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Published: May 29, 2007

 
 

Nondestructive Creation

It’s not just the quantity of entrepreneurship, but its quality — and, most of all, its level of experimentation — that makes a difference. Some innovators do better than others in both bettering their own future and improving the state of the economy at large.

Why hadn’t this drawn much attention before? Perhaps because economics, as a discipline, has tended to give short shrift to the subject of innovation and entrepreneurship. Over the past 20 years, there have been 35 Nobel laureates in economics. Twenty-eight of them made no use of the terms entrepreneur or entrepreneurship in their prize lectures. The 17 references that Ned Phelps made in his Nobel Prize acceptance lecture exceeds by two the sum of all the other references made in the previous 19 years.

And the way in which he described entrepreneurs (or, as he called them, “Hayekian entrepreneurs”) is also significant. Like Hayek, Phelps sees entrepreneurs as seekers and experimenters: “continually striving to expand their knowledge into some areas where knowledge is scarce or nonexistent in order to see whether they might develop something commercially salable that no one else has conceived before.” He added: “This is creativity — acquiring ideas that no one else has or likely will have without doing the necessary exploration.” The long wave of exactly this sort of experimentation, from the mid-19th through the mid-20th century — followed by technological innovation in the past two decades — has led to unparalleled booms in investment and cumulative economic growth and change.

Significantly, Phelps does not generally refer to the entrepreneur as many economic models do: as a “black box,” a human calculator evaluating all available information to process optimal choices. Rather, his concept harks back to the more classical entrepreneurs that Hayek and the Chicago School economist Frank Knight described — entrepreneurs who, like today’s business innovators and managers, must make decisions in a rapidly changing world. As Phelps observed in his Nobel lecture, those entrepreneurs play a “human role over a vast range of activities, involving management, judgment, insight, intuition, and creativity.” They take on risk, with only their own judgment as protection against failure; and although some do indeed fail as individuals, together the entrepreneurs reduce the economic risk for society.

And they do not do this in a vacuum. The modern capitalist economy includes both entrepreneurs and large organizations in its process of innovation and economic growth (in contrast to the precapitalist economy, which grew more slowly because it depended on farmers and small-scale merchants). As many economists have noted, institutional arrangements undergirding property rights, company law, and financial institutions made possible the advances of substantial large-scale innovations by entrepreneurs. In his Nobel lecture, Phelps summed this up by listing the people required to make an innovation take hold: not just entrepreneurs but also the managers who evaluate whether a new product or service will succeed in the market, the consumers who bring it home, and the financiers “who can do better than choose randomly” in deciding where to invest their money. Concluded Phelps, “It takes a whole village for an innovation to be developed, launched, and adopted.”

Capturers of Opportunity
How, then, can policymakers and corporate chiefs better encourage a vibrant system of entrepreneurial risk taking — and how can business schools better foster entrepreneurialism? The first step is to recognize and even embrace the uncertainty and ambiguity inherent in a dynamic economy, spilling out beyond the future for entrepreneurs to the economy as a whole. As Phelps observed in his Nobel lecture, “Since innovation and change occur unevenly from place to place and industry to industry, there is also uncertainty about the present.” Governments that try to protect their people from uncertainty by fiat, like many of the “social welfare”–prone governments in western Europe, will, according to Phelps, succeed primarily in slowing their own economic growth.

 
 
 
 
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