Economics Rediscovers the Entrepreneur

Unit 14

Searching For the Invisible man

 

The French, according to George Bush, have no word for them, economic theory has surprisingly little room for them, and it is a mystery why anyone would choose to be one of them. Entrepreneurs are the leading men of capitalism, the venturesome protagonists who move the plot forward. But economic theory gives them few if any lines to read.

Translated literally, entrepreneur means one who undertakes – one of life’s doers. To start a firm you need gumption, and to succeed you need an eye for a gap in the market. That in turn demands alertness, as Israel Kirzner, of new York University (NYU), has pointed out. But it does not always demand much originality or power of invention. The fresh-born firm may be a mere clone of another one in a neighbouring town.

More interesting are the entrepreneurs who innovate, who introduce something new into the world. Unfortunately, such figures have been all but banished from the theory of the firm and the market. Macroeconomics instead gives pride of place to prices. Guided by the wages and interest rates they must pay, businessmen choose among different techniques of production (labour-intensive when workers are cheap, capital intensive when they are scarce) but they do not reinvent or revolutionize them. Guided by the price their wares will fetch, they decide

to make more goods or fewer. But they do not conjure up new products that no one had previously thought of.

William Baumol, who holds positions at both Princeton and NYU, has been labouring for years to create more space for entrepreneurship and innovation in economic theory. At this year’s annual meeting of the American Economics Association, three special sessions on entrepreneurship were held in his name. Mr. Baumol’s work in turn pays homage to the insights of Josef Schumpeter, for whom the

settled equilibria and smooth adjustments of microeconomics held little interest.

Schumpeter wanted to dislodge the price mechanism from its “dominant position” in “the sacred precincts of theory”. In the real world, he said, the competitive weapon that counts is not lower prices, but new commodities and techniques. These weapons are much deadlier, striking “not at the margins of …the existing firms but at their foundations and their very lives.’

If innovation threatens companies with obsolescence and extinction, they cannot afford to leave it to chance. Rather than waiting for flashes of inspiration, they set up research-and-development (R&D) departments and commit an annual budget to the pursuit of new products and processes. In this way, invention becomes routine.

This domestication of wildcat entrepreneurialism is good news for economists. Once research and innovation are reduced to a regular outlay and a steady stream of results, they become amenable to economists’ analytical techniques. “We can far more easily subject such a customary, regular and predictable activity to systematic analysis than the erratic, unpredictable ‘Eureka! I have found it’ kind of discovery,” Mr. Baumol writes. R&D can be modeled much like any other investment decision, different only in degree from building factories or advertising.

Entre-penury

Most innovations are merely incremental improvements on something that already exists: a slightly better mousetrap, as Mr.Baumol puts it. A rare few represent discontinuous breakthroughs, such as the incandescent lamp, alternating electric current or the jet engine. All of the above, according to Frederic Scherer, professor emeritus at Harvard, were introduced not by the regimented R&G of established corporations, but by scrappy new firms, twin-born with the invention itself. Mr. Baimol ventures that most breakthroughs arise this way – the offspring of independent minds and not of incumbent companies. He has two explanations for this. First, radical innovation is the only kind lone entrepreneurs can do; and, second, they are the only ones who want to do it.

The first explanation seems paradoxical. Breakthroughs are, by definition, more difficult than routine innovations. Surely, They should be beyond the meager means of the independent entrepreneur? But as Mr. Baumol points out, building the Kitty Hawk was much cheaper, and less complicated, than upgrading the Boeing 737 to the 747. Genuinely new ideas are often breathtakingly simple. They grow more elaborate as improvements and modifications are laid on top of them. If you are the first to discover a tree, you get to pick the lowest-hanging fruit.

The second explanation is more intuitive. Revolution is a risky endeavour. Of 1,091 Canadian inventions surveyed in 2003 by Thomas Astebrot, of the University of Toronto, only 75 reached the market. Six of these earned returns above 1,400%, but 45 lost money. A rational manager will balk at such odds. But the entrepreneur answers to his own dreams and demands. Mr. Baumol thinks a “touch of madness” is probably one of the chief qualifications for the job.

Economist have little to say about madness, of course. But they can point out its economic implications. If money isn’t everything to the independent inventor, he is likely to be cheap. Indeed, he will be the lowest-cost provider of the kind of risky, painstaking endeavour that lies behind the breakthrough inventions. Big firms could pursue the big ideas, but since they would be employing professionals not amateurs for these quixotic ventures, they would have to pay them in money, not love.

Thanks to Mr. Baumol’s own painstaking efforts, economists now have a bit more room for entrepreneurs in their theories. But it remains a mystery why anyone would want to be one.

 

The Economist

Notes

Kitty Hawk – the first airplane built by the Wright brothers which they flew in the town of Kitty Hawk, North Carolina in 1903.

 

Vocabulary

. 1. entrepreneur предприниматель

creative (innovative, ambitious,

budding, would-be) entrepreneur

entrepreneurship предпринимательство

enterprising предприимчивый

2. obsolete устарелый, вышедший из

моды

obsolescence устаревание, моральный

износ 3. to commit a budget to sth выделять бюджетные

средства на ч-л

4. outlay on (for) sth расходы на

to make large (huge, modest small) outlay

5. professor emeritus почётный профессор

6. breakthrough прорыв, достижение

(научное)

7. to upgrade (products, quality) улучшать, повышать

качество

8. endeavour попытка, усилие

to make an endeavour,

to make every endeavour to do sth

in an endeavour to do sth

9. return доход, прибыль, выручка

excellent (decent, adequate) return

to achieve (receive, improve, maximize) return

to offer a return of 5%

a return on capital доходность капитала

10. implication (скрытый) смысл

the implication of statement смысл заявления

to realize (grasp, consider, ignore) implications

to imply подразумевать

Silence implies consent молчание – знак согласия

11. to have qualifications for the job иметь все данные для

получения работы

12. to pursue ideas придерживаться

определённого замысла

 

 

Assignments

I. Suggest the Russian for the following:

1. venturesome protagonist
2. gumption
3. alertness
4. a fresh-born firm
5. to give pride of place
6. to fetch a price
7. to conjure up new products
8. the sacred precincts
9. incremental improvements
10. to balk at sth
11. to leave sth to chance

 

II. Give the English for the following:

1. если перевести буквально
2. предпринимать, брать на себя определённые обязательства
3. занимать должность
4. отдавать должное к-л, ч-л
5. сводиться к ч-л (исследовательская работа сводится к расходам для получения результатов)
6. озарение
7. поддаваться анализу
8. подвергать анализу (испытанию)
9. различаться по степени (по масштабам)
10. предприниматель-одиночка
11. шансы, вероятность, возможность

III. Paraphrase the words and expressions in bold type:

1. Entrepreneurs are the leading men of capitalism… … who move the plot forward.
2. … such figures have been all but banished from the theory of the firm.

3 Schumpeter wanted to dislodge the price mechanism from its “dominant position”.

4 This domestication of wildcat entrepreneurialism is good news for economists.

5 “Eureka! I have found it!”

6 … new firms, twin-born with the invention itself

7 … since they would be employing professionals not amateurs for these quixotic ventures, they would have to pay them in money, not love.

IV. Answer the following questions:

1. What makes a true entrepreneur?

2. In what way should the activity of a R&D department in a company aspiring to

innovation be organized?

1. How does an innovation differ from a breakthrough?
2. How can you explain the subtitle “ entre-penury ”?
3. What is the implicit message of the picture preceding the text?

 

V. Make a short presentations on one of the topics:

1. Entrepreneur as a risk bearer
2. Entrepreneur as an organizer
3. Entrepreneur as a leader
4. Famous American entrepreneurs (Bill Gates – software; Henry Ford – automobiles; Steve Jobs – computer hardware, software; Estee Lauder – cosmetics; John Rockefeller – oil; Ted Turner – media and others)

 

Chapter VII

Human Resources Management

Unit 15