Abstract
A large literature explores the importance of entrepreneurship as the catalyst of economic progress. In contrast, this paper argues that entrepreneurs are the driver of economic stagnation. We analyze the non-productive entrepreneurial process and discuss three channels through which non-productive activities have a multiplier effect culminating in economic decline and stagnation. Drawing on examples of non-productive entrepreneurship from both underdeveloped and developed countries, we provide insight into why economic stagnation persists in the former and why economic decline can occur in the latter.
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Notes
For an empirical test of Baumol, see Sobel (2008). Using a variety of measures for institutional quality, productive entrepreneurship and unproductive entrepreneurship, Sobel finds that Baumol’s theory holds. Where the payoff to engaging in unproductive activities is relatively high, entrepreneurs will tend to exploit those opportunities at the expense of productive opportunities which contribute to economic growth. Also relevant is Murphy et al. (1991) who analyze the proportion of engineers to lawyers. They conclude that a high level of engineers has a positive impact on growth and a large number of lawyers have a negative effect because of a high level of rent-seeking. The underlying idea is that lawyers can be productive in enforcing existing laws and rules. However, lawyers can also be unproductive because they play a key role in the rent-seeking process.
Coyne and Leeson (2004) build on Baumol by adding an additional category for evasive entrepreneurship. Evasive activities include the expenditure of resources and efforts in evading the legal system or in avoiding the unproductive activities of others. Examples of evasive activities include tax evasion and bribes paid to avoid burdensome regulations. Like unproductive and destructive activities, evasive activities involve the creation of deadweight losses.
For a history of institutions in Austrian economics, see Garrouste (2008).
The fact that antitrust laws were used by non-productive entrepreneurs to insulate themselves from competitive market forces is supported by DiLorenzo (1985) who finds that of the 17 industries accused of forming trusts and acting monopolistically in the 1880–1900 period, all of them actually increased output and reduced price; the exact opposite of what the theory of monopoly would suggest should happen and in complete contradiction to the intent of antitrust legislation.
Non-productive activities also influence mental models regarding perceptions of profitable entrepreneurial opportunities. North (2005) emphasizes that norms and culture determine the performance of a society over time by framing the perceptions of individuals regarding opportunities and alternatives. Further, a growing economics literature drawing on psychology finds that a society’s culture, in the form of values, beliefs, and norms, influences interactions through individual’s perceptions of their ‘locus of control’ and ‘self-efficacy’ (see Lane 1991; Harper 2003). In the context of our analysis, this implies that as an increasing number of entrepreneurs engage in non-productive activities, their actions can influence broader perceptions regarding what profitable entrepreneurial activities entail. Where non-productive activities dominate, they will contribute to the perception that engaging in non-productive activities is what entrepreneurs do to profit. As more and more people frame entrepreneurial activity in this manner, it further contributes to the perpetuation of non-productive activities and the associated negative effects.
For a review of the empirical evidence regarding poverty traps, see Easterly 2006: 38-51.
Skarbek and Leeson (2009) discuss what foreign aid “can do.” They conclude that while aid can increase output in a specific area, it cannot solve the fundamental economic problem.
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Coyne, C.J., Sobel, R.S. & Dove, J.A. The non-productive entrepreneurial process. Rev Austrian Econ 23, 333–346 (2010). https://doi.org/10.1007/s11138-010-0124-2
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DOI: https://doi.org/10.1007/s11138-010-0124-2