E N T R E P R E N E U R S H I P A N D E C O N O M I C P R O G R E S S

BOOK REVIEW - Art Carden Assistant Professor Department of Economics and Business Rhodes College Memphis, USA cardena@rhodes.edu

Randall G. Holcombe New York: Routledge, 199pp., ISBN: 978 0415 770 903, $170.00 (hb), 2007

Someday, someone somewhere will write the definitive treatise on entrepreneurship and economic progress, and the book under review will figure prominently in that author’s bibliography.

Randall G. Holcombe, the DeVoe Moore Professor of Economics at Florida State University, does not presume to bring us The Last Word on entrepreneurship and economic progress, but he lays a solid foundation for further inquiry in a very tightly packed 199 pages (including notes and references).

Future generations of scholars will owe Professor Holcombe a debt of gratitude for his work clarifying exactly what is meant by economic progress and for highlighting the importance of different types of entrepreneurship.

An excellent question that I’ve heard attributed to Tyler Cowen by Peter J. Boettke is ‘what are you reading that you’re learning from?’ This is a book that I learned from. Like many books of this type, Entrepreneurship and Economic Progress is based on the author’s previously-published work. Holcombe bases his work on several of his earlier studies, including a 1998 contribution to the Quarterly Journal of Austrian Economics of which I am particularly fond, and assembles a short, accessible volume that considers different conceptions of entrepreneurship, different theories of economic growth, evidence on the role of economic freedom in creating economic progress, and the implications of each for numerous sub-fields in economics.

Holcombe’s use of ‘economic progress’ rather than ‘economic growth’ is both intriguing and deliberate. He contrasts the two because economic growth, which consists of increased production of the same kinds of output, is a proper subset of economic progress, which includes not just more output, but better output. The key to economic progress, in his view, is entrepreneurship of the right kind. Throughout the book, Holcombe criticises the traditional Ricardian view of economic growth, which relies on increasing the stock of inputs, and contrasts it with an entrepreneurial focus.

The weakness of the Ricardian framework is that inputs (land, labour and capital) have been with us forever while sustained economic growth is much more recent. There must be something more, and this ‘something more’ for Holcombe (and for Austrian

economists more generally) is the entrepreneur.

Holcombe explains two views of entrepreneurship. The first is Kirznerian entrepreneurship, which is a response to disequilibrium, and the second is Schumpeterian entrepreneurship, which creates disequilibrium. But where do entrepreneurial opportunities come from? Misalignments in the structure of production create opportunities for entrepreneurs to increase the value of resources (p. 76). The only way profits can be competed away is if they emerge to serve their signalling role in the first place (p. 76). Holcombe ‘identifies three major categories of factors that create profit opportunities: (1) factors that equilibrate the market, (2) factors that enhance production possibilities, and (3) entrepreneurial activity that creates additional entrepreneurial possibilities’ (p. 76). Entrepreneurship can itself be endogenous in part because prior entrepreneurship alters what Hayek called ‘the particular circumstances of time and place’. Understanding entrepreneurship’s role in economic theory requires that we (quite literally) think outside the Edgeworth Box. Holcombe argues that entrepreneurship is essential to the microfoundational structure of the macroeconomy, and he makes an important Hayekian–Misesian argument that monetary disturbances interfere with entrepreneurial calculation. This distorts the mutual adjustment process that leads to equilibrium.

He suggests that ‘[r]egardless of the source of the disruption, policies that encourage entrepreneurship can help reequilibrate an economy and stabilize the business cycle, and policies that interfere with Kirznerian entrepreneurship – such as tax and regulatory policies – can slow the adjustment to an efficient allocation of resources’ (p. 104). However, the analytical problem is that entrepreneurship ‘cannot be analyzed within an equilibrium framework where firms and individuals react to known parameters’ (p. 106). In part, entrepreneurial action is the process by which the parameters themselves are formed. Holcombe’s ninth chapter, ‘National Income Accounting and Public Policy’, applies the entrepreneurial paradigm to important policy debates.

He points out – correctly – that most economic progress consists of changes in the composition of what is produced rather than increases in the amount of output produced. Product differentiation is the essence of the competitive process, and it strikes at the heart of the practical problems associated with national income accounting. Further, he borrows directly from James Buchanan and asks whether government spending should be included in GDP (pp. 135–136). Buchanan argues that since governments do not sell their output, it should be valued at zero for purposes of national income accounting.

In addition, as Holcombe points out, government accounting that values government spending on the basis of cost rather than the value of output necessarily overstates the government’s contribution to national output. Holcombe argues that ‘[f ]or consistency, highways, police and fire services, and national defense should not be included in GDP for the same reason home production is excluded: they are not sold in the market’ (p. 136). The policy implications are particularly intriguing as he points to ‘increases’ in income as government spending replaces home production

in some places (p. 137). While there are problems upon problems with gross domestic product as a measure of welfare, I am still left asking what would be superior.

GDP is imperfect, but it is still sufficiently highly correlated with what we would really like to measure that it is serviceable for most uses. It’s good enough for government work, yes, but it can be profoundly misleading. Holcombe contrasts the ‘production function’ approach with the entrepreneurial approach in government regulation, which takes little account of the development of new markets as a result of entrepreneurial innovation. The debate over the Whole Foods Market–Wild Oats Market merger is one example.

US government authorities have argued that this merger would create too much market concentration in a particular segment of the market that does not even have an entry in the North American Industrial Classification System. Similarly, Google has attracted attention from antitrust authorities in spite of the fact that they ‘control’ the market for a product that did not exist as recently as when antitrust authorities were persecuting IBM, to say nothing of when the theory of antitrust was developed in the early twentieth century.

Holcombe’s exposition of the entrepreneurial paradigm has important implications for the design and implementation of economic institutions. A Hayekian message emerges: while Friedrich Hayek has argued in several places that we cannot make specific predictions about the outcome of a complex order, we can arrive at general conclusions about the institutions that are conducive to the emergence of order. Entrepreneurial alertness adjusts the structure of production and rearranges resources into a pattern that is more able to satisfy the wants and needs of consumers.

For governments, the policy implication is clear. A government can encourage entrepreneurship by reducing barriers to trade (pp. 118–119). This assumes that economic growth is part of the government’s objective function. However, as economists have argued and as Professor Holcombe noted explicitly in his 2008 Presidential Address to the Public Choice Society, what maximises the ruler’s income is not always what will maximise economic growth. In the twentieth century, capitalism was criticised because of the ‘separation of ownership and control’ inherent in the corporate structure. The state, however, only carries the problem to another, more intractable level.

We have to ask as well about how state intervention alters incentives and returns to different types of entrepreneurship. As William Baumol argued in a classic article, institutions can encourage productive, unproductive or destructive entrepreneurship. Increasing the relative importance of the state in human affairs means increasing the relative returns to unproductive or destructive entrepreneurship. Industrial policy, for example, has a checkered past littered with rent-seeking, waste and failed attempts by governments to pick winners and losers (see pp. 118–119).

Holcombe asks us to consider Anne Krueger’s exploration of the political infrastructure in

India, where ‘some of the best and brightest individuals were employed not doing anything to add to the productivity of the economy, but rather to deal with cumbersome government regulations and to try to produce some personal monetary gain by working those regulations to their advantage’ (p. 123). Instead of creating economic progress, they were investing in human capital that was specific to a certain rent-seeking infrastructure.

Holcombe also contributes to the growing body of literature on the foundations of economic growth, noting that while countries like the USSR directed resources toward basic research, they remained poor because they sharply restricted the institutions of exchange that could have turned this basic research into wealth (p. 119). Further, state intervention in the market for basic science creates a rent-seeking infrastructure that dissipates the benefits associated with the research.

Before concluding, Holcombe treats us to a chapter on how the political environment influences entrepreneurial behaviour. The key difference between economic and political entrepreneurship, he argues, is that the economic sphere is the sphere of voluntary exchange while the political sphere is the sphere of coercion (p. 143). His thesis (p. 143) that there will always be opportunities for political entrepreneurship suggests that ordered anarchy is an unstable equilibrium – a point he has made elsewhere. Nonetheless, a growing body of research into the economics and politics of anarchy suggests that this is unresolved (this work is summarised in a paper by Benjamin Powell and Edward P. Stringham in Public Choice). Arguments based on externalities and public goods provide convenient pretexts for state expansion (p. 145).

Holcombe’s book assembles and integrates the theory of entrepreneurship and theories of economic growth and progress into a more coherent whole. Much work remains to be done, but Holcombe lays an impressive foundation on which future scholars will build a more systematic entrepreneurial theory of economic progress. Scholars interested in the entrepreneurial paradigm as well as ‘the foundations of the market economy’ more broadly will find this to be a welcome and useful addition to their bookshelves.

Art Carden Assistant Professor Department of Economics and Business Rhodes College Memphis, USA cardena@rhodes.edu