Foundations of Entrepreneurship and Economic Development.
Boettke, Peter J.
David A. Harper New York: Routledge, 2003, 276 pp.
In commenting on modern economics, Ronald Coase once remarked,
"That in my youth it used to be sad that something was so silly it
could be sung, but in modern economics it can be put in
mathematics." This silliness was no more evident than in the fields
of comparative economic systems and development economics. From the
mid-20th century to the 1990s, optimal planning and statistical analysis
of aggregates substituted for institutional analysis in both of those
fields' models. The silliness was not only an academic exercise, it
also proved damaging to the lives of millions of individuals as they
languished in poverty and suffered under the yoke of totalitarian rulers
and military dictatorships.
With the collapse of the Soviet Bloc in the late 1980s and 1991 in
Russia, much has changed in the world and in terms of our thinking about
the world. Despite what you may read in the popular press about life in
the former Soviet Union, by any reasonable measure of well-being, the
lives of millions of people have been made better off by the collapse of
the old regime, and our thinking about the institutional preconditions
for human flourishing has improved immensely. This improvement has not
been limited to East and Central Europe and the former Soviet Union, but
also to the Third World. Intellectual improvement is more evident as
several international agencies rethink their agenda in light of new
knowledge about legal, political, social, and economic institutions, and
how they shape and transform societies. William Easterly in his The
Elusive Quest for Growth has made indictments of the older approach to
development policy and foreign assistance, and the scholarly literature
is filled with examples of how the investment-gap theory failed and must
be replaced with an institutional analysis of alternative legal and
political arrangements. The institutional revolution in comparative
systems and development economics is not limited to Douglass North;
major figures such as Andre Shleifer and Ed Glaeser at Harvard, and
Avner Greif and Barry Weingast at Stanford are transforming the fields.
Studies continually flow from Massachusetts Institute of Technology by
scholars such as Simon Johnson and Daron Acemoglu stressing
institutions, policy, and cultural heritage as primary explanatory
variables in the analysis of why some countries are rich and others
poor. Times certainly are changing, and for the better intellectually
and, one hopes, for the millions of people still stuck in poverty.
There are still major intellectual challenges that scholars wanting
to explore the institutional foundations of economic development must
confront. Existing empirical techniques are too aggregative to address
the problem, and modeling still seems to crowd out the dynamic
adjustments that characterize a vibrant society. If our institutional
analysis of social change has indeed been enriched over the past decade,
as I believe it has, we still lack an analysis of the agent of change.
This agent is the entrepreneur and he unfortunately has proven as
elusive to institutional analysis as he was to static analysis. But that
is more a lack of focus than a problem of model construction. In a
static analysis of the problem, the agent of change is assumed away. In
an institutional analysis, the entrepreneur has just tended to be
ignored but he is still there. Moving the entrepreneur from the side to
the center stage of analysis is the value-added of David Harper's
wonderful new book, Foundations of Entrepreneurship and Economic
Development.
Harper examines the role that entrepreneurial discovery plays in
ensuring the efficient allocation of resources within a market economy,
and how alternative institutional arrangements and cultural factors
impinge on the psychological disposition for alertness so that
individuals can realize the benefits from exchange. And he proposes ways
to test his conjectures and ways to explore in an empirically meaningful
way cross-cultural patterns of beliefs and institutions and their impact
on economic performance.
Entrepreueurship is fundamentally a wishful conjecture--a bet so to
speak. As in science, freedom is essential to advancement because it
provides a background for individuals to bet on ideas. Obviously, in
economic life betting on an idea is not sufficient, one must 'also
have complementary institutions of finance (e.g., capital markets) so
that those bets can be brought to life in realized projects. Again, as
in science, not all conjectures prove to be correct, so we also have to
have institutions of evaluation and assessment (e.g., economic
calculation through profit and loss accounting) that weed out incorrect
conjectures and steer us in a direction less erroneous than before.
To address the questions of economic development, Harper surveys
the field and summarizes the main teachings from New Institutional
Economics, Positive Political Economy, and Austrian economics. In
addiction to the emphasis one finds in those literatures on legal,
political, economic, and social institutions, Harper adds work from
cognitive and social psychology. The idea of the locus of control that
an actor perceives plays a major role in Harper's analysis and is
the mechanism through which cultural beliefs such as individualism or
collectivism impinge on economic life. The existing psychological
literature has many problems, Harper readily admits, but in surveying
that literature he has made a good first step in incorporating those
findings and alerting others to a field that could both add to our
knowledge and benefit from interaction with economists in terms of the
conceptual and analytical rigor that could be provided.
Harper rejects the idea that individualist cultures are more
conducive to entrepreneurship than collectivist cultures. Instead he
proposes that we look at developing countries where a more collective or
group-oriented culture dominates and examine the underlying social
organization and its impact on entrepreneurship. Harper's points
are well taken, especially his critique of economists who believe there
exists a neutral scale for measuring entrepreneurial activity across
cultures. But it is 'also here where my only point of radical
disagreement with Harper's book lies. Just as traditional Austrian
subjectivists are caught in a quandary when it comes to the issue of
development, I am afraid Harper ties himself up in an intellectual
straightjacket he doesn't want. Entrepreneurship is omnipresent, as
Harper points out, and .all societies exhibit some degree of alertness
to opportunities. He claims that the cornerstone hypothesis (that
individualist societies are more conducive to entrepreneurship) must be
rejected. Indeed he is right because entrepreneurial alertness is
evident across cultures and across time. But the way in which that
alertness is directed is not and that is what matters. There may in fact
be many ways for people to live, and they do, but there are very few
ways for people to live prosperously. The institutions associated with
Western capitalism, in their functional if not literal form, must be in
place for entrepreneurial alertness to be directed toward mutually
beneficial opportunities for exchange. Absent that institutional
framework, what we see is entrepreneurial alertness directed toward
zero-sum gains in redistributive politics rather than the positive-sum
gains of market transactions. Harper's own analysis would seem to
agree with my point, but he cannot bring himself to put it that bluntly.
Clarifying that result through empirical analysis would have added to
Harper's analysis, but instead he is content to leave the analysis
at the level of prediction without testing. Both what Harper calls the
cornerstone and convergence (i.e., that as societies develop they become
similar) hypotheses once reinterpreted slightly are more robust than
Harper gives them credit. For example, as Tyler Cowen has argued in
Creative Destruction, as societies develop they become more similar
along one dimension (use of the market, establishment of property rights
and contract law, etc.) and more diverse along another (different
cultural products, food, beliefs, etc.). Which dimension does Harper
propose to measure along? He states that we cannot say because there is
no single dimension, and he leaves it at that. But in a book on economic
development the measure is more straightforward--the relationship
between the institutional framework, public policy, and material
well-being.
The Economic Freedom Index speaks plainly to us on this. Countries
with institutions and policies that protect private property through the
establishment of a rule of law, with low levels of taxation and
regulation, with monetary policy bound more by rules than by the
discretion of politicians, with fiscal responsibility instead of
deficits and public debt, and with markets that are open to
international trade have higher levels of income per capita than
countries that do not. Countries that adopt those policies also enjoy
higher rates of economic growth. More important is that these figures of
per capita GDP translate into human capabilities that are viewed as
essential to human flourishing--higher levels of educational attainment,
better sanitation, higher life expectancy, lower infant mortality, and
so forth. Harper utilizes the Economic Freedom Index measurements in his
analysis, but not as much as I would like to see for the questions he is
tackling. As Harper states himself, "Societies which bind
themselves to the principles of the rule of law, security of property
rights, market coordination of resources, free trade and sound money
grow faster than societies in which economic freedom is curtailed.
Because many of the components of economic freedom are the result of
public policy and explicit political decisions, it follows that the
choice of institutional framework has immense consequences for economic
prosperity and the wealth of nations" (p. 125).
Yes, and the question then becomes whether we can expect the sort
of institutional framework and public policies to emerge in a society
which possesses a more collectivist culture than one in which elements
of individualism are promulgated in popular myth, religious
interpretation, and social rituals. Obviously, the answer to this
question has major importance not only intellectually but also with
regard to the practical policy issues associated with reconstruction and
development. The jury is still out, but the only way a verdict will
emerge is through empirical investigation and preferably on-the-ground
empirical work that gains access to the norms, mores, and underlying
beliefs systems in operation in any society so we can develop a
political economy of everyday life in these developing countries.
Despite my quibble with David Harper's Foundations of
Entrepreneurship and Economic Development, the book is in many ways a
masterful display of synthesis, creative application of ideas from
disparate disciplines, and policy wisdom.
Peter J. Boettke
George Mason University
