Skip to main content
SpringerLink
Log in
Book cover

Foundational Research in Entrepreneurship Studies pp 179–201Cite as

Palgrave Macmillan

William Baumol’s “Entrepreneurship: Productive, Unproductive, and Destructive”

  • Chapter
  • First Online:

Abstract

This chapter offers a retrospective account of William Baumol’s “Entrepreneurship: Productive, Unproductive, and Destructive” in light of its influence on entrepreneurship studies. The first section describes Baumol’s core arguments about the influence of institutions on the allocation of entrepreneurial talent. The second section then discusses their impact on the entrepreneurship discipline. Following this, the third section explores some criticisms of Baumol and explains how addressing these criticisms can provide paths forward for entrepreneurship studies that do justice to Baumol’s work while at the same time integrating it into important emerging research. In particular, Baumol’s arguments open the way to research on institutional entrepreneurship as well as the judgment-based view of entrepreneurial decision-making. The fourth section then considers the policy implications of Baumol’s work. The final short section concludes.

This is a preview of subscription content, log in via an institution.

Chapter
USD   29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD   119.00
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD   159.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD   159.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Learn about institutional subscriptions

Notes

  1. 1.

    To take another example, Baumol’s paper was republished in 1996 in the Journal of Business Venturing—the flagship journal of the entrepreneurship discipline—a sign of its enduring influence outside strictly economic circles. More recently, it has been the subject of a special issue of the Journal of Entrepreneurship and Public Policy (2016) celebrating the 25th anniversary of its original publication in the Journal of Political Economy.

  2. 2.

    Baumol supports his argument with several historical case studies, though he clarifies that these are for illustrative purposes, and are not intended to make a contribution to economic history (1990, p. 895).

  3. 3.

    Although Schumpeter does hint at the question of the allocation of scientific talent (1986 [1954], p. 490).

  4. 4.

    Jean-Baptiste Say, a founder of entrepreneurship theory writing almost two centuries before Baumol, also took the view that the entrepreneurship appears in every society in which production occurs, regardless of its specific forms of social organization. Similarly, for Say’s entrepreneur, innovation was an incidental choice influenced by the institutional framework (Hoselitz 1960, pp. 252–254, 257n55). Baumol’s view of entrepreneurship as a universal feature of society is also reminiscent of Ludwig von Mises’s argument that all human action contains an entrepreneurial element (Mises 1998 [1949], pp. 286–291).

  5. 5.

    Frank Fetter, an American economist and entrepreneurship theorist of the early twentieth century, also argued that the relative payoffs to different profit-seeking activities could lead entrepreneurs away from productive entrepreneurship and into rent-seeking or criminal behavior (Fetter 1915, pp. 367–368). Bhagwati (1982) too emphasized the importance of “Directly Unproductive, Profit-seeking (DUP) activities,” of which rent-seeking is one example.

  6. 6.

    For criticisms of this view, cf. Klein and Foss (2008) and Davidsson (2015).

  7. 7.

    See, however, the various critical discussions in the following section.

  8. 8.

    Interest in explicitly testing Baumol’s theory was largely motivated by a 2008 special issue of the Journal of Business Venturing on the economics of entrepreneurship.

  9. 9.

    In light of Baumol’s examples, this description is more appropriate for historical rulers, bureaucrats, and other political figures who created and administered the rules of the game, rather than entrepreneurs. Davidson and Ekelund (1994, p. 277) make a similar point when they argue that regulation is the most likely source of unproductive entrepreneurship .

  10. 10.

    Baumol and Strom (2007) also make this point. Baumol’s broader definition of profit hints at the idea, pioneered by Fetter and Mises, that all human action involves the pursuit of subjective benefits, also known as “psychic profit” (Fetter 1915, pp. 27–29; Mises 1998 [1949], pp. 286–288).

  11. 11.

    Desai and Acs (2007) recognize, as Davidson and Ekelund (1994) do, that how we define entrepreneurial productivity depends on the context in which it occurs. Different contexts carry different welfare implications for different people, and for different time periods.

  12. 12.

    Furthermore, the administrative process of wealth redistribution consumes resources, thus ensuring a net loss.

  13. 13.

    This is also a key question posed by Lucas and Fuller (2017).

  14. 14.

    Baumol does not mention Mises’s work when discussing the relationship between Austrian views and his own (Baumol 2003).

  15. 15.

    The selection process of the market normally limits the ability of any particular entrepreneur to waste resources systematically for any significant period of time.

  16. 16.

    Padilla and Cachanosky (2016) argue that regulation can actually produce “indirectly unproductive entrepreneurship.” That is, regulations increase the costs of entrepreneurial behavior, opening the way for other entrepreneurs to profit by reducing those costs. The welfare implications of this secondary, “artificial” entrepreneurship are unclear, but it is possible they might undermine the need for evasive entrepreneurship.

  17. 17.

    For overviews of recent work and proposals for future research concerning the relationships between entrepreneurs, institutions , and public policy, cf. Bradley and Klein (2016) and Bjørnskov and Foss (2016).

References

  • Acemoglu, D. (1995). Reward structures and the allocation of talent. European Economic Review, 39(1), 17–33.

    Article  Google Scholar 

  • Ageev, A. I., Gratchev, M. V., & Hisrich, R. D. (1995). Entrepreneurship in the Soviet Union and post-socialist Russia. Small Business Economics, 7(5), 365–376.

    Article  Google Scholar 

  • Aidis, R., Estrin, S., & Mickiewicz, T. (2008). Institutions and entrepreneurship development in Russia: A comparative perspective. Journal of Business Venturing, 23(6), 656–672.

    Article  Google Scholar 

  • Baumol, W. J. (1968). Entrepreneurship in economic theory. American Economic Review, 58(2), 64–71.

    Google Scholar 

  • Baumol, W. J. (1990). Entrepreneurship: Productive, unproductive, and destructive. Journal of Political Economy, 98(5), 893–921.

    Article  Google Scholar 

  • Baumol, W. J. (2003). On Austrian analysis of entrepreneurship and my own. Advances in Austrian Economics, 6, 57–66.

    Article  Google Scholar 

  • Baumol, W. J. (2006). Textbook entrepreneurship: Comment on Johansson. Econ Journal Watch, 3(1), 133–136.

    Google Scholar 

  • Baumol, W. J., & Strom, R. J. (2007). Entrepreneurship and economic growth. Strategic Entrepreneurship Journal, 1(3–4), 233–237.

    Article  Google Scholar 

  • Bhagwati, J. N. (1982). Directly unproductive, profit-seeking (DUP) activities. Journal of Political Economy, 90(5), 988–1002.

    Article  Google Scholar 

  • Bjørnskov, C., & Foss, N. J. (2012). How institutions of liberty promote entrepreneurship and growth. In J. Gwartney, R. Lawson, & J. Hall (Eds.), Economic freedom of the world: 2012 Annual Report (pp. 247–270). Vancouver: Fraser Institute.

    Google Scholar 

  • Bjørnskov, C., & Foss, N. J. (2016). Institutions, entrepreneurship, and economic growth: What do we know and what do we still need to know? Academy of Management Perspectives, 30(3), 292–315.

    Article  Google Scholar 

  • Boettke, P. J., & Piano, E. (2016). Baumol’s productive and unproductive entrepreneurship after 25 years. Journal of Entrepreneurship and Public Policy, 5(2), 130–144.

    Article  Google Scholar 

  • Bowen, H. P., & De Clercq, D. (2008). Institutional context and the allocation of entrepreneurial effort. Journal of International Business Studies, 39(4), 747–767.

    Article  Google Scholar 

  • Bradley, S. W., & Klein, P. (2016). Institutions, economic freedom, and entrepreneurship: The contribution of management scholarship. Academy of Management Perspectives, 30(3), 211–221.

    Article  Google Scholar 

  • Bylund, P. L., & McCaffrey, M. (2017). A theory of entrepreneurship and institutional uncertainty. Journal of Business Venturing, 32(5), 461–475.

    Article  Google Scholar 

  • Cantillon, R.. (2001 [1755]). Essay on the nature of commerce in general (trans: Higgs. H.). New Brunswick: Transaction.

    Google Scholar 

  • Clark, J. R., & Lee, D. R. (2006). Freedom, entrepreneurship and economic progress. Journal of Entrepreneurship, 15(1), 1–17.

    Article  Google Scholar 

  • Coyne, C. J., Sobel, R. S., & Dove, J. A. (2010). The non-productive entrepreneurial process. Review of Austrian Economics, 23(4), 333–346.

    Article  Google Scholar 

  • Davidson, A. B., & Ekelund, R. B., Jr. (1994). Can entrepreneurship be “unproductive?” Towards an evolutionary interpretation. Review of Social Economy, 52(4), 266–279.

    Article  Google Scholar 

  • Davidsson, P. (2015). Entrepreneurial opportunities and the entrepreneurship nexus: A re-conceptualization. Journal of Business Venturing, 30(5), 674–695.

    Article  Google Scholar 

  • Davidsson, P. (2016). Researching entrepreneurship: Conceptualization and design (2nd ed.). New York: Springer.

    Book  Google Scholar 

  • Davidsson, P., & Wiklund, J. (2001). Levels of analysis in entrepreneurship research: Current research practice and suggestions for the future. Entrepreneurship Theory and Practice, 25(4), 81–100.

    Article  Google Scholar 

  • Demsetz, H. (1969). Information and efficiency: Another viewpoint. Journal of Law and Economics, 12(1), 1–22.

    Article  Google Scholar 

  • Desai, S., & Acs, Z. J. (2007). A theory of destructive entrepreneurship. Jena Economic Research Papers, No. 2007, 085.

    Google Scholar 

  • DeTienne, D. R., Shepherd, D. A., & De Castro, J. O. (2008). The fallacy of “only the strong survive”: The effects of extrinsic motivation on the persistence decisions for under-performing firms. Journal of Business Venturing, 23(5), 528–546.

    Article  Google Scholar 

  • Douhan, R., & Henrekson, M. (2010). Entrepreneurship and second-best institutions: Going beyond Baumol’s typology. Journal of Evolutionary Economics, 20(4), 629–643.

    Article  Google Scholar 

  • Eckhardt, J. T., & Shane, S. A. (2003). Opportunities and entrepreneurship. Journal of Management, 29(3), 333–349.

    Article  Google Scholar 

  • Engelhardt, L. (2012). Expansionary monetary policy and decreasing entrepreneurial quality. Quarterly Journal of Austrian Economics, 15(2), 172–194.

    Google Scholar 

  • Fetter, F. A. (1915). Economic principles. New York: The Century Co.

    Google Scholar 

  • Foss, N. J., & Klein, P. G. (2012). Organizing entrepreneurial judgment: A new approach to the firm. Cambridge: Cambridge University Press.

    Book  Google Scholar 

  • Foss, K., Foss, N. J., Klein, P. G., & Klein, S. K. (2007). The entrepreneurial organization of heterogeneous capital. Journal of Management Studies, 44(7), 1165–1186.

    Article  Google Scholar 

  • Granovetter, M. S. (1985). Economic action and social structure: The problem of embeddedness. American Journal of Sociology, 91(3), 481–510.

    Article  Google Scholar 

  • Hall, J., Matos, S., Sheehan, L., & Silvestre, B. (2012). Entrepreneurship and innovation at the base of the pyramid: A recipe for inclusive growth or social exclusion? Journal of Management Studies, 49(4), 785–812.

    Article  Google Scholar 

  • Henrekson, M. (2005). Entrepreneurship: A weak link in the welfare state? Industrial and Corporate Change, 14(3), 437–467.

    Article  Google Scholar 

  • Henrekson, M., & Sanandaji, T. (2011). The interaction of entrepreneurship and institutions. Journal of Institutional Economics, 7(1), 47–75.

    Article  Google Scholar 

  • Hoselitz, B. F. (1960). The early history of entrepreneurial theory. In J. J. Spengler & W. R. Allen (Eds.), Essays in economic thought: Aristotle to Marshall. Chicago: Rand McNally & Company.

    Google Scholar 

  • Kalantaridis, C. (2014). Institutional change in the Schumpeterian–Baumolian construct: Power, contestability and evolving entrepreneurial interests. Entrepreneurship and Regional Development, 26(1–2), 1–22.

    Article  Google Scholar 

  • Klein, P. G., & Foss, N. J. (2008). The unit of analysis in entrepreneurship research: Opportunities or investments? International Journal of Entrepreneurship Education, 6(3), 145–170.

    Google Scholar 

  • Knight, F. H. (1933 [1921]). Risk, uncertainty, and profit, Series of reprints of scarce works on political economy No. 16. London: London School of Economics and Political Science.

    Google Scholar 

  • Levie, J., & Autio, E. (2008). A theoretical grounding and test of the GEM model. Small Business Economics, 31(3), 235–263.

    Article  Google Scholar 

  • Lucas, D. S., & Fuller, C. S. (2017). Entrepreneurship: Productive, unproductive, and destructive—Relative to what? Journal of Business Venturing Insights, 7, 45–49.

    Article  Google Scholar 

  • McCaffrey, M. (2009). Entrepreneurship, economic evolution, and the end of capitalism: Reconsidering Schumpeter’s thesis. Quarterly Journal of Austrian Economics, 12(4), 3–21.

    Google Scholar 

  • McCaffrey, M. (2015). Economic policy and entrepreneurship: Alertness or judgment? In P. Bylund & D. Howden (Eds.), The next generation of Austrian economics: Essays in honor of Joseph T. Salerno (pp. 183–199). Auburn: Ludwig von Mises Institute.

    Google Scholar 

  • McCaffrey, M., & Salerno, J. T. (2011). A theory of political entrepreneurship. Modern Economy, 2(4), 552–560.

    Article  Google Scholar 

  • McCloskey, D. N. (2010). Bourgeois dignity: Why economics can’t explain the modern world. Chicago: University of Chicago Press.

    Book  Google Scholar 

  • McMullen, J. S., & Shepherd, D. A. (2006). Entrepreneurial action and the role of uncertainty in the theory of the entrepreneur. Academy of Management Review, 31(1), 132–152.

    Article  Google Scholar 

  • McMullen, J. S., Bagby, D., & Palich, L. E. (2008). Economic freedom and the motivation to engage in entrepreneurial action. Entrepreneurship Theory and Practice, 32(5), 875–895.

    Article  Google Scholar 

  • Minniti, M. (2008). The role of government policy on entrepreneurial activity: Productive, unproductive, or destructive? Entrepreneurship Theory and Practice, 32(5), 779–790.

    Article  Google Scholar 

  • Murphy, K. M., Shleifer, A., & Vishny, R. W. (1991). The allocation of talent: Implications for growth. Quarterly Journal of Economics, 106(2), 503–530.

    Article  Google Scholar 

  • Padilla, A., & Cachanosky, N. (2016). Indirectly productive entrepreneurship. Journal of Entrepreneurship and Public Policy, 5(2), 161–175.

    Article  Google Scholar 

  • Reynolds, P. D. (1997). Who starts new firms?–Preliminary explorations of firms-in-gestation. Small Business Economics, 9(5), 449–462.

    Article  Google Scholar 

  • Rothbard, M. N. (1987). Breaking out of the Walrasian box: The cases of Schumpeter and Hansen. Review of Austrian Economics, 1(1), 97–108.

    Article  Google Scholar 

  • Salerno, J. T. (1990a). Ludwig von Mises as social rationalist. Review of Austrian Economics, 4(1), 26–54.

    Article  Google Scholar 

  • Salerno, J. T. (1990b). Postscript: Why a socialist economy is ‘impossible’. In Economic calculation in the socialist commonwealth. Auburn: The Ludwig von Mises Institute.

    Google Scholar 

  • Salerno, J. T. (1993). Mises and Hayek dehomogenized. Review of Austrian Economics, 6(2), 113–146.

    Article  Google Scholar 

  • Schumpeter, J. A. (1934). The theory of economic development (trans: Opie. R.). Cambridge: Harvard University Press.

    Google Scholar 

  • Schumpeter, J. A. (1942). Capitalism, socialism, and democracy. New York: Harper and Brothers Publishers.

    Google Scholar 

  • Schumpeter, J. A. (1986 [1954]). History of economic analysis. London: Routledge.

    Google Scholar 

  • Shepherd, D. A., & DeTienne, D. R. (2005). Prior knowledge, potential financial reward, and opportunity identification. Entrepreneurship Theory and Practice, 29(1), 91–112.

    Article  Google Scholar 

  • Sobel, R. S. (2008). Testing Baumol: Institutional quality and the productivity of entrepreneurship. Journal of Business Venturing, 23(6), 641–655.

    Article  Google Scholar 

  • Stenholm, P., Acs, Z. J., & Wuebker, R. (2013). Exploring country-level institutional arrangements on the rate and type of entrepreneurial activity. Journal of Business Venturing, 28(1), 176–193.

    Article  Google Scholar 

  • Tyson, L. D. A., Petrin, T., & Rogers, H. (1994). Promoting entrepreneurship in Eastern Europe. Small Business Economics, 6(3), 165–184.

    Article  Google Scholar 

  • Ucbasaran, D., Shepherd, D. A., Lockett, A., & Lyon, S. J. (2013). Life after business failure: The process and consequences of business failure for entrepreneurs. Journal of Management, 39(1), 163–202.

    Article  Google Scholar 

  • von Mises, L. (1990). Economic calculation in the socialist commonwealth. Auburn: The Ludwig von Mises Institute.

    Google Scholar 

  • von Mises, L. (1998 [1949]). Human action: Scholar’s edition. Auburn: Ludwig von Mises Institute.

    Google Scholar 

  • von Mises, L. (2008 [1951]). Profit and loss. Auburn: Ludwig von Mises Institute.

    Google Scholar 

  • Wennekers, S., & Thurik, R. (1999). Linking entrepreneurship and economic growth. Small Business Economics, 13(1), 27–56.

    Article  Google Scholar 

  • Westlund, H., & Bolton, R. (2003). Local social capital and entrepreneurship. Small Business Economics, 21(2), 77–113.

    Article  Google Scholar 

  • Williamson, O. E. (2000). The new institutional economics: Taking stock, looking ahead. Journal of Economic Literature, 38(3), 595–613.

    Article  Google Scholar 

  • Zellweger, T. M., & Astrachan, J. H. (2008). On the emotional value of owning a firm. Family Business Review, 21(4), 347–363.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. University of Manchester, Manchester, UK

    Matthew McCaffrey

Authors
  1. Matthew McCaffrey
    View author publications

    You can also search for this author in PubMed Google Scholar

Editor information

Editors and Affiliations

  1. Morgan State University, Baltimore, MD, USA

    Golshan Javadian

  2. The University of Alabama, Tuscaloosa, AL, USA

    Vishal K. Gupta

  3. University of New Hampshire, Durham, NH, USA

    Dev K. Dutta

  4. Sacred Heart University, Hartford, CT, USA

    Grace Chun Guo

  5. Rutgers, The State University of New Jersey, Newark, NJ, USA

    Arturo E. Osorio

  6. University of Massachusetts, Boston, MA, USA

    Banu Ozkazanc-Pan

Rights and permissions

Reprints and permissions

Copyright information

© 2018 The Author(s)

About this chapter

Check for updates. Verify currency and authenticity via CrossMark

Cite this chapter

McCaffrey, M. (2018). William Baumol’s “Entrepreneurship: Productive, Unproductive, and Destructive”. In: Javadian, G., Gupta, V., Dutta, D., Guo, G., Osorio, A., Ozkazanc-Pan, B. (eds) Foundational Research in Entrepreneurship Studies. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-73528-3_9

Download citation

Publish with us

Policies and ethics

Search

Navigation