March 15, 2006

Entrepreneurs and Macroeconomics.  The recent addition of The Economist carries an excellent story on how economists are “rediscovering” the entrepreneur.  The story centers on the work of William Baumol at Princeton and the recent annual meeting of American economist in Philadelphia this January.

Baumol builds on the work of Joseph Schumpeter in arguing that microeconomics places far too much emphasis on “price” and not enough on innovation.  Schumpeter elegantly argued that innovation of new products/processes were the way for firms to maximize profits.  That is, firms do much more than simply to compete solely on the basis of a lower price.  Those firms that innovate will destroy those that do not.  It’s not just about price.

Recently the Wall Street Journal ran an article in a similar vein.  The article raised questions such as: why do people spend five dollars for a 25 cent cup of coffee at Starbucks?  Why are people willing to pay a very high price for vegetables at Whole Foods when they could get the exact same thing at a lower price at a Wal-Mart Supercenter?  The answer:  people are willing to pay for the “experience.”  Again, it’s not just about price, but it is about an innovative way to provide a good or service.

I have always had the deepest amount of respect for Bill Baumol and his work.  I had some correspondence with him very early in my career and found him to be as cordial as he is intelligent.  I am pleased to see the profession is starting to recognize his contributions.

Now if Baumol could also wake-up the macroeconomists…while the microeconomists are finally catching on to the importance of the entrepreneur and trying to formally model her behavior, she is still mostly ignored in macroeconomics.  In our macroeconomic growth models “innovation” does play a role, and people like Paul Romer and others have modeled the positive spillover effects of innovation, but actual entrepreneurship and the venture capital that feeds it have yet to be fully incorporated into our models.

Some of the interesting questions yet to be explained (that is formally modeled and empirically tested) is why does the level of entrepreneurship wax and wane over time?  Often times this is explained by “culture.”  Economists hate that explanation because we can’t quantify it…and it sounds like a cop-out:  if you can’t explain something, blame it on culture.

But maybe culture does have a role to play in explaining entrepreneurship on a macro level.  For example, in the 1950’s and 1960’s in the United States entrepreneurship was looked down upon.  In those days college educated workers were expected to be “company men” i.e. those who wore suits and worked for large corporations.  During these two decades “starting out on your own” was seen as a sign of senility.

By the 1980’s and 1990’s things had changed in America.  Partly, I believe, because of the Reagan Revolution, the entrepreneur now had an elevated status in American culture.  Entrepreneurship was now viewed as daring, cutting edge, dramatic, and worth while.

So why the change?  I’m not sure.  And I am having an extremely hard time formally modeling it.  But…maybe brighter minds than mine will find a way to do it one day.

In the mean time, we can hope that society will continue to appreciate this special bread of people in our society and our economy.  The well being of our market economy, both micro and macro, depends upon it.

Brandl needs YOUR help.  Recently the NBC affiliate here in Austin asked me to volunteer my time and serve as a “financial expert” during their morning news program.  Once a week, I am suppose to present a two minute report on some topic and then chat about it with the anchors.  The audience (this airs at 6 am…yeah, that is early) are described as “moms and business professionals.”

So I turn to you for help…what on earth should I talk about?  What might be interesting to these two groups simultaneously?  If you have any suggestions feel free to email them to me at:  michael.brandl@mccombs.utexas.edu

For those of you in central Texas the segments are suppose to air at 6:20am on Tuesdays on KXAN-36, starting next week.  We will try this for four Tuesdays and see if anyone watches!  Depending on the feedback KXAN gets they will decide whether to continue it…and to see if I can get there each Tuesday by 6am!  Let me know your suggestion on topics and be sure to turn in.

All the best,

MB