Johan Mayer-Kjarby
Entrepreneurship: Productive, Unproductive, and Destructive
William J. Baumol
There are a variety of roles among which the entrepreneur’s efforts can be reallocated. Some
of those roles are not constructive and innovative. At times the entrepreneur may even have a
damaging impact to the economy.
How the entrepreneur acts depends heavily on the rules of the game, the reward structure of
the economy.
1. On the Historical Character of the Evidence
I shall proceed on the basis of all the main economic periods and places that the economic
historians single out for the light they shed on the process of innovation and its diffusion.
These will be used to show that the relative rewards of different types of entrepreneurial
activity have in fact varied dramatically from one time and place to another and that this
seems to have had a profound effect on patterns of entrepreneurial behaviour.
2. The Schumpeterian Model Extended: Allocation of Entrepreneurship
The analysis of this paper rests on what seems to be the one theoretical model that effectively
encompasses the role of the entrepreneur and that really “works” in the sense that it
constitutes the basis for a number of substantive inferences. It will be suggested here that only
a minor extension of that model to encompass the allocation of entrepreneurship is required to
enhance its power substantially in this direction.
Schumpeter tells us that innovations take various forms besides mere improvements in
technology:
1. The introduction of a new good – one which consumers are not yet familiar.
2. The introduction of a new method of production.
3. The opening of a new market that the country has not previously entered.
4. The conquest of a new source of supply of raw materials or half-manufactured goods.
5. The carrying out of the new organisation of any industry.
To derive more substantive results from an analysis of the allocation of entrepreneurial
resources, it is necessary to expand Schumpeter’s list, whose main deficiency seems to be that
it does not go far enough. Most important for the discussion here, Schumpeter’s list of
entrepreneurial activities can usefully be expanded to include such items as innovations in
rent-seeking procedures, for example, discovery of a previously unused legal gambit that is
effective in diverting rents to those who are first in exploiting it.
Suppose that it turns out that the benefit the economy derives from its entrepreneurial talents
depends substantially, among other variables, on the allocation of this resource between
productive and unproductive entrepreneurial activities.
3. Entrepreneurship, Productive and Unproductive: The Rules Do Change
Let us now turn to the central hypothesis of this paper: that the exercise of entrepreneurship
can sometimes be unproductive or even destructive.
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Johan Mayer-Kjarby
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Proposition 1: The rules of the game changes dramatically from one period to the next.
Proposition 2: The entrepreneurs behaviour changes in a manner that corresponds to
the rules of the game.
Ancient Rome
In ancient Rome they had no reservation about the desirability of wealth or about its pursuit
as long as it did not involve participation in industry or commerce.
Persons of honourable status had three primary and acceptable sources of income:
landholding, ”usury” (lending money for a fee) and “political payments” (taxes and other
payments). Personal political payments in Rome are misunderstood when labelled
“corruption”. We are here faced with something structural in the Roman society.
Commerce and industry was mainly undertaken by freedmen, former slaves that bore a stigma
for life and hence needn’t mind the loss in prestige by their trade.
In other words, the rues of the game seem to have been heavily biased against the acquisition
of wealth and position through Schumpterian behaviour. (see above) The bottom line is that
the Roman reward system, although it offered wealth to those who engaged in commerce and
industry, offset this gain through the attendant loss in prestige.
Medieval China
1. In China the monarch commonly claimed possession of all property in his territories.
Confiscation of private property was entirely in order. This led to those who had
resources to avoid investing them in visible capital. This was a substantial obstacle to
economic expansion.
2. In addition, China reserved its most substantial rewards in wealth and prestige for
those who climbed the ladder of imperial examinations. Wealth was in prospect for
those who passed the examinations and appointed to government positions. But the
sources of earnings was not the salaries, which where meagre, but corruptive income
in the form of payments from the people.
3. Enterprise was not only frowned on but may have been subject to obstructions
imposed by the officials. Enterprises were stopped and successful enterprises were
taken over and nationalised.
The earlier middle ages
Before the rise of the cities and before monarchs were able to subdue the aggressive activities
of the nobility, wealth and power were pursued primarily through military activity. It seems
reasonable to interpret the warring of the barons in good part as the pursuit of prestige but also
of an economic objective.
(In England, with its institution of primogeniture younger sons who chose not to enter clergy
ha no socially acceptable choice other than warfare to make their fortunes.)
This violent economic activity inspired frequent innovations within the military sector.
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Johan Mayer-Kjarby
The later middle ages
By the end of the eleventh century the rules of the game had changed from those of the Dark
Ages. A number of activities that where neither agricultural nor military began to yield
handsome returns.
Architect-engineers could live in great luxury. But, a far more common source of earnings
was the water driven mills in France and southern England.
Also the monks had an important economic role as enthusiastic entrepreneurs. The rules of the
game appeared to have offered substantial economic rewards to the exercise of Cistercian
entrepreneurship. The order received support from the laity and in the form of exemptions
from road and river tolls.
Fourteenth Century
The fourteenth century brought with it an increase in military activity. Payoffs, surely must
have tilted to favour more than before inventions designed for military purposes. Clearly, the
rules of the game had changed to the disadvantage of productive entrepreneurship.
Early Rent Seeking
Enterprising use of the legal system for rent-seeking purposes has a long history. For example
12th century mill owners won prohibition of use of animal driven mills.
In the middle ages rent seeking also gradually replaced military activity as a prime source of
wealth and power. Rent seeking entrepreneurship took many forms such as the quest for
grants of land and patents of monopoly from the monarch.
To illustrate this the noble families earned probably 10 times more than the richest merchants.
The central point of all the preceding discussion seems clear. If entrepreneurship is the
imaginative pursuit of position then we can expect changes in the structure to modify the
nature of the entrepreneur’s activities.
4. Does the allocation of entrepreneurship matter much?
Proposition 3: The allocation of entrepreneurship between productive and unproductive
activities can have a profound effect on the innovativeness of the economy and the degree of
dissemination of its technological discoveries.
Rome and Hellenistic Egypt
As mentioned earlier ancient Rome was a case where the rules did not favour productive
entrepreneurship. The Romans had the knowledge but did not put their technology to
economically productive use.
Some of the explanation for the lack of productive entrepreneurship is to be found in the rules
of the game which severely discouraged productive entrepreneurship to acquire wealth.
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Johan Mayer-Kjarby
Medieval China
In China the rules did not favour productive entrepreneurship. There was no individual
freedom and no security for private enterprise, no legal foundation for rights other than those
of the state, no alternative investment other than landed property. But perhaps the supreme
inhibiting factor was the overwhelming prestige of the state bureaucracy, which maimed from
the start any attempt to be different and innovate.
The High Middle Ages
Perhaps the hallmark of this industrial revolution was the remarkable source of productive
power, the water mills.
In sum the industrial revolution of the 12th and 13th century was robust and it is plausible that
improved rewards to industrial activity had something to do with its vigour.
The Fourteenth Century Retreat
The end of all this period of buoyant activity has a variety of explanations. Temperatures
dropped, the plague returned, the church clamped down on new ideas. Furthermore the
fourteenth century included the first half of the devastating Hundred Years’ War.
Remark on “Our” Industrial Revolution
All the causes for our industrial revolution can hardly be fully discovered. The continued
association of output growth with high financial rewards to productive entrepreneurship is
suggestive even if it can hardly be taken to be conclusive evidence of proposition 3.
5. On Unproductive Avenues for Today’s Entrepreneur
Some unproductive entrepreneurship of today: Rent seeking, tax evasion efforts and
arbitrageurs
6. Changes in the Rules and Changes in Entrepreneurial Goals
A central point in this discussion is the contention that if reallocation of entrepreneurial effort
is adopted as an objective of society it is far more easily achieved through changes in the rules
that determine relative rewards than via modification of the goals of the entrepreneurs and
prospective entrepreneurs themselves.
There exist testable means that promise to induce entrepreneurs to shift their attentions in
productive directions without major change in their ultimate goals; to increase their wealth.
7. Concluding Comments
A expansion of Schumpeter’s theoretical model to include the allocation of entrepreneurship
is not without substance. The rules of the game specify the relative payoffs to different
entrepreneurial activities and can significantly affect the vigour of the economy’s productivity
growth.
Jämför USA och Japan. I Japan är det betydligt färre stämningar i konkurrens mål p.g.a. av
annat regelverk. Slutsatsen är att vi inte behöver vänta på en långsam kulturell förändring för
att göra entreprenörskapet mer produktivt. Det räcker att vi ändrar spelets regler på rätt sätt.
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