Authors Forum: "Entrepreneurship and Economic Progress"

0:00Thank you very much, Joe. I'm delighted to be here and I will show off a copy of my book, Entrepreneurship and Economic Progress. I actually talked to Jeff Tucker about getting copies of this book for the Mises Institute bookstore and he said he tried to negotiate a deal with Routledge, the publisher, but he said it was so expensive that they don't have it right now. I was curious about that, so I went on to Amazon.com to see how much it was. It was $135 on Amazon.com, so I'm thinking it would be like a library book only. So this is your last chance to really hear about it because... Well, let me tell you a little bit about the book, and I think for starters, I'm going to just read the blurb that's in the dust jacket of the book According to the Dust Jacket, economic progress is often analyzed narrowly as income growth, but this volume shows that other aspects of progress, new and improved goods, and improved methods of production, are ultimately more significant.

1:20Not only have these other dimensions of progress been responsible for much of the increase in human welfare, they are also what drives income growth. The volume develops a framework that demonstrates how entrepreneurship produces economic progress and contrasts that framework with the mainstream theory of economic growth. The contrast is interesting from an academic perspective, but there are also significant differences in policy implications. Entrepreneurship and economic progress discusses the institutional features that promote entrepreneurs entrepreneurship, and draws on historical examples from the 20th century to illustrate its major points. That's what the dust jacket says about the book. Let me tell you a little bit about the contents of the book and what I'm doing here. I have to say, when I look at the ideas in the book, a lot of it comes across to me as common sense, where you'd read the book, or at least I look at it and I say, yeah, that makes sense, that makes sense.

2:17But if you've had any formal economics training, it's pretty significantly at odds with what mainstream economics teaches about economic growth. Let me start out talking about these concepts with the concept that I prefer to call progress. The title of the book is Entrepreneurship and Economic Progress and I really prefer the term progress to growth because what growth suggests is that incomes are getting larger And indeed, that's true. Our incomes are rising. If you look over the 20th century in the United States, per capita income grew about seven times. That's pretty impressive. But I think more impressive is that we've got new and different types of goods and services to consume.

3:03When you stop to think about it, looking at the 20th century, how many people at the end of the 20th century would like to have seven times as many horses as they had at the beginning of the 20th century? 7 times as much food. It's true we eat more, but not that many people would really want 7 times the per capita amount of food. So when you look at the economic progress of the 20th century, it's great that income has gone up so much. But a big element of economic progress is the different types of goods that we have to consume. At the beginning of the 20th century, if you wanted to cross the continent, you'd do it on a railroad. And if you wanted to head to Europe, you'd get on a steamship to go over. Now, we get in these aluminum cylinders and travel at 550 miles an hour, six miles above the surface of the earth, to get where we want in a matter of hours.

3:57I mean, that's progress. What would we do with seven times as many trains? Well, we don't need them, but we've got this progress. Progress. You know, at the beginning of the 20th century we didn't have movies, telephones were rare, not that many electric devices, no radio, you know, now television, the internet and so forth. And when you look at the advances in health care and the remarkable increases in life expectancy, all of these aspects of economic progress aren't captured in models that look at individual In fact, all that income growth wouldn't have been possible without progress, because, I mean, as I said, there's a limited demand for seven times as much of the goods we consumed at the beginning of the 20th century, so actually, income growth is driven by the fact that people want new and improved goods.

4:55of Goods. So I start out in the book differentiating growth, which is how standard neoclassical economics looks at things, differentiating growth from progress and discussing why progress is really the important thing that we want to focus on. Then I go on to talk a little bit about the theory of the firm and what businesses do. And in the neoclassical theory The Theory of the Firm, which is the foundation for standard economic growth theory, the foundation of that theory is a production function, where typically output is a function of capital and labor, Q is F of K and L. And when you look at that framework, going back to what I said before, the fact that we have this output as Q really misstates what's going on in the economy because that Q changes and by setting up the theory that way to start with, we eliminate that important aspect of economic progress in growth theory by having some homogeneous Q, some homogeneous output that we're producing. And then we have this production function,

6:09is a function of capital and labor and within that framework what people who run firms can do is to try to adjust the amount of capital and labor to produce the optimal amount of output that's going to maximize profits. And another function that firms might want to undertake is to try to make sure that resources are utilized efficiently, I mean we don't want to waste our capital or waste our labor, but essentially in that neoclassical theory of growth, what people who run firms do, their activity is management, that they're trying to manage the firm's inputs and outputs efficiently in order to maximize profits.

6:58But what I argue in the book is that really the key thing that firms do, the people who People who run firms do is entrepreneurship, looking for better ways to produce things, cheaper ways to produce things, ways to improve goods, which generates economic progress. So it's this entrepreneurship that generates economic progress, but in the standard neoclassical theory, growth theory, people who run firms are managers, not entrepreneurs. They've left out this entrepreneurial function, so what I want to do is try to draw in that entrepreneurial function to explain the origins of economic progress. Now a lot of you will probably be familiar with Israel Kirzner's competition and entrepreneurship Entrepreneurship and Kirzner's ideas on entrepreneurship and I start with some of Kirzner's ideas here really as a starting place but Kirzner's idea is that the entrepreneurial act is noticing a profit opportunity so you see this profit opportunity and I'd like to go a step further and say you act on it because a lot of people might you know see something and not seize on it but

8:22Markets are out of equilibrium. There's a potential profit opportunity. Entrepreneurs spot those profit opportunities and act on those profit opportunities to equilibrate markets. And Kirzner, especially in his 1973 book, Competition and Entrepreneurship, differentiates his ideas from Schumpeter's. Schumpeter is the disequilibrating entrepreneur. Schumpeter says, or Kirzner says, no, entrepreneurs are equilibrating. But I think that's really only part of the story and I try to integrate Schumpeter's ideas along with Kirzner's ideas. I mean, one thing you might wonder if you look at Kirzner's ideas of entrepreneurship, there are these profit opportunities that entrepreneurs spot and when they act on them they equilibrate markets.

9:08Eventually, aren't all those entrepreneurial opportunities going to be used up? I mean, once the market gets to equilibrium, all those entrepreneurial opportunities will be used up. So where do these entrepreneurial opportunities come from? And I discussed that a bit in the book, but the main place that entrepreneurial opportunities arise is as a result of entrepreneurial actions. When entrepreneurs act, they change the underlying data of the market. They provide entrepreneurial opportunities for other entrepreneurs. I mean, you look at things like, for example, does anybody have a wireless mouse on their computer?

9:55Man, what a great idea, you know, and where did the opportunity to do that come from? Well, it came from the Windows operating system. You know, once that innovation came along, that opened up entrepreneurial opportunities for the wireless mouse and for other things. Where did that come from? Well, it came from entrepreneurs who made personal computers. You know, I had a great idea of making personal computers. And how did that opportunity arise? Well, it came from entrepreneurs who said, you know, we can make microprocessors, you know, put a bunch of transistors on a chip and make these microprocessors. And you just have one chip that can, well, actually the designers of the microprocessor didn't really have in mind personal computers. It was other entrepreneurs who said, Entrepreneurs who said, hey, we can use this microprocessor as the brains of a computer.

10:40And that's one example of many that you could cite where, in fact, entrepreneurial actions don't use up entrepreneurial activities, they create more. And so entrepreneurship is the origin of entrepreneurial activities. The more entrepreneurial an economy is, the more entrepreneurial opportunities arise, And so the greater is economic progress. And that's one of the fundamental ideas that's in this book. And there are a lot of other little theoretical aspects that I could focus on in the book. Let me mention one. And that is the idea of product differentiation.

11:28And in the neoclassical theory of product differentiation, I've looked at a lot of contemporary microeconomics books to see if this has advanced since the 1930s when these ideas originally came and I don't see them in economics books, but if you studied some economics and talked about product differentiation, there's this idea of monopolistic competition and product Product Differentiation, and with differentiated products, as the standard theory goes, because firms have downward sloping demand curves with differentiated products, you tend to get firms that aren't producing at minimum average total cost.

12:14So there's a little bit of an inefficiency there according to that standard theory. But the advantage is you can have a whole choice of a variety of products. So you don't have to just take one product, you know, you have Coke or Pepsi or Dr. Pepper or Mountain Dew or whatever. You can have McDonald's or you can have Wendy's hamburger, Burger King or whatever. But this product differentiation comes at a cost and the cost is that firms are producing a bit above minimum average total cost. So there's the trade-off and that's the neoclassical theory. And if anybody has any sites to any literature that's, you know, the economic literature that suggests differently, I'd be happy to see them, because I've looked in particular in microeconomic theory textbooks and so forth.

13:00But this really misses the whole function of product differentiation in an economy, because the key thing is firms don't differentiate their products to make those products different. They differentiate their products to make their products better. It gives you no advantage to differentiate your product from your competitor's product. Invest resources in doing that because you invest the cost and your product is just as different from theirs as theirs is from yours. You're not giving yourself any advantage there. Why would you differentiate your product? It's to make it better, to make your product more attractive to consumers, maybe to find a cheaper way of producing. So product differentiation is the engine of economic progress. It's not a trade-off between variety and cost. I mean, that's like taking a Marshallian snapshot of the economy. But if you look at the market process, the advantage of product differentiation is firms differentiate their products to make them better, and product differentiation is is the engine of economic progress. That's where progress comes from.

14:15And one implication of that, again, going back to the standard theory of the firm, if you were to take the neoclassical theory of the firm that economic students learn in textbooks, if you were to take that theory literally, and you say, okay, I've studied economics, now I'm going to run a business, what you would do, I mean, what you would do is you would say, I would say, okay, what's the profit-maximizing combination of capital and labor and let me try to keep my factors of production from shirking and so forth so I can produce at minimum average total cost and there I'll just earn normal profits. That's equilibrium. And if you were to do that, you would fall steadily behind your competitors until eventually you would go out of business. You follow that profit-maximizing strategy that's in the textbooks, your competitors are going to keep getting ahead of you If you're running a firm, you need to be entrepreneurial because everyone else is. You need to look for better ways of producing products, you need to look for better products to produce, you need to find better ways to satisfy your customers, and I've got a lot of examples in the book, and in the interest of time I won't go through all of those examples. Maybe I'll mention one quickly if you look at the computer industry. I think the fast food industry is kind of simple. Let me focus on the computer industry, where in the 1960s, the Department of Justice sued IBM.

15:36IBM for monopolizing the industry. And they had a bunch of high-priced good attorneys, so they managed to stall the suit until the 1980s when it was dropped. Why? Because so many other competitors had entered the industry. And eventually the minicomputer industry came along, and IBM was sticking with its old profit-maximizing plan. And in the early 90s, people were saying IBM was going to go bankrupt and go out of business. Now, they changed their business model, and so they're back on their feet again. But, you know, they found that profit-maximizing Maximizing Strategy and stuck with it, and over time it's worse and worse and worse. And you have to be of a certain vintage to remember this. I talked to my students about this and they don't even know about minicomputers. Anybody know what a minicomputer is? You know, in Digital Equipment Corporation, DEC was the big firm in minicomputers. They did the same thing. They had a profit-maximizing strategy and they stuck with it until eventually, well,

16:26DEC ended up being bought by Compaq, which was bought by Hewlett-Packard. I don't think anybody is making minicomputers anymore because PCs came along and knocked the legs out from under minicomputers and that's an example from a high-tech industry of how you can't find the profit-maximizing strategy and stick to it. You've got to be entrepreneurial in markets in order to survive. You've got to keep finding new and improved ways of producing goods. You've got to find better products and entrepreneurship is the Entrepreneurship is the engine of economic progress. So this characterization of equilibrium completely mischaracterizes the whole nature of the market economy, which isn't characterized by equilibrium, it's characterized by economic progress.

17:15Entrepreneurship is the engine of economic progress. I mentioned before, all this sounds to me like common sense, But it's so at odds with the growth theory that's in the mainstream journals right now that is based on these equilibrium models. They've taken the static equilibrium models of the 20th century and put time into them. So now you've got these dynamic models. But the models leave out altogether the entrepreneurial nature of the economy and the importance of economic progress, not growth, but economic progress to our prosperity. Prosperity Let me just throw in one little critique of neoclassical welfare economics.

18:04The benchmark of welfare economics is Pareto optimality, we want to allocate resources efficiently and when we do that, that's how we maximize income and that underlies these growth models also. But if you just look at the real world, who in the world would say we're better off now than we were 20 years ago or 50 years ago or 100 years ago because we're closer to Pareto optimality. It just doesn't make sense. It's the economic progress that makes us better off. That's what we should be focusing on, but that's what the neoclassical growth models are not focusing on. And I talk about some policy implications here, and I think a lot of our antitrust policies, A lot of our policies oriented toward growth are based on conclusions out of the neoclassical models and so I also suggest in the book the way that we ought to be looking at public policies from an entrepreneurial standpoint rather than this neoclassical equilibrium standpoint.

19:09And one example from an industry I already mentioned, as you look at these antitrust suits against IBM back in the 60s, Microsoft in the 90s and so forth, are these firms monopolies? Well, by some definition, that is a neoclassical definition. They're the dominant firm in the industry and maybe there appear to be barriers to entry. Of course, over time we see those barriers aren't as significant as at first they looked. But I think what we see there would be more accurately described as transitional profits from an entrepreneurial action. Entrepreneur sees an opportunity, seizes it and they make profits until others can catch up, rather than seeing it in a static sense as some kind of a monopoly that needs to be broken up.

19:55Of course the problem is that if you punish that kind of behavior, you're punishing the very entrepreneurial behavior that drives economic progress. I just wondered if it wasn't standard you focused specifically on technology, because so many growth economists are just now discovering the effects of technology.

20:35of Technology. And that's not necessarily to say that technology is unimportant. I mean, obviously, you look at economic progress in the world and technology is vitally important. But Joseph Schumpeter made the distinction between what he called invention and innovation. And invention, that's the technology part. You know, we come up with some great idea. Innovation is applying that technology to the market, to bring goods to market where you can make a profit. And from an economic standpoint, I don't want to downplay the importance of technology, but from an economist standpoint, it's really the innovation that's much more important than the invention.

21:20You look at, for example, you go back thousands of years, China had invented gunpowder. and they use it for entertainment. They made fireworks and entertained themselves with it and everything. So they had the invention, but they didn't have the innovation. And then Europeans came along and they discovered gunpowder and they said, hey, we can kill people with this. So there's the innovation. So what I'm really focusing on, I think the innovation part is ultimately more important than the invention part. and let me say one more word about that it's really the fact that there's the opportunity for innovation that leads to the invention a lot of times anyway that you get firms do an R&D and so forth and the reason they're doing that isn't to be inventors it's because they're thinking if we come up with a great idea we can make a profit on this so it's really the innovation that drives the invention in a market economy anyway. Is there a question?

22:26______________

22:35That s a good question and I mean obviously legal costs in a lot of ways stifle innovation, in fact tax policies also stifle innovation. So there's a lot of government policies that get in the way of innovative activity, and I do, in the book, I have a chapter in there on institutions, and I try to focus on government policies that can foster economic progress, but unlike the typical policy view, I mean those policies aren't things government can do to encourage progress, it's things the government's doing now that stand in and the way of progress. So looking at it from a policy standpoint, I think the public policy thing is get the government out of the way so people are free to innovate and profit from their innovations. With the IBM case specifically, I'm really not sure how much the lawsuits had slowed them down, but you look now at Microsoft, for example, and I think there are some legal costs that are involved with Microsoft dealing with not only

23:49in the United States, but also the European Union now that wants them to change their product and everything. But I think the bigger factor than just the legal costs is essentially the government intimidation that says if you do things this way, we'll fine you, we might take your products out off the market, we'll make you change the characteristics of your products. You know, and it's ludicrous to think that somehow the government knows better how an operating system ought to be designed than Microsoft. It's not necessarily that I'm a huge fan of Microsoft, but who would say people in the government would know better how to design an operating system? And if other people do have better ideas, and Linux is coming up and a lot of people like Mac and so forth, but the government actions against Microsoft are also intimidating against these other innovators.

24:36So from a public policy standpoint, the big problem is a lot of times the government stands The choice of a publisher, that was interesting, the trade-off between could you sell your books here and the publisher. That general subject of how a writer chooses a publisher, do you make more money from this other bunch?

25:13and the very last part is do you make more money off of this publisher? I don't think I'm going to make that much money off any of my books. That really wasn't a concern. Routledge has a pretty well respected series in Austrian economics and so that's why I sent the manuscript to Routledge for their consideration. I had nothing to do with setting the price. in fact I'm surprised to find that the price was so high and sometimes publishers will grant concessions to people who buy large quantities of the book for resale so I was hoping for something like that but I mean I didn't even know what the price of the book would be until it came out and also along those lines I've written a lot of books before and the first book I wrote and this happened for a few other books I've tried first The first book I wrote, I tried to get some publishers interested in it before it was finished.

26:16And they said, well, send us some sample chapters, which I did. And they said, boy, we're very interested in this book. We'd love to see the final manuscript when it's done. So why did I send them the sample chapters? I don't know. And I've had this also. I've talked about the same things happened before where publishers approached me and said, you know, what are you working on? Oh, we would be very interested in that book. You know, would you send us some sample chapters? I send them sample chapters. I say, boy, we're just very interested. We think this is great. Send us the manuscript when you've got it done. If you're thinking about writing a book, my strategy is to write the book first and have the complete manuscript, and then say, here's the manuscript. Are you interested in publishing it? And another thing that does is sort of keep you on track, so the manuscript has what you want to have in it, as opposed to what the publisher might want to have in it.

27:11Sort of along those lines also, I had a book, I guess it was about ten years ago, called Public Policy and the Quality of Life, which I think, I don't know if there are any copies, I think Mises Institute has sold it before. But when I sent them the manuscript, as a result of the advice of some reviewers, they wanted me to take a chapter out of the book. And that was a chapter on legalizing drugs. They said, well, you know, I mean, the book has a lot to recommend, but when people see this chapter saying that drugs ought to be legalized, they're going to think that, I mean, it detracts from the rest of the book, and they're going to think the guy is a wacko who's writing the book, which may be true. But anyways, I told them, no, I didn't want to take the chapter out of the book, so if they wanted to publish it with all the chapters, that's fine.

27:58If they didn't, I'd look for another publisher, but they then did publish it with all the chapters in it. So my strategy on writing books is to finish the whole manuscript and then look for a publisher. And in this case, I chose Routledge because of the Austrian economics series that they had. And other authors may have other ideas on that. Okay, you have the last question.

28:50I don't deal directly with that argument in the book. What I think about it is that it's wrong. An argument I do deal with, William Baumol has a book. I really like Baumol's work on entrepreneurship. However, he has a recent book called The Free Market Innovation Machine that I think is not as good as some of his earlier work Work, where he says that in modern economies R&D has just become a routine part of business bureaucracy and so the entrepreneurial aspect has essentially become bureaucratized. And I think he misses the whole point of entrepreneurship in that, which is kind of disappointing because I like a lot of Baumol's work on entrepreneurship, but it's true that firms do a lot of R&D And that tends to be a bureaucratic function of firms.

29:48And the way I look at it is what they're doing is setting up an environment where it's more likely they can spot entrepreneurial opportunities. But that doesn't necessarily mean that they'll be able to take advantage of them in a profit maximizing way. So I think he really underplays the importance of the entrepreneurial aspect. Sort of look at government R&D the same way, you know, that the government's not going to make a profit on anything. And a great example along the lines of corporate R&D, a lot of you will know, that the Windows operating system was invented by Xerox, and they have the little windows on the screen and the mouse interface and everything, Xerox invented it.

30:42and they never were able to make a profitable product out of it. Steve Jobs comes along with the Macintosh and Bill Gates. Those guys aren't the inventors, they're the innovators. Just doing the R&D and coming up with an idea isn't enough to generate economic progress. It's taking that idea and turning it into a profitable product. The idea of the Windows interface is pretty instructive because the inventors in that case, Xerox, never were able to profit from their invention, but other people saw it as a profit opportunity, did things a little bit differently and turned it into a profitable product. Well, thank you very much for your attention.

31:36And like I said, I didn't have anything to do with the pricing of the book. I apologize for the fact I'm the only one who can afford to have a copy.