Destructive Entrepreneurship

Pennsylvania, Ohio, and other former industrial states have spent a lot of money to promote entrepreneurship over the past decade. But, can there be too much of a good thing? Sure. I've had my fair share of Chicago-style pizza and Old Style, and there's definitely a limit to how much one can tolerate in one sitting. The same is true of entrepreneurship, or should I say promoting entrepreneurship. That's where the term Destructive Entrepreneurship comes in.

Noted economist William Baumol penned a brilliantly simple, important, and regrettably obscure article on destructive entrepreneurship. Baumol points out that e-ship comes in various flavors: productive, unproductive, and destructive. The gist of his article is that entrepreneurship can be expressed in a variety of forms, some which are quite bad for a society. Society and the famed invisible hand can provide resources and incentives to promote entrepreneurial endeavors, but if the wrong conditions are in effect, "entrepreneurs" will utilize these resources for personal gain at the cost of economic growth for society.

What are the wrong conditions? Without close monitoring of public resources, stable and predictable courts, and infrastructure support for business growth, entrepreneurship takes the form of graft, theft, and the style of business dealings most common in The Sopranos. These are extreme cases, but Baumol impressively has examples. (If I whet your appetite, you can find his article in the Journal of Political Economy, 1990 v98: pp 893-921.)

There is a softer but more prevalent threat when providing public and philanthropic funds to support entrepreneurship. Nepotism, favortism, vanity investments, and the like all creep into the scene. Public investments to support entrepreneurship are susceptible to each of these unproductive (at best) and destructive (at worst) activities. Unchecked by monitoring or market forces, and you have leaders of entrepreneurial efforts in jail or raking in salaries in the many hundreds of thousands... yes, that's U.S. dollars.

Entrepreneurial support is critical, but it is equally important to make sure that someone is guarding the guardians of the regional economy.