Thursday, March 21, 2013


In yesterday's post, I claimed that entrepreneurship is not euvoluntary without providing supporting arguments. Here are those supporting arguments.
  1. Uncompensated externalities. 

    Economists use a term of art they call "creative destruction". This is what happens when a new product displaces an old one. Automated telephone switchgear displaced human-operated switchboards, touch-tone phones displaced rotary dials, and cell phones displaced land lines. Digital photography displaced film displaced daguerreotype. Ditto for cars, broughams, and buckboards. Each little innovation sprouts from the seeds planted by entrepreneurs, and each little innovation unapologetically ruins the market for the thing it replaces. The automated copier gutted steno pools, the ATM atrophied bank tellers, the combine attenuated field hands, the washing machine disemployed the laundress. Sure, each of these inventions improved the lives of millions of people, but what of the touch-typist put out of a job? What of the teller handed a pink slip? What of the washer-woman who no longer has any customers? What are they supposed to do?

    The answer is obvious of course. Find another way to better serve your neighbors. Yet despite this self-evident prescription, Luddite sympathies linger in droves any time low-margin jobs get the axe thanks to fancy new machines or better ways of doing business. "Bring back American manufacturing" they cry, even as manufacturing output is the highest it's ever been. Ask yourself what's really keeping people from finding work when robots oust them on the assembly line. Is it labor market friction? Human capital deficiencies? Regulation? Blaming the entrepreneur, blaming the innovator is easy enough, but it's always easy to point to proximate causes. We need careful analysis to get at root causes and to alter the institutions that bar peaceful people from finding the best ways of participating in the economy.

    So yes, entrepreneurship can (and should!) generate some uncompensated externalities. That's a feature, not a bug. If things are working well, recovery from technological shock should be swift and beneficial. If things aren't working so well, it may be because there's interference somewhere.
  2. Conventional ownership/capacity to exchange

    The thing about new products and services is that, well, they're new. If you're the dudes who invented the airplane, there are no existing conventions over the allocation of airspace. If you're the inventor of the phonograph, there are no existing conventions over the copyright of recorded performances. If you're the inventor of genetic resequencing, there are no conventions over patents on DNA strands. Entrepreneurs don't necessarily know how the common law (or unscrupulous competitors) will react to an innovation. Recall that the very purpose of IP law is to promote the advancement of the useful arts and sciences; patents exist to promote innovation, to unburden entrepreneurs of the threat of expropriation. The spirit behind patent law recognizes the non-euvoluntarity of entrepreneurship in the state of nature.

    The extent to which modern IP law actually promotes the advancement of the useful arts and sciences is very much open for debate.

    The intuitions remain, however. De novo goods may have poor or absent conventions. Expect hand-wringing.
Entrepreneurs need to be protected from having their ideas stolen, but this does not imply they should be mollycoddled either. Ideas need to withstand rigorous testing by customers, not by the supercilious judgement of disinterested elected officials or state bureaucrats. The first welfare theorem does not empower technocrats. Entrepreneurship is not euvoluntary: protecting it insists on solid constitutional liberty underpinned by an appreciation for the dignity of men and women of industry.

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Do you have suggestions on where we could find more examples of this phenomenon?