of other agents.” Regulatory entrepreneurs, according to legal scholars Elizabeth Pollman and Jordan Barry, are innovators who “are in the business of trying to change or shape the law” and are “strategically operating in a zone of questionable legality or breaking the law until they can (hopefully) change it.” Evasive or regulatory entrepreneurs generally adopt a “permissionless innovation” approach to both business and political activities.
Generally speaking, evasive and regulatory entrepreneurs are synonymous, although regulatory entrepreneurialism implies a more active intent to change policy through entrepreneurial acts. Evasive entrepreneurs might also be ignorant of what the law says, whereas regulatory entrepreneurs, by definition, understand how the law negatively affects their efforts and seek to change policy through their actions.
However, both evasive and regulatory entrepreneurs are distinct from what economists Alexandre Padilla and Nicolas Cachanosky call indirectly productive entrepreneurs. They argue that regulation often creates unintended consequences which lead to new entrepreneurial opportunities. Indirectly productive entrepreneurs seize upon these opportunities by finding ways to mitigate the costs associated with specific regulations. Unlike regulatory entrepreneurs, who desire to change policy, or evasive entrepreneurs, who seek to avoid it, indirectly productive entrepreneurs create value by reducing the harm caused by policies. For example, the Transportation Safety Administration (TSA) has a policy prohibiting passengers from bringing liquids on an airplane unless they are kept in a container that is smaller than 3.4 ounces. As a response, several indirectly productive entrepreneurs have created “TSA Approved” containers for shampoo, mouthwash, and other toiletries that make it easier for passengers to comply with the regulation.
Social Entrepreneurs
There is also a growing acknowledgment that entrepreneurial behavior can transcend economic or political activities. Mercatus scholars have defined social entrepreneurs as individuals who engage in “innovative, social value-creating activity that can occur within or across the nonprofit, business, or government sectors.” Social entrepreneurial activities are not typically in pursuit of compensation or profit, but that need not always be the case and “the distinction between social and commercial entrepreneurship is not dichotomous, but… a continuum ranging from purely social to purely economic,” they note.
Some sort of social mission drives this type of entrepreneurship, and social entrepreneurialism will often incorporate what MIT economist Eric von Hippel refers to as “free innovation.” He defines a free innovation as “a functionally novel product, service, or process that (1) was developed by consumers at private cost during their unpaid discretionary time (that is, no one paid them to do it) and (2) is not protected by its developers, and so is potentially acquirable by anyone without payment—for free.” A good example of free innovation would be social entrepreneurs using 3D printers and open source designs to voluntarily create prosthetics for children with limb deficiencies.
Conclusion
As this brief survey reveals, there are many different forms of entrepreneurialism. Individuals can act in an entrepreneurial fashion in pursuit of many different objectives: profits, fame, social or legal change, or even personal or organizational privileges that come at the expense of others. Clearly, not all forms of entrepreneurialism produce socially beneficial outcomes. Policymakers should seek to foster and reward Schumpeterian-Kirznerian entrepreneurs given the positive implications for innovation and economic growth and avoid falling into the trap of rewarding political entrepreneurs, who instead seek to game laws and regulations to their own advantage.
Given the extensive research and academic literature inherent to this subject, we’ve curated a list of selected readings below.
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Further Reading
Austin, J., Stevenson, H., & Wei-Skillern, J. (2006). Social and Commercial Entrepreneurship: Same, Different, or Both? Entrepreneurship Theory and Practice, 30(1), 370-384. Retrieved from https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6520.2006.00107.x
Baumol, W. (1968). Entrepreneurship in Economic Theory. The American Economic Review,58(2), 64-71. Retrieved from https://www.jstor.org/stable/1831798?seq=1#page_scan_tab_contents
Baumol, W. (1990). Entrepreneurship: Productive, Unproductive and Destructive. Journal of Political Economy, 98(5), 893-921. Retrieved from https://www.jstor.org/stable/2937617?seq=1#page_scan_tab_contents.
Boettke, P. J., & Coyne, C. J. (2009). Context Matters: Institutions and Entrepreneurship. Foundations and Trends in Entrepreneurship, 5(3), 135-209. Retrieved from https://www.nowpublishers.com/article/Details/ENT-018.
Boudreaux, D. (1994), Schumpeter and Kirzner on Competition and Equilibrium. In P. Boetkke & D. Prychitko (Eds.), The Market Process: Essays in the Contemporary Austrian Economics (pp. 52-61). Cheltenham, UK: Edward Elgar. Retrieved from http://cafehayek.com/wp-content/uploads/2011/02/Heres-a-paper-that-I-wrote-back-in-1986-or-1987.-In-it-I-attempt-to-explain-how-non-price-competition-can-be-equilibrating..pdf
Coyne, C. J., & Leeson, P. T. (2004). The Plight of Underdeveloped Countries. Cato Journal, 24(3), 235-249. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=869123
Desai, S., & Acs, Z. J. (2007). A theory of destructive entrepreneurship. Jena Economic Research Papers no. 85, Friedrich-Schiller University and Max Planck Institute of Economics, Jena, Germany, October, Retrieved from https://www.econstor.eu/bitstream/10419/25657/1/553834517.PDF
Dees, J. G. (2001), ‘The meaning of Social Entrepreneurship’. The Fuqua School of Business, Center for the Advancement of Social Entrepreneurship.
Desai, S., Acs, Z.J., and Weitzel, U. (2013), “A model of destructive entrepreneurship: insight for conflict and post-conflict recovery,” Journal of Conflict Resolution, Vol. 57, No. 1, pp. 20–40, Retrieved from https://repository.ubn.ru.nl/bitstream/handle/2066/170796/170796.pdf
Elert, N. & Henrekson, M. (2016). Evasive Entrepreneurialism. Small Business Economics, 47(1), 95-113. Retrieved from http://www.ifn.se/wfiles/wp/wp1044.pdf.
Ellig, J. & Lin, D. (2001). A Taxonomy of Dynamic Competition Theories. In J. Ellig (Ed.), Dynamic Competition and Public Policy: Technology, Innovation, and Antitrust Issues (pp. 16-44). Cambridge: Cambridge University Press. Retrieved from https://www.cambridge.org/core/books/dynamic-competition-and-public-policy/taxonomy-of-dynamic-competition-theories/C536918DD453ADB34A47F48EDA6D21B7.
Hippel, E. V. (2017). Free Innovation. Cambridge, MA: The MIT Press. Retrieved from https://mitpress.mit.edu/books/free-innovation.
Kirzner, I. M. (2009). The Alert and Creative Entrepreneur: A Clarification. Small Business Economics, 32(2), 145-152. Retrieved from https://link.springer.com/article/10.1007/s11187-008-9153-7
Lucas, D. S. & Fuller, C. S. (2015). Entrepreneurship: Productive, Unproductive, and Destructive—Relative to What? Journal of Business Venturing Insights, 7, 45-49. Retrieved from https://www.sciencedirect.com/science/article/pii/S2352673417300033.
Mitchell, M. D. (2012). The Pathology of Privilege: The Economic Consequences of Government Favoritism. Mercatus Center. Retrieved from https://www.mercatus.org/publication/pathology-privilege-economic-consequences-government-favoritism.
Murphy, K.M., Shleifer, A. and Vishny, R.W. (1991) “The Allocation of Talent: Implications for Growth,” The Quarterly Journal of Economics, 106(2): 503-530. Retrieved from http://www.nber.org/papers/w3530
Murphy, K.M., Shleifer, A. and Vishny, R.W. (1993) “Why is rent-seeking so costly to growth?” American Economic Review Papers and Proceedings, 83 (2): 409-414. Retrieved from https://scholar.harvard.edu/shleifer/publications/why-rent-seeking-so-costly-growth
Padilla, A. & Cachanosky, N. (2016). Indirectly Productive Entrepreneurship. Journal of Enterprise and Public Policy, 5(2), 161–175. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2584741.
Pollman, E. & Barry, J. M. (2017). Regulatory Entrepreneurship. Southern California Law Review, 90, 383-448. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2741987.
Schumpeter, J. (1942, 2008). Capitalism, Socialism and Democracy (3rd ed.). New York, NY: HarperCollins Publishers. Retrieved from https://www.amazon.com/Capitalism-Socialism-Democracy-Joseph-Schumpeter/dp/0061561614.
Simmons, R. T., Yonk, R. M., & Thomas, D. W. (2011). Bootleggers, Baptists, and Political Entrepreneurs: Key Players in the Rational Game and Morality Play of Regulatory Politics. The Independent Review, 15(3), 367-381. Retrieved from http://www.independent.org/pdf/tir/tir_15_03_3_simmons.pdf.
Storr, V., Haeffele, S., & Grube, L. (2015). The Entrepreneur as a Driver of Social Change. In Community Revival in the Wake of Disaster (pp. 11-31) New York, NY: Palgrave Macmillan. Retrieved from
https://www.palgrave.com/us/book/9781137286086
Thierer, A. (2018). Evasive Entrepreneurialism and Technological Civil Disobedience: Basic Definitions, The Bridge. Retrieved from https://www.mercatus.org/bridge/commentary/evasive-entrepreneurialism-and-technological-civil-disobedience-basic-definitions
Thierer, A. (2016). Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom. Retrieved from https://www.mercatus.org/publication/permissionless-innovation-continuing-case-comprehensive-technological-freedom
Thierer, A. (2017). You’re in Joseph Schumpeter’s economy now. Learn Liberty, Retrieved from http://www.learnliberty.org/blog/youre-in-joseph-schumpeters-economy-now
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