The Mark of the Entrepreneur

Which of Schumpeter's five roles of the entrepreneur is/are illustrated here?

Creative Destruction: From Sci-Fi to the Palm of Your Hand

Today's edition of The Wall Street Journal has an engaging opinion piece by Orson Scott Card. For those of you who do not recognize the name, Card is the author of a very successful science fiction series that started with Ender's Game, a novel of young military genius who helps save the planet from a war with an alien species. The later volumes involve some moral dilemmas that come with "winning."

But Card's commentary is not about the book, but rather about how technology has changed our life in just one generation - call it creative destruction. The economist Joseph Schumpeter wrote about economic growth as creative destruction. He saw new enterprises, new opportunities, and new technologies always replacing older ones. The new created new jobs. The old took old jobs. And as the new jobs demanded new skills that society valued more; the wages improved. The old jobs, because they were connected with goods and services that were no longer valued as highly by society, saw wages languish.

Card talks about how changing technology has impacted how we communicate and how we even do research. But his piece reminded me of another. Mark Perry at Carpe Diem had a post on creative destruction last month. Specifically, he looked at all the devices that were being "replaced" by the smartphone. The list is impressive. And what about all the derived demand for labor that is being lost because we want everything at our fingertips? These might be useful when you next discuss the economic growth process. I welcome your thoughts.

Institutions and Entrepreneurship

Regular readers of this blog know I find the idea of economic institutions interesting. Institutions have been defined as "the rules of the game." More specifically they are the set of rules and organizations (both formal and informal) that influence our decision-making by setting up incentives to action. They can include written laws, voluntary standards of conduct, even cultural beliefs. The last category is the subject of this post.

An article in today's edition of The Wall Street Journal (free content at this writing), discusses motorcycle taxis in Nigeria. Specifically, the article is about how dangerous the motorcycle taxis are. Evidently, there are so many accidents that one hospital has a ward specifically for people who were in motorcycle taxi accidents.

But attempts to get people to wear helmets have been unsuccessful, largely because of superstition (cultural belief). There is a belief among many that placing the helmet in contact with their head is bad "juju" which can have drastic consequences. People can disappear, lose their brains or their luck. People make choices, often tragic, because the belief presents a perceived cost that exceeds a perceived benefit. Thus, they make a "logical" choice.

Enter one entrepreneur who has developed a cloth liner that can be placed between the helmet and the wearer. It eliminates the contact and, for some at least, overcomes the cultural fear. There are other issues involved, including hygiene, but the fact is the entrepreneur was able to use his understanding of an institutional factor to identify and open a market. I don't know how successful he will be, given there are many inexpensive substitutes like personal handkerchiefs. And there are likely to be more commercial substitutes. But this remains an interesting example of entrepreneurship mixed with institutional economics.

I look forward to your comments.

On Schumpeterian Ideas

The economist Joseph Schumpeter is known for a number of things. But for me, two of them stand out. He defined the role of the entrepreneur and he introduced the idea of growth as "creative destruction." Arts & Letters Daily recently had two links that focused on these ideas. Both are worth your consideration.

The first is a review of the book, American Colussus: The Triumph of Capitalism by H. W. Brands that appeared in The Wall Street Journal. It is a study of those entrepreneurs we first learned of as "robber barons" in early forays into American History. Reviewer Amity Shlaes finds fault with Brand's approach of pitting capitalism against democracy. And I understand why.

If we focus on "creative destruction" we may forget that it is the democratic choice (voting with dollars) of the majority that brings about true change, destroying one industry and creating another. While I have not read the book, I may have to add it to my holiday "wish list" despite Shlae's reservations.

The second link is an essay by Virginia Postrel on Big Questions Online. Postrel suggests that entrepreneurial spirit may be less about risk-taking and more about youthful optimism, or as she borrows it - irrational exuberance. That would seem to square with Schumpeter's views of the entrepreneur - one who opens a market, finds a new source of resources, develops a new product, develops a new product, or develops a new business organization. My only question is why Postrel didn't include him among the others she reference in her article. No matter - the idea is what counts in this case. And her article has an excellent idea.

I look forward to your comments.

Ruthless Capitalism and Alternative "Technology"

Dr. Mark sends this link as something to think about. I think it would make a great discussion starter. What do you think?

Follow-up on Haiti

One of my ongoing themes this year appears to be Haiti. (I won't bother you with a bunch of links. It's easier if you just put Haiti in the search at the upper left corner of the blog.)

Here is a follow-up courtesy of the folks from Planet Money at National Public Radio. It seems that entrepreneurial spirit can accomplish wonderful things - even overcoming bureaucratic barriers of all kinds.

“New” Podcast Source

For those of you looking for podcast sources, I just ran across InfectousTalk on the Kauffman Foundation site. It is only a couple of months old and it focuses on entrepreneurship.

It looks like it will be the site for some quality discussions.

Haiti Update

A few weeks back, I posted on the unintended consequences of foreign aid. Specifically I highlighted a story on National Public Radio about how food aid to people in Haiti who had been impacted by the earthquakes earlier this year was affecting local rice farmers.

NPR did an earlier story (which I did not see or cover) about a Haitian woman who was in danger of losing her small business, which had been devasted by the earthquake, because she did not have the funds to make a loan payment.

But her life has changed. Many NPR listeners sent her money - more than enough to make the payment. She has taken the bulk of the extra funds and reinvested in her business. It's a great story, and speaks to the positive side of aid to developing countries - and especially to the power of small amounts of capital to change a life.

Now in NPR's Friday podcast, there is a follow-up on that story. You can listen beginning at about the 3-minute mark. I see it as an interesting variation of an unfettered market. Funds did not have to go through a government bureaucracy, and they provided a benefit to both parties - the donor and the recipient. The recipient’s business is clearly better off, and the donor "profits" although not in a monetary sense. Rather the donor feels better knowing they have done some good. This is similar to what I try to teach about Adam Smith. It is not just about The Wealth of Nations, but it is also about The Theory of Moral Sentiments. (However, suffice it to say, there is a trade-off to success. But I don’t want to give it away.)

In that same podcast, there is another story about economic success in Haiti, beginning at about the 14:45 mark. In this case, it involves an economic development project to help Haitian mango farmers. The previous attempts by various governmental and non-governmental entities failed. But through the combined efforts of the villagers who benefitted, the work gets done - apparently including digging up and replacing 27 miles of pipe to bring water to a newly-built processing center.

I recommend this. If you can’t sit and listen, download and put it in your personal device and listen while you jog, while you work in the yard, or around the house. It will be time well-spent.

The Question of Research and Risk

Given the last flight of the Space Shuttle is not too far off, the future role of NASA is in question. That eventually leads us to ask "Who should fund research?" "Who should bear the costs of high risk ventures?"

The argument for private funding (corporate, etc.) is that knowledge then is proprietary and can be used for private gain. Losses are part of the risk. The argument for government funding is that knowledge should be available to everyone, and the cost should thus be spread as any gain should be for everyone.

However, this cartoon reminds me that many of the discoveries that are part of the "Age of Discovery" ended up being for the benefit of government (kings, etc.). Anyway, it's something you can use to stir debate.

Business Organization

When teaching about firms, here is an example of vertical integration that is priceless.

Growth

Reader and friend Dr. Mark sent a link to this visual from FlowingData. It's a dynamic presentation showing the growth of WalMart and Sam's Club, from a single store in Arkansas in 1962 to a retail giant. It's impressive. And it adds meaning to the term "exponential".

The final image reminded me of something I saw on Chartporn. Also an impressive outcome, but definitely not as much fun to watch as the FlowingData link. Thanks Dr. Mark.

Entrepreneurs and Emerging Order in Haiti

One of my posts last week was about how systems seem to develop from such chaos and was a reference to the spontaneous nature of social and economic cooperation. Now we have a very good video from the folks at PBS (HT to Carpe Diem) to provide an illustration of the spontaneous nature of entrepreneurship in the same environment.

I hope you find it as interesting as I did.

Fast Food in the Old West: Entrepreneurship and Utility

There is an extremely interesting book review in the most recent Weekend Edition of The Wall Street Journal. The book reviewed is Appetite for America by Stephen Fried, and it describes the life of Fred Harvey. Harvey was a 19th-century entrepreneur who developed and operated the first fast food chain in the United States. By putting his restaurants at railroad depots shortly after the completion of the transcontinental railroad, and then standardizing fare, maintaining quality, and staffing the restaurants with young ladies, he provided utility for travelers and frontier residents alike.

The utility I refer to are the basic types of utility (form, place, time). He was able to provide meals of predictable quality in a convenient place (think about on/off ramps on the interstates of today) and in short order (the train frequently didn't stop for long).

As to entrepreneurship, I'm falling back on Schumpeter's five roles of the entrepreneur:

introduction of a new product,
using new or different inputs to produce a product,
introduction of new technology or process,
opening a new market,
and creating a new economic organization.

I can make a case for at least three of these (the second, fourth and fifth). And after I read the book, I may be able to make a case for more.

I think this book could be useful to both the economics and the American History teacher. I will add it to my carousel at left. And I will try to review it when I read it. But be forewarned - my current 'to be read' pile is fairly tall. I look forward to your comments.

Economic Development, Comparative Advantage and Complexity

There was an article in a recent issue of The Economist that is definitely worth your time. The topic is economic development. But the twist on this article is not just size but sophistication. It seems that the complexity of the economy can be a factor in development, as much as size.

The article looks at the joint work of an economist and a physicist, examining the complexity of many of the world's economies. They have developed some fascinating visual models that you can find at this web site.

One of my big takeaways was the spin this puts on concepts like absolute and comparative advantage; and the role of the entrepreneur in economic development. As I stated above, this one is worth reading.

Let me know if you agree or disagree.

Economics in the Movies

The Princess Bride is one of my favorite fun films. And it's loaded with opportunities to illustrate economic concepts. Probably the most often used is the famous “battle of wits” clip that can be used to illustrate how people choose. But there are more.

At the beginning of this clip, we learn that two of the characters need the help of the "man in black" - Wesley. He seems to have absolute advantage in several areas. At about the 8:00 minute mark, there is a fun example of negotiating prices, with all kinds of incentives thrown into the process.

This next clip begins with a continuation of the price negotiation. But about 1:35 into the clip, we watch Wesley demonstrate some entrepreneurial thinking, bringing his productive resources together in innovative ways to satisfy a need. And at about the 4:00 minute mark, Wesley explains how he can use asymmetric information to his advantage. We also see that wants (problems) are unlimited and can even arise from satisfying other wants. And about 5:00 in, we see the payoff to Wesley's "entrepreneurial" skills.

You can view the clips to see what I mean, but you really should consider purchasing a copy of the DVD. I’ve added it to my carousel at left, and I hope you’ll consider using that venue if you do choose to purchase.

I welcome your ideas and comments.

World without Wal-Mart

The students in my global economics course have a class blog to contribute to as part of the course expectations. One of them posted this interesting piece about "Life without Wal-Mart" over the weekend.

Compare the list of innovations to Schumpeter's definition of entrepreneurial activity (briefly explained in this previous post) and see how they match up. Let me know what you and your students think.

Economics and Somali Pirates

I think this story from The Financial Post about Somali pirates setting up a "stock exchange" has a lot of possibilities. (HT to Arts & Letters Daily.)

It provides a platform to launch discussions on a variety of concepts. The author examines risk and reward, providing an opportunity to discuss incentives. The story can also be used to discuss markets and other economic organizations (or lack thereof), as well as the rules (institutions) used in the market (from participation to cash to barter). There are even aspects of marginal analysis (cost vs. benefit) that can be brought out with a little discussion of "everyday life" in Somalia. As you're approaching the end of the semester and looking for something to prime their brains for exams, this could be a fun and educational diversion.

I welcome your thoughts and comments.

Mass Production and Specialization

I know many of you know the basics of mass production and specialization. But if you're looking for a basic explanation to keep in the file and to share with the student who missed that day of class, here's a good one-pager, courtesy of The Economist. It should be useful, provided your students are at or near high school reading level.

Let me know if you think it's too hard.

Property Rights, Trademarks, Patents and Board Games

A friend of mine uses a popular board game, Monopoly, at various points in his AP Economics course. He uses it to fill up the period after the exams, but he also uses it to discuss the rules of markets. He even has numerous versions. As a result, when this article (free at this writing) appeared in yesterday's edition of The Wall Street Journal, I was drawn into it.

It chronicles the long struggle of an economist who came up with something called Anti-Monopoly. But its value for the economics and personal finance teacher is its repeated focus on property-rights: specifically copyrights (and patents). Those are specific enforcements of property rights (some even refer to them as temporary monopolies) meant to encourage innovation. But we can have very interesting discussions about the idea.  For the institution, designed to foster innovation, can also stifle innovation.  The idea can be extended to many areas including pharmaceuticals, and technology.

I won't ruin the story for you, but there is a lot of usable information in the story that relates the concepts to an experience that many of your students are sure to have shared. And that provides a point of departure for deeper and more complex discussion.

I look forward to your comments.

Evolution of Our Healthcare System

While running a number of errands this weekend, I was listening to this well-done history of the evolution of the U.S. healthcare system on This American Life on National Public Radio. And while I haven't heard all of it, what I did hear was excellent. The evolution of our current healthcare system is a mix of entrepreneurial insights and development of an institutional structure (the rules and organizations) that create a system that provides many players with incentives to shift costs or seek incremental innovation, while depriving other participants of some basic information to help in decision-making. There are even examples of placing incentives to choose more expensive treatments under the guise of "it's free - someone else is paying for it."

I strongly recommend the program. What it made clear for me is the problem inherent in continuing any system that deprives the primary producers (doctors) and consumers (patients) of fundamental information (costs) to help them make choices. While we all want the "best," sometimes the "best" isn't what is needed.

I look forward to other comments on the episode.

***UPDATE***
I just received my email notification of this week's EconTalk episode.  It features a discussion of prices in the healthcare system between host, Russ Roberts of George Mason University, and frequent guest Mike Munger of Duke University.  While I don't always agree with either of them, their sessions on EconTalk are
consistently among the best, in my opinion.  Consequently, consider listening to this after you listen to the
show on This American Life. That's what I plan to do.

***UPDATE***
For those of you who tuned in earlier, my apologies.  I gave a link to the wrong episode of This American Life.  This is the episode I was referring to (although the other one is good, as well).