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Published: May 29, 2007


Nondestructive Creation

That doesn’t mean that Phelps is callous about the disadvantaged; rather, he suggests a different type of protection is necessary for them. And that protection will come from an economy that is able to respond flexibly to entrepreneurial innovation. In his lecture, Phelps said that policies based on neoclassical economics, with its workhorse models of investment, production, and economic growth, have “abstracted from the distinctive character of the modern economy — the endemic uncertainty, ambiguity, diversity of beliefs, specialization of knowledge, and problem solving. Thus neoclassical theory could not capture the observable phenomena of the modern economy — endogenous innovation, endogenous growth, and endogenous swings, disequilibrium phenomena, the engagement of employees, and their personal phenomena.”

Entrepreneurs and entrepreneurially minded business leaders are successful not because they set an unchanging goal and then labor to achieve it. Rather, they succeed as agile seekers looking for many different ways to identify and capture opportunity. Business institutions and governments could serve society better by enabling these seekers more effectively — not just in their technological research, but in taking innovations to market.

For example, Phelps has noted in his later work that businesspeople, not scientists and technicians, are the conceivers of much of the “clinical research” or experimentation that constitutes the bulk of contemporary innovation. He stresses the role of financial institutions and economic culture in enabling entrepreneurs to capture opportunity, and his research over many years has emphasized the role of managers in analyzing innovations to evaluate their viability. (See, for example, Edmund Phelps and Gylfi Zoega, “Structural Booms,” Economic Policy, vol. 16, no. 32, April 2001; or Richard Nelson and Edmund Phelps, “Investment in Humans, Technological Diffusion and Economic Growth,” American Economic Review, vol. 56, no. 2, May 1966.) A lively stock market, in itself, is perhaps the first ingredient an emerging nation needs to create a prosperous, self-sufficient economy, because entrepreneurs need investors to back their risky ventures.

Broadly Educated Managers
Ned Phelps’s insights are already changing some of the prevailing economic models that minimized the importance of people (entrepreneurs and managers) and concepts (uncertainty and uncoordinated seeking of opportunity). His work also offers two important observations for education — both in business schools and in firms.

First, general knowledge — of business, technology, and the economic environment at large — is an important enabler of the virtuous circle of creativity, innovation, and growth. In Phelps’s view, knowledgeable managers are better able to evaluate innovation and have the confidence to pursue it. “The manager of a vineyard confronting a new insecticide,” he said in his Nobel speech, “might have no idea what the expected value of the benefit and cost would be, or what the probability of successful practice with it would be if adopted — if he lacked an education in basic science and humanities.” This point is consistent with recent empirical evidence linking general management talent (grounded in a liberal arts and sciences background and with awareness of management techniques) to firm-level productivity growth. Another point complementary to Phelps’s argument is that multiskilled managers may facilitate the ability to innovate when they can see the whole picture.

Stanford University economist Edward P. Lazear, as reported in his April 2003 article “Entrepreneurship” (Institute for the Study of Labor discussion paper no. 760), studied the career paths of Stanford MBA students. He found that individuals with more varied backgrounds were more likely to become entrepreneurs. So were students who pursued a broader curriculum while in business school.

Phelps’s second observation is that business education could do much more to promote uncoordinated, effective entrepreneurial exploration by its students. General theory and ideas are important in business training, but so is practice in seeking, identifying, and capturing opportunity. Such practice can take the form of case studies of entrepreneurs and managers making the leap from creative ideas to commercially viable innovations. (See Nick Bloom and John Van Reenen, “Measuring and Explaining Management Practices Across Firms and Countries,” Centre for Economic Policy Research discussion paper no. 5581, March 2006.) In addition, project-based exercises with academic faculty and industry practitioners can be particularly fruitful. At Columbia Business School, we tackle the latter through a series of industry-based master classes, cotaught by senior faculty members and leading practitioners and focused on actual projects and decisions.

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