The Entrepreneurial Economist and the Red Queen Game
By Paul
This week’s Economist magazine has a summary of a session on entrepreneurship that took place at the annual AEA conference;
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&D of established corporations, but by scrappy new firms, twin-born with the invention itself. Mr Baumol ventures that most breakthroughs arise this way—the offspring of independent minds not 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.
Chris at Austrian Economists thinks that Economist should have focused more on Kirzner’s work. It needs to be noted that Baumol uses the term ‘entrepreneur’ in the Schumpeterian sense to mean bold and imaginative deviator from established business patterns and practices, who constantly seeks the opportunity to introduce new products and to create new organizational forms. It doesn’t refer to anyone who creates a new firm ( The Free Market Innovation Machine, p. 57). Firms in this competitive milieu are forced into a sort of (after Lewis Carroll) ‘Red Queen’ game in which it is necessary to run as fast as one can in order to just stand still.
What does this all mean for policy makers who are always on the look out for ways to dole out money? There are those who say entrepreneurship is the true engine of growth. But a lot of focus on entrepreneurship like the World Bank’s Doing Business tends to focus on countries as a whole whereas everyone knows that there are many differences within the countries itself. Robert Schiller brings that issue to notice;
Economists and others often tend to look at countries as a whole and emphasize national attitudes and national policies as the main factors in encouraging or discouraging entrepreneurship. But, in fact, the national success in entrepreneurship depends on the evolution of local cultures and their interaction with national policies. Entrepreneurship can take root in culturally congenial regions of any country after economic barriers against it are lifted, and then feed on itself to grow to national significance.
Mr Baumol thinks a “touch of madness” is probably one of the chief qualifications for the job. He himself is a sculptor and artist and as he jokes in his lecture at AEI-Brookings Joint Centre there are several books written by other people with his paintings on the books’ cover. I was surprised by the similarity of his paintings with Outsider Art. The picture above is one by Sylvia Convey – an Australian outsider. May be economists would be more creative if they learned to paint.
Relate Links
- Reviews of the ‘The Free-Market Innovation Machine’, by Alexander Field, Joel Mokyr, Wolfgang Kasper, John Quiggin (Quiggin is very disappointed by the book)
- The Entrepreneur as Hero, Federal Reserve
- Lessons from telephone privatization in Argentina and the United Kingdom, William Baumol
- Some of Baumol’s contributions to Economics
- The Role of the Entrepreneur in the Economic System, Kirzner
- The Red Queen Paradox: A Proper Name for a Popular Game – Note
- Carnival of Entrepreneurship
Multimedia:
- Lecture by Baumol at AEI-Brookings; talks mostly about new approaches price discrimination – ‘price discriminatory price takers’ and shortcomings of the current approaches to dealing with monopolies, Q&A was interesting with lot of questions from FTC staff.
- The Role of Self-Interest in Economic Theory, Israel Kirzner (his lectures are never boring)
- Doing Business 2006: Creating Jobs (podcast)
- Outsider Art, Radio National Australia (download the podcast now, in a week it won’t be there)
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