William J. Baumol, Ph.D.
Senior Advisor, Ewing Marion Kauffman Foundation; Harold Price Professor of Entrepreneurship and Academic Director, Berkley Center for Entrepreneurship and Innovation, New York University; Senior Economist and Professor Emeritus, Princeton University
"In other countries poverty is a misfortune—
with us it is a crime." — Edward Bulwer-Lytton, England and the English
Surely the vast numbers of people who live on two dollars a day or less, along with the many children who lack basic medical care (in both the developing world and a comparatively wealthy nation, like the United States) should be a primary concern of economists. Yet, in paying inadequate attention to the role of entrepreneurs, economists also overlook vital opportunities to contribute to the eradication of these blights to the general welfare. Entrepreneurs' role in combating poverty is substantial—in dealing with both the shorter-run problems posed by recession and unemployment and in countering the more significant, long-run impediments to reduction of poverty posed by a society's lack of innovation and economic growth.
Arguably, the latter is the more significant matter, as the end of a short-term recession can reduce unemployment and enhance per capita incomes, but only innovation can bring the substantial, long-term economic growth that, for example, led to the seven-fold-plus rise in real per capita income that is estimated to have occurred in the United States and other industrialized countries during the twentieth century. Either way, however, I am not claiming that entrepreneurs can perform these growth miracles all by themselves, nor am I implying that they all play similar roles in creating economic growth.
The Role of Entrepreneurs and Their Indispensable Partners
During recession, for instance, it is those replicative entrepreneurs who open retail shops or other businesses of the standard variety that are most effective in creating new jobs and thereby aid in the economic recovery. Of course, these replicative entrepreneurs do not act alone. Success in their business efforts requires the help of others—especially those who provide them with loans and those who educate them in the relevant regulations governing their businesses, among others.
In the case of long-term growth, the role of replicative entrepreneurs is reduced substantially. Instead, innovative entrepreneurs, with their new products, new processes, new markets, and novel approaches to putting inventions to effective use, are key to an economy's long-term growth. Indeed, without innovative entrepreneurs, many promising inventions may never have been put to effective use and, as a result, the totally unprecedented explosion of real per-capita income noted earlier never could have occurred.
Innovative entrepreneurs are even more dependent than replicative entrepreneurs on others who play complementary roles in furthering their efforts. Since innovative entrepreneurs are, fundamentally, the marketers of inventive ideas contributed by others, the work of inventors is obviously indispensable to their activities. In addition, innovative entrepreneurs also require the help of producers—often large, well-established enterprises—to whom they frequently sell either the inventions per se, or the right to use those inventions. As early as 1803, the great economist, J. B. Say, recognized this, noting that effective innovation requires the triple partnership of the innovative entrepreneur, the inventor, and the manufacturer.
Innovative entrepreneurs, with their new products, new processes, new markets, and novel approaches to putting inventions to effective use, are key to an economy's long-term growth.
However, Say failed to mention a critical fourth player—government—to which we may ascribe a key role in the generation of growth via innovation. In the centuries leading up to the British industrial revolution of the late-eighteenth century, for instance, government paved the way for an explosion of innovation through changes made to public sector practices ranging from the general move toward uniformity of legal standards via the adoption of "the Common Law" in the twelfth century to the creation, in 1623, of the patent system as an institution mandated by law. Indeed, in any time period and geographical location, functional governments carry out many critical activities, such as constructing and maintaining infrastructure (used by businesses) and supporting education (thereby ensuring a supply of knowledgeable and skilled employees). As such, it is clear that governments play an indispensable role in enabling the innovation and entrepreneurship that fuel economic growth, though we also know that, in all too many cases, misguided governmental policy and activity can be a powerful impediment to economic expansion. I emphasize the often-overlooked role that government plays, as partner to the innovative entrepreneur, in the process of enhancing an economy's prosperity, because one serious threat to prosperity and growth emerges from developments related to international trade. Action by government may be indispensable in dealing with this problem.
The Threat Underlying International Trade and Possible Solutions
The United States faces a threat to international trade as productivity in its trading partners grows and their share of imports follows. As part of this, gains from trade will be diminished in the United States and living standards will be imperiled. Stated Alan S. Blinder in a Foreign Affairs essay, as this trade imbalance continues over time, demand for labor in the United States will fall, bringing down wages and reducing the number of jobs available in the United States. Indeed, all of this appears to be happening already, as some governments have intervened to distort the market-determined pattern of trade to their own advantage. At the very least, this problem poses a significant impediment to the prosperity and growth that otherwise would be contributed by full freedom of trade.
Governments play an indispensable role in enabling the innovation and entrepreneurship that fuel economic growth, though we also know that, in all too many cases, misguided governmental policy and activity can be a powerful impediment to economic expansion.
Unfortunately, the oft-proposed remedy for this situation—training more inventors and encouraging innovation—will not provide the remedy because the innovation process, with its limited demand for labor, employs a mere fraction of the labor force that once was employed in manufacturing or that is now engaged in the service sector. Indeed, we do not know of any automatic market mechanism that can be relied upon to solve this problem by itself. Nor is the answer a retreat to trade protectionism, with its many perils (namely, its impediments to production of the different commodities, assigning each to the countries that can do so most efficiently).
Instead, it can be argued that only government can introduce policies that discourage such trade distortions and the business practices that arise from them—for instance, the off-shoring of production and the outsourcing of service jobs. The introduction of new regulations that encourage both domestic invention and domestic production of the products yielded by those inventions is one possible method of countering the current trade imbalances. Warren Buffet's proposal that we introduce what amounts to a market for import licenses—with tradable import licenses issued to every firm in an amount that equals the value of each firm's exports—also merits consideration. Surely such a scheme would induce entrepreneurs to find inventive ways to stimulate exports as a means of obtaining the valuable import licenses.
The bottom line in all of this is that the activities of the innovative entrepreneur are critical for the economic processes that ensure long-run prosperity and economic growth, which, in turn, yield the resources necessary for continued reduction of poverty. Clearly, entrepreneurs play an indispensable role in this process. However, it is important to understand that they do not act alone. Rather, success in entrepreneurial activities requires the collaboration of several parties—notably, inventors, firms that produce the inventions, and government, which alone can ensure that the "rules of the game" (e.g., those of international trade, among many other "games") are compatible with the general welfare.
Some of the main ideas in this discussion were contributed by my colleague and collaborator, Ralph Gomory, to whom I am indeed grateful.
