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Summary Theory Session 1
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- Maastricht University (UM)
Preparation for mid-term exam
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THEORY SESSION 1: WHAT’S ENTREPRENEURSHIP?BAUMOL (1996). ENTREPRENEURSHIP: PRODUCTIVE, UNPRODUCTIVE, AND DESTRUCTIVE.
HYPOTHESIS OF ENTREPRENEURSHIP: it is the set of rules and not the supply of entrepreneurs or the nature of their objectives that
undergoes significant changes from one period to another and helps to dictate the ultimate effect on the economy via the allocation of
entrepreneurial resources.
- Rewards to entrepreneurial activity varied a lot from time to time, it seems to have a great impact on patterns of
entrepreneurial behavior. Therefore, it can also have great influence on the prosperity and growth of an economy.
Innovation takes various forms (new: goods, methods, market, or new source of raw material) but also it can contain
unproductive activities (Litigation, tax management, etc)
Innovation can be based on something that already existed or can be a radical innovation.
Shumpterian model introduces the unproductive entrepreneurship, role of rules and incetives.
- He thinks that entrepreneurs are innovators that disrupt existing markets and economic structures. This
creative destruction is fundamental for economic development.
Main ideas of Baumol's main point is that the number of entrepreneurs in a society can vary, but what really matters is how they
the article contribute to the economy and say that entrepreneurs would do whatever makes the most financial sense. He
disagrees with the idea of Schumpeter that the level of innovation and entrepreneurial activity depends on some
special "entrepreneurial spirit.” and that it is a “positive contribution to society”.
Baumol looks to different historical periods and he shows that the rules and opportunities for entrepreneurs change
a lot from one time and place to another, which affects how they contribute to society. In other words, it's the
environment and rules that shape entrepreneurial behaviour, not some innate entrepreneurial spirit.
PRODUCTIVE Refers to entrepreneurial activities that lead to the creation of new businesses, products, or services that generate
value, contribute to economic growth, and improve the overall well-being of society.
Characteristics:
- Innovation and creativity are often key drivers of productive entrepreneurship.
- These entrepreneurs identify market needs and develop solutions to meet them.
- They create sustainable businesses that provide employment opportunities and generate profits.
- Productive entrepreneurship typically follows ethical and legal standards.
UNPRODUCTIVE Unproductive entrepreneurship refers to entrepreneurial activities that may not necessarily create value for society,
or they may do so in a limited or unsustainable manner.
Characteristics:
- Unproductive entrepreneurship might involve exploiting legal or market loopholes to gain a competitive
advantage without contributing substantially to innovation or economic growth. Some unproductive
entrepreneurs may engage in fraudulent or unethical activities.
DISRUPTIVE To entrepreneurial activities that challenge and potentially reshape existing markets or industries by introducing
innovative products, services, or business models.
Disruptive entrepreneurs often identify opportunities to offer better solutions at lower costs or create entirely new
markets.
THE SCHUMPETERIAN MODEL EXTENDED: ALLOCATION OF ENTREPRENEURSHIP
Innovations take various forms, besides mere improvements in technology:
Productive entrepreneurship activities:
Activities that lead to the creation of new products, services, or innovations that benefit society and the economy. Involve adding value
to the economy, generating jobs, and contributing to economic growth.
- The introduction of a new good / a new quality good.
- The introduction of a new method of production.
- The opening of a new market.
- The conquest of a new source of supply of raw materials or half-manufactured goods.
- The carrying out of the new organization of any industry (such as introducing monopoly).
Expanding Shumpter’s list, it also contains unproductive activities.
- Innovative acts of technology transfer that take advantage of opportunities to introduce already-available technology to
locations were the technology has been unused.
- Unproductive entrepreneurship includes activities that may not necessarily benefit society but still serve self-interest of
entrepreneurs.
, - Innovations in rent-seeking procedures.
- Litigation (rechtzaken)
- Tax evasion and avoidance
- Takeovers
Destructive entrepreneurship:
- Destructive entrepreneurship refers to entrepreneurial activities that harm or undermine the well-being of society and the
economy. These activities can include illegal or harmful actions such as fraud, organized crime, or activities that degrade the
environment or social values. Destructive entrepreneurship has a negative impact on the overall welfare of society.
Incremental innovation: based on something that already exist, sequentially step by step improving product over time (Iphone).
Radical innovation: an innovation is something which is very bigly forward introduction smartphone.
"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" favour productive innovative action, there will be more.
ENTREPRENEURSHIP, PRODUCTIVE AND UNPRODUCTIVE: THE RULES DO CHANGE
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)
- The differences in the amount of entrepreneurial activity depend on the rules and opportunities available in each society. If
the rules favour making money through corrupt or unproductive means, that's where entrepreneurs will focus their efforts. If
the rules encourage productive and innovative activities, you'll see more of that.
- Hypothesis: the exercise of entrepreneurship can sometimes be unproductive or even destructive, and that whether it takes
one of these directions or one that is more benign depends on the structure of payoffs in the economy-the rules of the game.
- Proposition 1: The rules of the game that determine the relative payoffs to different entrepreneurial activities do
change dramatically from one time and place to another.
- Proposition 2: Entrepreneurial behaviour changes direction from one economy to another in a manner that
corresponds to the variations in the rules of the game. Connection to Welter, F. (2011): The rules of the game change
as the context changes -> “important to understand when, how and why E. happens and who becomes involved”
- Proposition 3: The allocation of entrepreneurship between productive and unproductive activities, profound effect
on the innovativeness of economy and degree of dissemination of its technological discoveries.
Entrepreneurship can be either productive or unproductive, and the direction it takes depends on the rules and incentives in an
economy. Also the prevailing economic and social conditions, shape the behaviour of entrepreneurs.
Who, then, operated commerce and
ANCIENT Entrepreneurship in commerce and Romans pursued wealth and prestige industry? According to Veyne
ROME industry was discouraged, while through socially acceptable means (1961), it was an occupation heavily
political activities were rewarded. such as landholding, "usury," and undertaken by freedmen-former
political activities. slaves = Stigmatized
MEDIAVAL Success through entrepreneurship In medieval China, high rewards and prestige were reserved for success in
CHINA was discouraged and wasn’t a sign imperial examinations, emphasizing Confucian philosophy and calligraphy.
of success.
, THE EARLIER Pursuit of Wealth and Power Land and castles were highly valued Violent activities inspired
MIDDLE Wealth and power were often forms of wealth. innovation in military technology
AGES pursued through military activities and tactics.
THE LATER Changing rules and For example, the small group of Monastic orders like the Cistercians
MIDDLE entrepreneurship. Economical role architect-engineers who were in played an entrepreneurial role in
AGES of monks. New avenues for charge of the building of cathedrals, technology and land acquisition.
earnings emerged, including palaces, bridges, and fortresses could
architecture, water-driven mills, live in great luxury in the service of The rules of the game offered
and investments. their kings substantial economic rewards for
entrepreneurship.
FOURTEENTH Influence of Military Activity Increased military activity in the Mercenary troops-the condottiere-
CENTURY fourteenth century. who roamed Europe, supported the
side that offer the most attractive
terms.
EARLY RENT Unproductive entrepreneurship In the upper strata of society, rent Rent-seeking entrepreneurship
SEEKING can also take less violent forms, seeking (land grants and monopolies then took a variety of forms, notably
usually involving various types of from monarch) also gradually replaced the quest for grants of land and
rent seeking, the type of (possibly) military activity as a prime source of patents of monopoly from the
unproductive entrepreneurship wealth and power. monarch
that seems most relevant today.
Monarchies imposed law and order,
leading to the quest for land grants and
monopolies.
The economic role of monks in
technology promotion is somewhat
puzzling but may have involved rent
seeking.
DOES THE ALLOCATION BETWEEN PRODUCTIVE AND UNPRODUCTIVE ENTREPRENEURSHIP MATTER MUCH?
PROPOSITION3. 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.
Rome and Hellenistic Egypt: Despite some technological innovation, the rules of the game did not favor productive entrepreneurship.
Innovative creations like the steam engine were used for trivial purposes. Water mills had the potential to drive industrial progress, but
they were underutilized.
Medieval China: Ancient China had many technological innovations, including paper and gunpowder. However, these inventions did
not lead to significant industrial growth. The rules of the game did not favor individual entrepreneurship, leading to underutilization of
innovation.
Slow Growth in the "Dark Ages": Between Charlemagne and the end of the tenth century, there was slow economic growth.
Entrepreneurship often revolved around military activities. Military-oriented entrepreneurship may have contributed to slower growth.
The "High Middle Ages": The late Middle Ages saw a successful industrial revolution with innovations like water mills. Water mills played
a crucial role in boosting productivity. This period was characterized by increased entrepreneurship and improved rewards for
productive activities.
The Fourteenth-Century Retreat: The end of the prosperous period in the fourteenth century was influenced by factors like cooling
temperatures, the plague, and the Hundred Years' War. The church suppressed new ideas and innovations. The renewal of military
enterprise may have contributed to the economic slowdown.
The "Our" Industrial Revolution: The industrial revolution starting in the eighteenth century brought unprecedented wealth and respect
to entrepreneurs. This period also witnessed a remarkable explosion in industrial output. The financial rewards and respect associated
with productive entrepreneurship played a significant role in driving innovation.
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