Tuesday, July 21, 2015

Reading :: Change and the Entrepreneur

Change and the entrepreneur: postulates and the patterns for entrepreneurial history
Prepared by the Research Center in Entrepreneurial History, Harvard University

I ran across a citation to Schumpeter's paper in this 1949 collection, so I looked it up and UT's library had a copy. I'm glad it did. In addition to Schumpeter's paper, the collection also has a brief position paper by Dmitri B. Shimkin on entrepreneurship and the Soviet economic system—putting together two of my current interests. Below, I focus on these two papers.

Shimkin, Dmitri B. "Entrepreneurship and the Soviet economic system." pp.48-53.

In this brief paper, Shimkin reviews entrepreneurship's short and troubled history in the Soviet Union. Before the Revolution, he notes, entrepreneurship had a brief history due to the late start of capitalist development. (Depending on who you listen to, Russia was either feudalist up to the Revolution or until a few decades before it.) Russia's serfs were not liberated until 1861, and "in 1865, there was only one bank in the whole of the country with a capitalization of 2,000,000 roubles" (p.48).

With the liberation of the serfs, labor suddenly became more mobile and incentivized; by 1915, there were fifty banks with a capitalization of over two million roubles each; iron production increased ninefold; coal production increased 3.5 times (p.49). "This rather rapid rate of development was accomplished through an alliance between the state and the capitalists. The primary source of capital within the country was the state. ... There was no encouragement of small business, no attempted control of monopoly" (p.49). Thus the economy was asymmetric, with large, well capitalized industries and "tiny, unprotected handicraft workers" (p.49). Foreign investments flowed into the large industries, leading to high debt service and thus high exports (p.49). Thus, entrepreneurship before the Revolution
was characterized by energetic development and a dynamic outlook. It was based on a patterned cooperation between the state and the entrepreneur. Its weakness lay in its shallow roots, in the unbalanced rate of economic development, and in its domination by foreign capital -- which incidentally opened the way to xenophobia. (p.50)
With the Revolution, the state nationalized "banking, trade, industry, transportation, commerce, and the like"—before putting into place institutions that could adequately handle them—and gave land back to the peasants. The result was "confusion and weakness," leading Lenin to finally institute the New Economic Policy. "Despite burdensome controls, private enterprise boomed. In most cases, however, it was only a proliferation of one-man efforts" (p.50). By 1926, capital and labor was consistently in flight from state to private sector (p.50). The Soviets also began to encourage foreign capital investment (pp.50-51). But "as the government became stronger, it attacked private capital": during the first five-year plan, small manufacturing was eliminated, foreign capital was eliminated, and farmers were collectivized (p.51). The author adds:
The NEP showed that even under adverse conditions, the small entrepreneur is an extremely efficient mechanism for economic recovery. His vitality far exceeded Soviet expectations. Contrary to theoretical expectations, private capital did not wither away but soon rose to endanger state enterprises, and had to be forcefully eliminated by political measures. (p.51)
Yet "By 1930-1932, entrepreneurship had been eliminated wholly, except for the privte plots of the members of the Kolkhoz and their rights to sell the produce thereof. For the rest, private initiative was restricted to professional activity, and to the black market" (p.51). Small-scale entrepreneurial effort is the most tenacious, the author concludes (p.52).

Schumpeter, Joseph A. "Economic theory and entrepreneurial history." pp.63-84.

Here, Schumpeter addresses three topics: (1) he surveys the history of economists' notions about entrepreneurship; (2) he examines enterprise's evolution; and (3) he comments on economic history as viewed via the standpoint of enterprise. Here, we'll focus on (1).

Schumpeter notes that Adam Smith had little to say about entrepreneurship. "Natural law preconceptions led Adam Smith to emphasize the role of labor to the exclusion of the productive function of designing the plan according to which this labor is being applied" (p.65). And "With Ricardo and Marx the processes of production and commerce are still more automatic. The designing, directing, leading, co-ordinating function had practically no place at all in their analytic schemata" (p.65). Similarly, John Stuart Mill did not believe that the management of the production process required any great skill (p.66).

What would that skill be? What separates entrepreneurship from ordinary business management? Schumpeter forwards the same argument here that he does elsewhere: the entrepreneur (a) transforms or combines factors into products and (b) creates something new, not inherited (p.68). Typically, he says, this entrepreneurial function is accompanied by other functions, specifically leadership (pp.69-70).

Was this book useful? It was to me, and it may be to you as well, if you want to get a mid-20th century view of entrepreneurship. Pick it up—if you can find it.

No comments: