Entrepreneurship: Productive, Unproductive, and Destructive

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Citation: William J. Baumol (1990) Entrepreneurship: Productive, Unproductive, and Destructive. Journal of Political Economy (RSS)

doi: 10.1086/261712

Tagged: Business (RSS) entrepreneurship (RSS), innovation (RSS)


Baumol's article Entrepreneurship: Productive, Unproductive and Destructive begins with a quote from the Marxist historian Eric Bosbawm:

It is often assumed that an economy of private enterprise has an automatic bias toward innovation, but this is not so. It has a bias only toward profit.

This basic fact frames the rest of Baumol's lucid article. Baumol lays out a simple hypothesis that, "while the total supply of entrepreneurs varies among societies, the productive contribution of the society's entrepreneurial activities varies much more because of their allocation between productive activities and unproductive activities such as rent seeking or organized crime." In other words, Baumol rejects the idea that different degrees of innovation over time would, as a naive reading of Schumpeter might suggest, depend on the waxing and waning of a mysterious "spirit of entrepreneurship might suggest. Baumol criticizes Schumpeter's concept of entrepreneurial activity as being too explicitly tilted toward "positive" contributions to society. He counters that entrepreneurs are, fundamentally, in it for money, and will make it in whatever ways make most sense.

Differences in the amount of entrepreneurship depend, in that case, on changing "rules of the games." If one lives a at time or in an environment where the best way to make money is through corruption, that's where entrepreneurs will be putting their effect. If one lives at a time where the "rules of the game" favor productive innovative action, there will be more.

Baumol supports his basic argument with a loose and selective history of a variety of time periods including ancient Rome, medieval China, and several periods in Europe over the last 1500 years to first support two propositions about variance in his variables of question:

  • The rules of the game that determine the relative payoffs to different entrepreneurial activities do change dramatically from one time and place to another. (which Baumol argues is proved by his evidence)
  • Entrepreneurial behavior changes direction from one economy to another in a manner that corresponds to the variations in the rules of the game. (which Baumol suggests is supported by, but not proved, by his evidence)

After introducing his historical evidence, supported entirely through secondary sources, he introduces a third proposition:

  • The allocation of entrepreneurship between productive and unproductive activities, though by no means the only pertinent influence, can have a profound effect on the innovativeness of the economy and the degree of dissemination of its technological discoveries.

He tries to answer this question by considering a series of what he calls "near industrial revolutions" where he argues that the allocation of resources toward unproductive entrepreneurship kept societies with technological advances or inventions in hand from fully realizing the value to society of the inventions in question. He argues that the inventions were in place but the incentives to exploit were not. Although he is careful not to claim too much for his data and example, he suggests that the "rules of the games" leading to such imbalances may have mattered some.

Baumol ends his article with a series of reflections on the current "rules of the games" and talks about policy changes that might be used to influence rates of productive entrepreneurship. In particular, Baumol seems concerned with what he sees as high rates of litigiousness and antitrust lawsuits which he feels are likely to deter productive entrepreneurship and, presumably, encourage entrepreneurs to into less productive forms of work. His conclusions strike a awkward balance between a very pro-regulation (i.e., it is the power and perhaps responsibility of the state to push entrepreneurship in more productive directions) and yet also what comes off as a rather pro-free-market perspective.

Theoretical and practical relevance:

Baumol's article has been cited more than a thousand times and is a common citation in the literature on entrepreneurship in particular.