Academic journal article Journal of Private Enterprise

Praise and Profits: Cultural and Institutional Determinants of Entrepreneurship

Academic journal article Journal of Private Enterprise

Praise and Profits: Cultural and Institutional Determinants of Entrepreneurship

Article excerpt

I. Introduction

Entrepreneurs play a crucial role in promoting economic development. They drive new innovation (Schumpeter, 1934) and the market's process toward equilibration (Kir2ner, 1973). However, the wide variation in efficiency and growth in countries around the world illustrates that entrepreneurship isn't universally productive.

Baumöl (1990) argues that entrepreneurs are omnipresent but vary in how productive they are on the basis of their institutional environment. When profits can be made through lobbying or other participation in the political arena, entrepreneurs will be attracted to unproductive or destructive activities. When profits are more readily available by serving consumers through enhancing efficiency or creating new products, entrepreneurship will be more productive. Sobel (2008) finds support for BaumoFs argument by examining the United States. He finds that as economic freedom increases, measures of productive entrepreneurship increase, but as economic freedom decreases, measures of unproductive entrepreneurship increase. Most studies citing Baumöl, like Sobel, point to the role that profit opportunities play in directing entrepreneurial activity. This is surely an important part of the story, but culture also matters in BaumoFs account.

Ancient Romans had profit opportunities available to them in both the marketplace and the political arena, but a social stigma accompanied engaging in entrepreneurial commerce. As Baumöl explains, "First, it may be noted that they had no reservations about the desirability of wealth or about its pursuit. As long as it did not involve participation in industry or commerce, there was nothing degrading about the wealth acquisition process. Persons of honorable status had three primary and acceptable sources of income: landholding. . . 'usury,' and what may be described as 'political payments'" (emphasis in original, p.899). Baumöl concludes his discussion of ancient Rome by writing, "The bottom line, for our purposes, is that the Roman reward system, although it offered wealth to those who engaged in commerce and industry, offset this gain through the attendant loss in prestige" (p.901). Thus, for Baumöl both the formal rules of the game that reward entrepreneurs with profits and informal culture that rewards or punishes entrepreneurs with social status will affect the prevalence of productive entrepreneurship.

BaumoFs claims are consistent with a Misesian understanding of human action in the market process (1949). Mises emphasÌ2es the role that "psychic profits" play in encouraging action:

Profit, in a broader sense, is the gain derived from action; it is the increase in satisfaction brought about; it is the difference between the higher value attached to the result attained and the lower value attached to the sacrifices made for its attainment... Profit and loss in this original sense are psychic phenomena. . . It is possible to ascertain in terms of money how much an individual has profited or lost. However this is not a statement about this individual's psychic profit or loss... every individual derives a psychic profit from his actions, or else he would not act at all (pp.286-87).

Baumol is not alone in arguing that the social status of entrepreneurs increases their "psychic profit" and can lead to higher rates of entrepreneurship. Moyker (1996) argues that the social status of entrepreneurs played a role in the industrial revolution. More recently, McCloskey (forthcoming) argues that the main cause of the industrial revolution was an increase in Kirznerian alertness brought about by what she calls a "Bourgeois Revaluation." Specifically, it was a change in cultural values that gave dignity and social standing to entrepreneurs, coupled with liberty, that led to the industrial revolution.

Etzioni's (1987) description of how culture can encourage entrepreneurship is also consistent with ours. He argues that "legitimation" is a major factor in determining the level of entrepreneurship within one society compared with others and in different periods of time within the same society. …

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