Entrepreneurship and Economic Progress.
Colombatto, Enrico
Entrepreneurship and Economic Progress
Randall G. Holcombe
New York: Routledge, 2007 (204 pages)
Entrepreneurship and Economic Progress is divided into three parts.
The first relies heavily on two articles published by the author in 1998
and 2001 on the economics of entrepreneurship (chapters 1 to 7). The
second develops the implications for policy making (chapters 8 and 9),
while the final part explores analogies and differences between
entrepreneurship in the market place and in the political environment
(chapter 10).
Overall, this is an excellent treatment of the Austrian approach to
growth and development. Quite appropriately, the author explains at
great length that while the mainstream view insists on the extensive
notion of growth (more input leads to more output), the Austrians
introduce entrepreneurship and are therefore able to maintain that
growth is also--if not mainly--a matter of progress: new products and
new technologies. Thus, in order to understand the extraordinary
improvements in living standards that the West has been experiencing
over the past two centuries, economists and economic historians should
focus on the economics of entrepreneurship: what it is, how it works,
how it can be encouraged and, following Baumol, why it can go the wrong
way (toward unproductive, rent-seeking activities).
Although repetitions are too frequent, Holcombe offers a clear and
comprehensive picture. He describes the Schumpeterian view, whereby
entrepreneurship means creating new ways to meet the buyers' needs
(lower production costs, new goods and services, new varieties of
existing goods and services). He illustrates an extended view of the
Kirznerian approach, which refers to entrepreneurship as the ability to
recognize existing opportunities (alertness), but also by backing up
watchfulness with knowledge, skills, and the willingness to apply itself
to wealth-creating purposes. Quite rightly, the author concludes that
the two approaches are not in opposition. Rather, they complement each
other, in that the former focuses on the benefits from breaking the
equilibrium, while the latter insists on the returns to the exploitation
of disequilibria.
There are many valuable elements in this volume. One of them is the
Schumpeter-Kirzner synthesis, which offers a unified and self-contained
theory of growth (or process) with clear implications with regard to the
damages provoked by industrial policy (antitrust legislation), the
fragile foundations of equilibrium theory, and the threatening myth of
optimization. Other important contributions concern the engine of
entrepreneurship, which is often profit, but not necessarily so. Fame
and prestige may also be adequate incentives, or the very pleasure of
having made new insights and created new knowledge. Similarly, readers
will appreciate the author's emphasis on the self-propelling
phenomenon of entrepreneurship whereby innovations create new
opportunities: They change the relative-price structures, reshape
people's preferences, and originate new needs to be met.
Other passages will probably provide food for thought to further
debate and scholarly investigation. For instance, Holcombe repeatedly
emphasizes that Adam Smith was the father of the entrepreneurial theory
of growth. Some might argue that Smith's theory of the wealth of
nations was based on the notion of exchange driven by instinct, rather
than by disequilibrium or the desire to disrupt the existing context and
benefit from innovation. Smith's specialization, therefore, would
be less a question of adopting new technologies than of engaging in a
learning-by-doing process in known techniques. Similarly, one might
question Holcombe's faith in the link between entrepreneurship and
Smith's invisible hand, another rather controversial topic for the
historian of economic thought.
On another front, Western growth probably deserves more than a list
of the variables that inhibited growth until 1700, grouped together as
"bad economic organizations, with relatively little attention
devoted to explaining what happened in the eighteenth century and why.
For instance, the focus on the British miracle should not obscure the
Italian and the Dutch experiences in previous centuries, or the German
success throughout the second half of the nineteenth.
The last three chapters will also be the object of future research
in a number of areas. For instance, Holcombe rightly reminds the reader
about the crucial role of institutions as determinants of economic
progress (chapter 8). Economic freedom and property rights are of course
the name of the game. Nonetheless, is the author advocating an ideal
state in terms of size and power? Is he postponing the answer until
proper exercises in constitutional design have been carried out? Is he
suggesting that the state becomes criminal whenever it fails to protect
property rights and violates individual freedom (which is always the
case, even in modern democracies)? It is not clear what the
author's point of view is here. His survey of the well-known
critical assessments of standard national accounting is also persuasive
(chapter 9), and clearly shows its built-in deceptive bias in favor of
an increase of government expenditure (and taxation). The reader might
wonder, however, how the world would look if the proper numbers were
used--or whether national accounts should be abolished altogether.
Chapter 10 is more ambitious: It aims to shape a theory of
political entrepreneurship within a democratic environment. Some of the
claims are well known. For instance, the political context is not the
same as the economic market, and Holcombe is right in referring to the
logic of collective action in order to explain that political exchange
leads to inefficient outcomes, regardless of the ideas prevailing in
Chicago. However, are we really sure that there is a theory of political
entrepreneurship whereby incumbents fight against potential entrants
from all quarters while their political allegiance is irrelevant? On the
one hand, the party distinction might seem irrelevant, for politicians
in power are usually members of a party. The case whereby a politician
is in government and his party belongs to the opposition does not seem
realistic in Parliamentary democracies. On the other hand, one can
surely conceive of situations where an individual is appointed to a
position because of his political loyalty and does not want to leave,
irrespective of the political color of the new appointee. Nonetheless,
this can happen as a result either of a fight for power within the
incumbent's own party, or of a change in the ruling coalition or
party. Put differently, the idea of political entrepreneurship might be
attractive, but one would like to know more.
To summarize, this is an excellent book that both students and
scholars will enjoy reading. It is well written, it contains frequent
reminders of the essential notions, and it stimulates reflection for
those interested in the history of economic thought, in public choice
and political science, and in economic history. Perhaps the first part
could have been shortened by merging a few chapters, so as to avoid
repetitions and sharpen the focus, and the second part could have been
expanded, so as to include the main lessons from Shane's General
Theory of Entrepreneurship (2003). Perhaps, though, we should just be
patient and wait for Holcombe's next book.
Enrico Colombatto
Universita di Torino, Italy
