Saturday, January 20, 2018

Frank Pasquale: "Entrepreneurship Can Be Unproductive or Destructive"

We linked to a similarly titled post last August which someone (ahem) mistook for this piece.
See after the jump if interested.

From Professor Pasquale via Law & Political Economy,
In contemporary American law, few figures are as lionized as the “entrepreneur.” Lobbyists evoke entrepreneurship as a cornucopia of better goods and services at lower prices. Even ostensibly academic business law courses tend to offer a narrative of wise incremental development of legal doctrine toward enabling disruption, easy entry into markets, and ultra-flexible corporate forms. The lawyer is ideally, in this view, a fixer capable of profit-maximizing distributions of responsibility and liability. Some even dream of automating this role via smart contracts, to ensure even more rapid entrepreneurial activity.
Professional Responsibility courses also tend to adopt a similarly reverential attitude toward the business client, instilling an ethic of “zealous advocacy” in generations of students. Few question whether the near-evacuation of ethical self-reflection from advocacy roles systematically advantages dubious (or worse) business propositions.

This emphasis on the disruptive and new is jarring in law, because legal systems’ internal values so often prize stability, regularity, precedent, and tradition. Pressed to justify it, partisans of disruptive innovation often turn to economics—a discipline all too happy to oblige with just-so stories of creative destruction. As William Baumol has observed, where economic growth has slowed, it is often “implied that a decline in entrepreneurship was partly to blame (perhaps because the culture’s ‘need for achievement’ has atrophied). At another time and place, it is said, the flowering of entrepreneurship accounts for unprecedented expansion.” Both policymakers and mainstream legal scholars tiptoe through the tulips of entrepreneurship, wary of disrupting the business plans of the disruptive innovators they admire.

However, as Baumol went on to wisely observe, there is no obvious connection between entrepreneurship and genuine productivity. Productivity, defined from a properly politico-economic perspective, reflects society’s ability to meet real needs, create capabilities, and to promote human flourishing. Some entrepreneurs contribute to it, but others do not. As Baumol observes, there are unproductive entrepreneurial activities, and at “times the entrepreneur may even lead a parasitical existence that is actually damaging to the economy.”  Baumol also argues that the relative balance of productive, unproductive, and destructive entrepreneurs is not dictated by technology or culture. “Changes in the rules and other attendant circumstances can, of course, modify the composition of the class of entrepreneurs,” he reminds us, insisting on the intertwining of political and economic reality.

Frank Pasquale is a Professor of Law at University of Maryland Francis King Carey School of Law.
Note: Some of this post was based on my recent testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs Committee, available here.

"The Dangerous Rise Of Unproductive Entrepreneurship"

from the this-is-bad-news dept
For many years now, we've talked about Andy Kessler's concept of political entrepreneurs vs. market entrepreneurs. In Kessler's telling, market entrepreneurs are the kind of entrepreneurs that people usually think about -- the ones creating startups and high growth companies and the like. While not everyone appreciates it, those entrepreneurs tend to provide a lot more to the world than they take away. They may get filthy rich in the process, but they tend to make the world a better place by creating lots of value. The "political entrepreneurs," on the other hand, are those who basically look to abuse the system to create monopoly rents and to limit competition. Those entrepreneurs may also get filthy rich, but they tend to do it by limiting value and locking it up so that only they can get it.

Obviously, one of those is a lot better for society than the other.

Of course, this idea certainly didn't originate with Kessler, either. Just recently, we had James Allworth on our podcast where we talked about this issue in response to an excellent article he'd recently written about how prioritizing profit over democracy was actually damaging American entrepreneurship. In that article, he referred back to the work of William Baumol, who wrote a paper back in 1990, entitled: Entrepreneurship: Productive, Unproductive, and Destructive. As you can see, that one divides entrepreneurship into three categories. Productive loosely maps to "market entrepreneurs" in Kessler's world, while "Unproductive" loosely translates to "political entrepreneurs" as well. Baumol also includes destructive entrepreneurs, who are actively making the world worse -- and getting rich off of people's misery (think drug dealers, and such).

But part of the point of Allworth's article is that it feels like too many people are just focusing on "profit" as the end goal, and thus either unwilling or unconcerned with determining if the entrepreneurship that drives the profit is "productive" or "unproductive." And, now the Economist has weighed in on this issue as well, noting that we're seeing more and more unproductive entrepreneurship in America, and that's a problem. The article focuses on the work of two economists, Robert Litan and Ian Hathaway, who are building on Baumol's concepts and are concerned about where things are heading. One interesting thing: they find that the issue can't be neatly put into the category of "too much regulation" or "too little regulation," but rather find that both of those situations can create the same rise in unproductive entrepreneurship:...

Some Stories About William Baumol