Great Gatsby! What income inequality and immobility means for entrepreneurship

The ‘Great Gatsby’  curve has been making news again – one of my favorite terms in economics right now. A recent article in the Economist magazine argues that that the so-called Great Gatsby curve, which shows that countries with higher income inequality also have lower income mobility, is particularly worrying.

The problem, as the Economist explains, is that people who want to defend gross inequalities of income in countries like America often argue that income inequality is okay as long as you have income mobility: if today’s burger-flipper can become tomorrow’s prosperous Richard Branson with a little grit and hard work, society is still fair. The problem with this thesis is the Great Gatsby curve. It shows that the greater the distance in a country between rich and poor, the harder it is to go from poor to rich or vice versa. Countries don’t compensate for income inequality through income mobility; they tend to be either fair or unfair on both metrics at the same time.

While, on the face of it, one would assume that this problem would be immediately seized upon and become part of a larger debate on the economic and political structures exasperating income inequality and immobility, that is not necessarily the case. For one, the relationship between inequality and immobility with entrepreneurship is not immediately apparent . In this post, I’ll review some negative effects the Great Gatsby curve can have on entrepreneurship.

As I have illustrated in another blog post, entrepreneurship has three faces: productive, unproductive, and destructive. Productive entrepreneurship is the identification, evaluation and exploitation of opportunities to provides new value to society and an economy as a whole. It can take the form of one-off-trade, sustained small business entrepreneurship, or even within larger (non- and for-profit) organizations. Unproductive entrepreneurship, on the other hand, is the exploitation of opportunities that have benefits for only a single party, while detracting from society and the economy as a whole. Ubiquitous examples are bribery, excessive lobbying, insurance fraud, etc. , which is called ‘rent’ seeking by many economists. Destructive entrepreneurship is the exploitation of opportunities that have socially negative consequences typically associated with black markets. The international drug trade, human trafficking, and poaching are all forms of entrepreneurship that have severe negative effect to society and the economy as a whole. Of course, what one calls ‘productive, unproductive, and destructive’ is open to debate, with proponents wanting to argue with stories and images why their form of entrepreneurship is ‘valuable’ and not ‘valueless’.

Typically in the past, economists have tried to tease out the relationships between entrepreneurship (i.e. only small business entrepreneurship) and innovation or income equality or mobility or economic growth. Turning the causality the other way, however, and defining entrepreneurship in its three types, brings up some worrying insights.

First, high income inequality and immobility is shown to have a negative impact on society as a whole. Richard Wilkinson, Professor Emeritus of Social Epidemiology at the University of Nottingham, charts the hard data on economic inequality, and shows what gets worse when rich and poor are too far apart: real effects on health, lifespan, even such basic values as trust. As these basics decline to the majority, health, lifespan, and trust diminish as well as productive forms of entrepreneurship . Why? Productive forms of entrepreneurship require a certain amount of basic social needs to be met, and those needs are roughly health, lifespan, and trust. Productive entrepreneurship is about taking on some amount of risk to offer new products and services that will greatly improve the living standard of society as a whole, which also creates real economic growth. If they fail, they need to know they will not be stigmatized and dignity ruined. However, if an individual perceives her health, education and distrustful community and culture as high, there is no belief that one should take on risk to offer anything of new value to these other people. Instead, a more reliable option is to act (unproductively or destructively) entrepreneurially on the black market to benefit yourself and family members. Those with economic power in these conditions also have little belief that their actions should be directed for the good of society as a whole. Instead, setting up a system that rewards themselves through bribes leads to an increase in unproductive entrepreneurship. The institutionalization of inequality through captured laws and regulations, the awful legacy of colonialism, or stereotypes creates cycles of distrust, income inequality and immobility. This again reduces the chances of the next generation of potential productive entrepreneurs to identify opportunities and act upon them.

Second, high income inequality and immobility stymies productive entrepreneurship because it inhibits fair competition and reduces overall demand. Productive entrepreneurs identify gaps in supply and demand by responding to the needs of the people. When income and mobility are unequal, monopolist engage in supply side economics to raise prices, protect their position, and thus become less efficient. Moreover, they may engage in unproductive entrepreneurship by capturing regulators and policymakers to bend laws in their favor. Innovation and creativity is thwarted because income inequality and immobility offers less access to capital for productive entrepreneurs. As monopolists have an increased power to act entrepreneurially in their own interests, they reduce the overall incentives for potential productive entrepreneurs and their new value becomes unrealized.

Contrastingly, some prominent thinkers argue that monopolists create new jobs since they have command over a larger amount of resource and therefore should be left alone to do so. Inevitably examples like Cornelius Vanderbilt and Jay Gould, who became wealthy through railroad ownerships in the 19th century, are said to have led to a railway unification of the USA. Without these few rich and visionary people we would not have had the expansion of railways an exponential economic growth. History shows however that Congress created the Interstate Commerce Commission (ICC) in 1887 to indirectly control the business activities of the railroads through issuance of extensive regulations. Congress also enacted antitrust legislation to prevent railroad monopolies, beginning with the Sherman Antitrust Act in 1890. The reason Congress took these actions is that monopolists were harming competition, exploiting labor (Chinese, minorities), and creating unfair prospects for potential entrepreneurs.

Increased income inequality and immobility also reduces overall demand in an economy since fewer people have the economic power to buy new products and services. The lack of purchasing power by the majority translates into little possibility for productive entrepreneurship to be successful. On the other hand, the monopolistic few however can only sleep in one, albeit glorious, bed at a time and ride in one luxurious car at a time. Instead, the economy is skewed so that cycles of disadvantage get more acute and desperate for the many, which promotes unproductive (insurance fraud, bribery, etc.) and destructive (gang membership and crime).

Ultimately, the effect of rising inequality and immobility is that people view ‘control’ differently. Social psychologists like Sheena Iyengar show us that mental health of humans and non-human animals is highly linked to independent choice based on a perception of control. While chance is always a factor, when potential productive entrepreneurs view choice being reduced due to lack of markets and capital, their perception of control is thwarted. A ‘locus of control’ has been found by psychologists as a key element of all entrepreneurship. However, as individual perceive their situation as limited in choice, so too they see productive entrepreneurship as less of a viable option. The overt lack of control reduces happiness, resources availability, and perception of making a difference in a community or society. Instead, disenfranchisement and marginalization take hold, which promotes unproductive and destructive forms of entrepreneurship.

I believe there are two ways in which societies can direct people into productive entrepreneurship rather than unproductive or destructive. First, is to reduce income inequality by supporting a minimum wage increase, reduce health care costs, and capping high incomes through redistributive tax system. Finding the right balance between support and competition is never easy, but the Gatsy Curve is good evidence that society should reduce run away inequality and immobility. Equality begins with a comprehensive system of fair taxation and health care readily available. The second is to boost mobility by providing better access to affordable education, reduce the degree of  institutionalized marginalization of racialized or sexualized groups (minority and sexual orientation) through progressive laws, and to encourage more stable early childhood experiences by allowing parents flexible work spaces. In the United States, the recent overturning of DoMA provides some clear progress in reducing stereotypes but the Travyon Martin case underscores the countries continued problems of offering equal access to minority groups. Flexible work spaces, allowing working from home or 4 day work days, creates space for parents to spend time with their children and a build a sensitive and caring new generation.  For it is the next generation that will transform society and the economy through productive entrepreneurship.

See Articles

Baumol, W. J. (1990). Entrepreneurship: Productive, unproductive, and destructive. Journal of Political Economy, 98(5), 893-921. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9103252727&site=bsi-live

Baumol, W. J., Litan, R. E., & Schramm, C. J. (2007). Good capitalism, bad capitalism and economics of growth and prosperity. New Haven, Conn. and London: Yale University Press.

Honig, B., & Dana, L. P. (2008). Communities of disentrepreneurship. Journal of Enterprising Communities: People and Places in the Global Economy, 2(1), 5-20. doi: 10.1108/17506200810861221

Schumpeter, J. A. (1994). Capitalism, Socialism, and Democracy. London, England: Routledge.

http://www.economist.com/blogs/democracyinamerica/2013/07/great-gatsby-curve?fsrc=scn/tw/te/bl/dontworryoldsport

http://hbswk.hbs.edu/item/6903.html

 http://www.forbes.com/sites/realspin/2013/03/05/want-to-reduce-income-inequality-lower-the-barriers-to-talented-immigrants/

 http://repository.library.georgetown.edu/handle/10822/558603

Marijuana, Opportunity, and Entrepreneurship

‘Marijuana’, and the social debate around the material, provides an attractive opportunity to consider the cultural origins of entrepreneurial opportunity.

Today in the United States, eighteen states and the District of Columbia currently allow its medical use. After Washington and Colorado passed sweeping laws to legalize cannabis, the pot business is, if not mainstream, at least ready to push toward it. A number of new start-ups have emerged to take advantage of the changing laws. UpToke, for instance, is a startup company that manufactures a handheld vaporizer. Others are starting up equity funds to consulate the potential market. Seattle based private-equity fund, Privateer Holdings, has designed a plan to acquire smaller marijuana-related businesses to create a ‘marijuana conglomerate’. Most notably, Jamen Shively, CEO of Seattle-based Diego Pellicer, announced plans to invest $100 million over the next three years in the burgeoning “social marijuana” market with a national chain of marijuana stores. In doing so, the former Microsoft manager is not only taking a page from the Howard Shultz playbook for building Starbucks, he’s also testing the Obama administration’s tolerance for flouting federal drug prohibition. “Yes, we are Big Marijuana,” Shively, 45, said unabashedly about ambitions to “be the most recognized brand in an industry that does not exist yet.” And in doing so, politically, Shively would also create the first consolidated economic engine that advocates for legalization.

What can these developments tell us about the origins of entrepreneurial opportunity? In this post, I’ll explore the changing meaning of ‘marijuana’ via the cultural knowledge that influences perceptions. I will briefly compare the shifting cultural knowledge around ‘marijuana’ in the United States and in the Netherlands provides some insights into the emergence of entrepreneurial opportunity that goes beyond current economic theory.

 

Culture and Perception

Researchers across the social sciences and humanities have found that each individual person has their own ‘view of the world’, which is sometimes shared with others and sometimes unique. Perception is the act or faculty of perceiving, or apprehending by means of the senses or of the mind, cognition, and understanding. It is the immediate or intuitive recognition or appreciation of something. For instance, as one tastes the sweetness of a cherry, one perceives the texture and qualities of the cherry. Our perception though goes much deeper than the physical senses. Research has shown us that perception has moral, psychological, and aesthetic qualities, which can be projected upon the subjective notion of objects, activities, and the like.

Strikingly, anthropologists have shown us that these moral, psychological and aesthetic qualities of perceptions are not (always) universally shared but tend to vary from culture to culture. Recent challenges to traditional psychology theories argue that people from across cultures have varying ideas and attitudes about space, place, territory, objects and actions. For example, Joseph Henrich and colleagues from University of British Colombia show that visual perception, fairness, cooperation, spatial reasoning, categorization and inferential induction, moral reasoning, reasoning styles, self‐concepts and related motivations, and the heritability of IQ all vary across cultures. Their comparative findings suggest that members of Western, educated, industrialized, rich, and democratic (WEIRD) societies, including young children, are among the least representative populations one could find for generalizing about humans (see http://www2.psych.ubc.ca/~henrich/pdfs/Weird_People_BBS_final02.pdf).

Since culture is the prevailing norms, practices, belief, and values regarding objects and subjects, knowledge about these can be described as cultural knowledge. Giving a big hug is known to be appropriate when meeting a friend in the United States, while three kisses on the cheeks in the Netherlands, or two in Italy, is known to be appropriate. More importantly, though, is that cultural knowledge isn’t limited to greeting, but can manifest in how people choose to organize their economy, political systems, education, hospitals, higher education, and the like.

This begs the question, how can we connect cultural knowledge to individual perception? The author Joan Didion, an author, is on to something when she said, “We tell ourselves stories in order to live. We live entirely… by the imposition of a narrative line upon disparate images, by the ‘ideas’ with which we have learned to freeze the shifting phantasmagoria — which is our actual experience.” Hence, one clear mechanism that transfers cultural knowledge from ‘out there’ to ‘in here’ are the stories, metaphors, symbols, and the theories of cause and effect that guide our sense of judgment and appropriateness. Whichever set of assumptions we’re given, these cultural scripts are intended not only to help us successfully navigate our own lives but also to perpetuate a set of values regarding the way society as whole functions best.

However, rather than cultural knowledge deterministically explaining all human behavior, they represent a guide of how to probabilistically act in certain situations. Individuals have the ability to act in ways other than those that reinforce the existing cultural knowledge, assuming they have some power to do so. They can make a difference, whether intentionally or not by drawing on cultural knowledge from another realm of life. An individual acting outside of existing cultural knowledge may not by herself change an existing cultural knowledge (nor create a new knowledge) if the original cultural knowledge continues to be enacted by other individuals. Nevertheless, if other individuals follow the lead of the individual acting outside of existing cultural knowledge, whether in direct and explicit defiance (e.g. as in collective action) or in tacit ways, they may together bring about change by reinforcing not traditional cultural knowledge, but new ones.

What is intriguing, though, is that cultural knowledge is constantly in flux; waiting to be challenged and overthrown. Changes to cultural knowledge creates new stories, metaphors, symbols, and the theories of cause and effect that guide, which replace taken-for-granted practices. Paradoxically, over time the new cultural knowledge becomes taken-for-granted myths that we all ‘know’ are true. Thus, our individual perceptions based on a set of values change over lifetimes, generation to generation, to bring new knowledge about how society will function best. On the other hand, cultural knowledge can shift the definitions of what is deemed inappropriate or undesirable, and vice versa. Some of the best research of the previous century shows how the entrenched cultural knowledge of what constitutes ‘whiteness’ and ‘blackness’ can be challenged, though often with considerable push-back.

Applying this cultural view of opportunity to the current debates around ‘marijuana’ and entrepreneurship provides some truly fascinating insights. Let’s start with the America’s cultural knowledge of ‘marijuana’.

 

A Brief History of ‘Marijuana’ in the United States

An excellent article titled ‘The Mysterious History of “Marijuana”’ published by NPR in the USA tells a story of how marijuana has been intertwined with race and ethnicity in America since well before the word “marijuana” was coined. Throughout the 19th century, news reports and medical journal articles almost always use the plant’s formal name, cannabis. Most of the pre-1900 press references to cannabis relate either to its medical usage or its role as an industrial textile. But then, in the early 1900s, you start to see accounts in major newspapers like this Los Angeles Times story from 1905 (“Delirium or death: terrible effects produced by certain plants and weeds grown in Mexico”).

Numerous accounts say that “marijuana” came into popular usage in the U.S. in the early 20th century because anti-cannabis factions wanted to underscore the drug’s “Mexican-ness.” One account, published in The Washington Post, draws a distinction between “Mexican marihuano or locoweed” and Indian “hasheesh,” aka “cannabis indica”. The article actually erroneously conflates a poisonous weed (that really is called locoweed; its clinical name is astralagus, not cannabis) with marijuana.

Cannabis was outlawed because various powerful interests (some of which have economic motives to suppress hemp production) were able to craft it into a bogeyman in the popular imagination, by spreading tales of homicidal mania touched off by consumption of the dreaded Mexican “locoweed.” Fear of brown people combined with fear of nightmare drugs used by brown people to produce a wave of public action against the “marijuana menace.” That combo led to restrictions in state after state, ultimately resulting in federal prohibition. In sum, ‘marijuana’s’ illegality was created by introducing the word ‘marijuana’ that was meant to play off of anti-immigrant sentiments.

‘Marijuana’ in America today has undergone a new revival with new parties struggling to redefine it as an illegitimate category. Cannabis advocates hope to legalize personal use in another 14 states by 2017, mostly among the 16 states besides Washington and Colorado where medical pot is legal (it’s also legal in Washington, D.C.). Industry estimates say today’s $1.5 billion legal market could quadruple by 2018. Importantly, the public is trending toward legalization. In a Pew Research Center poll released Thursday, a majority of Americans (52%) favored legalization, the first time that threshold has been reached since polling on the issue began in 1969. For the first time, a majority of Americans now support legalizing marijuana. Commercial marijuana sales are estimated at $1.5 billion today which could quadruple by 2018.

In sum, the cultural knowledge about the causes and effects of marijuana are being uprooted due to a lack of scientific evidence. Moreover, its links to institutionalized racism have begun to be more commonly understood. Marijuana is the reason for more than half of the drug arrests in America. A deeply disproportionate number of marijuana arrests (the vast majority of which are for possession) befall African-Americans, despite similar rates of usage among whites and blacks. The revolution of cannabis may be happening in the country, bringing the substance into the light and allowing entrepreneurs to seize new opportunities.

 

A Brief History of  ‘Marijuana’ in the Netherlands

Similar to the United States, prior to the 20th century, the Dutch had access to hemp plants for food, fuel, and fiber. As the Dutch language evolved into its present form, one word came to describe any and all sorts of plants: hennep. Dutch farmers stretched their expensive imported tobacco with the leaves and flowers of the hennep plant in the early 1500s.

By the mid-1970s, many citizens began to experiment with drugs and this period saw a widespread use of marijuana, speed, heroin, LSD, and other recreational drugs that presented various degrees of health risk to Dutch citizens. The then-Minister of Health and Interior, Irene Vorik, examined the medical and social studies of the harm cause by the various substances. Vorink proclaimed that young people often experiment with tobacco, sex, alcohol, and other drugs as a natural part of the maturation period, though the minister wanted to reduce any potential harm that Dutch youth faced. Thus, smoking cannabis is a part of what the Dutch view as “youthfulness” or freedom to grow up. The government decreed that cannabis was considerably less harmful than the other drugs and that the most common way to be introduced to drugs “harder” than cannabis was directly through the drug suppliers themselves. Vorink led the way towards recommending the authorities stop persecuting people for the consumption and sales of personal amounts of cannabis.

‘Coffeeshops’ quickly emerged from existing youth centers as places to permit the sales of small amounts of hashish and marijuana. These youth centers were transformed by entrepreneurs towards more commercial operations, and the coffeeshops of today were born. New entrepreneurs moved into the marketplace and developed new relations to offer marijuana, each coffeeshop with its own signature brands, reputation, and milieu. As Doysevsky would have said, “I know that my youth will triumph over everything – every disillusionment, every disgust with life. I’ve asked myself many times whether there is in in the world any despair that would overcome this frantic and perhaps unseemly thirst for life in me, and I’ve come to the conclusion that there isn’t…”. The ‘youth’ had triumphed.

However, cannabis remains a controlled substance in the Netherlands and both possession and production for personal use is still a misdemeanor, punishable by fines. Coffee shops are also technically illegal. The Dutch policy of non-enforcement has led to a ‘de-criminalized’ cultural category where norm of non-enforcement has become common.

Cannibis is still illegal because the Dutch Ministry of Justice applies a gedoogbeleid (tolerance policy) with regard to the category “soft drugs”: an official set of guidelines telling public prosecutors under which circumstances offenders should not be prosecuted. This is a more official version of a common practice in other European countries wherein law enforcement sets priorities regarding offenses on which it is important enough to spend limited resources. A November 2008 poll showed that a 60% majority of the Dutch population support the legalisation of soft drugs. The same poll showed that 85% supported closing of all cannabis coffee shops within 250 meters walking distance from schools

In the subsequent years, international tourism exploded in the Netherlands with visitors from all over the world coming to visit the famous ‘coffeeshops’. Since the countries climate is not ideal for growing cannabis, Dutch entrepreneurs experimented with greenhouses and growing techinques that have greatly increased both the quantity of supply and the quality of product (i.e. the quantity of THC – the chemical marker that makes a person high). These advances however have led to a more recent refinement in the categorization of cannabis. In October 2011 the Dutch government proposed a new law to the Dutch parliament, that will put cannabis with 15% THC or more onto the list of hard drugs. If the law comes into effect, it would prohibit “coffee shops” from selling cannabis of that potency.

 

The Cultural Origins of Entrepreneurial Opportunity

What does this mean for opportunity and entrepreneurship? Comparing the cases of cannabis across cultures sheds light on the cultural processes that create new opportunities. Scholars in this area tend to view opportunity as a function of some out of equilibrium markets – some demand is not being met for some reason. This creates potential for an individual to recognize this imbalance and work to meet demand, adding new value to the market, and possible to society and the economy as a whole. Re-examining this premise from a cultural perspective we see that opportunities arise as cultural knowledge is created, changes, or is destroyed. As perceptions move to build new sub-cultures of knowledge, they gain influence and appropriateness, even to the extent people are willing to spend money on a new product or service. Contrarily, changing cultural knowledge can illegitimate a business opportunity that seemed to have stood the test of time. Consequently, a potential market is being formed and reformed, emerging or destroyed, through the changes or creation of new stories, metaphors, symbols, and the theories of cause and effect. Entrepreneurs are fascinating since they are people that embody and usher in these changes – whether for better or for worse (See my other blog post on the types of entrepreneurship).

http://www.usatoday.com/story/money/business/2013/04/07/medical-marijuana-industry-growing-billion-dollar-business/2018759/

http://slog.thestranger.com/slog/archives/2013/05/30/seattle-entrepreneur-plans-100-million-national-chain-of-pot-stores

http://money.cnn.com/video/news/2013/03/21/f-marijuana-uptoke-startup.fortune/index.html

Cultural considerations of the carbon tax – what it means for entrepreneurship

The amount of carbon in the atmosphere has increased from its historical average of 275 parts per million to about 400 parts per million – and this number is rising by about 2 parts per million every year. Most scientists are now confirm the hypothesis  that number is higher than any time seen in the recorded history of our planet—and we’re already beginning to see disastrous impacts on people and places all over the world. Now climate scientists have revised the highest safe level of CO2 to 350 parts per million. Yet, very little coordinated action seems to be targeted at tackling the Earth’s most pressing issue (for instance, Australia scraps carbon tax early (morningstaronline.co.uk).

Recently, Planet Money, an excellent podcast on economics, posted a recent episode on a carbon tax plan to ‘fix’ global warming.(Episode 472: The One-Page Plan To Fix Global Warming). According to economists, a carbon tax would raise the price of carbon intensive products and services to match its full environmental costs, which to this point is artificially low. This promotes the incentives of individuals to find new ways to reduce their carbon usage, and increase their tax bill by an average of a $1 USD per day. Interestingly though at the end of the year, low emitting people, I suppose lower income too, would see most of these taxes paid back to them in the form of a refund.

I want to take this a step further and deconstruct the carbon tax, how it changes incentives, what the implication are for entrepreneurs trying build new start-ups that have both environmental and commercial goals, and what larger lessons can be learned about entrepreneurship in the process.

First, the carbon tax is a ‘rule’ – it doesn’t exist physically but only in our collective minds and made real through our actions. Therefore, we can call it fully socially constructed (an the debate is fierce). If introduced, a cultural consideration of the carbon tax would work like this: As we begin to understand the rule (availability of knowledge) and where it applies (accessibility), then will we start to see all economic actors starting to respond differently. As the podcast explains, the price of carbon based products and services will increase due to companies raising prices to offset the new costs – costs that would have now been capturing the full environmental costs of carbon. Yet, since the ‘rule’ doesn’t physically exist, it has little ability in of itself to change behavior of people unless there is some mechanism to disseminate knowledge that the rule exists and that it will be enforced. That mechanism is what we call the (large and small) media and word of mouth.

A large part over the battle for a carbon tax is to capture what ‘knowledge’ should be promoted. Here, we can view ‘knowledge’ as culturally produced through debate via youtube videos, newspapers, blogs (such as this) and the like. Just as in cultural discussions regarding women’s, civil, and gay rights have led to ideas and opinion, some more well argued than others, we see this playing out today in our everyday lives.

Upon introduction, enforcement is the otherside of the ‘rule’ of a carbon tax – it does incorporate resources as it takes man-power and equipment to monitor and enforce the new rule. Thus, it takes a certain amount of power to bend others to your will. Fortunately for most people, we have lent our representative  power to democratic governments that balance power.

Why is a carbon tax even necessary? Do we need another tax? Isn’t this just big government?

Yes, in this case a carbon tax is necessary and here’s why. Most proponents of a carbon tax will start by stating we need to save the natural environment, which isn’t necessarily untrue but it is poor argument for a carbon tax. Instead, a carbon tax and refund scheme is a way to change incentives by altering what sociologists call ‘structure’ or the form and shape of behavior. Since carbon emissions are harmful in the aggregate, they demand action in the aggregate. But each individual cannot readily monitor their own small contribution. This makes it difficult to persuade a complex society to alter behavior through typical cultural pressure, especially when time is of the essence. In certain sub-cultures that place considerable value on the natural environment, a carbon tax is not necessary as they are willing to purchase carbon free products and services. However, since they represent such a small proportion of people, their actions have little over all effect on the environment and cannot support enough demand to create a competitive business environment.

A carbon tax and refund scheme is a strong form of institutional power that can drastically alter individual behavior. But rather than this be ‘big government’ being wasteful, we should see this as a move towards equality, just like successful women’s rights, civil rights, and gay rights in the recent past. A social movement that moves towards equality breaks down another nature/culture barrier, which has only increased our freedom.

However, a carbon tax has very little chance of passing in the USA. Why? The main political discussions that are playing out all over the world now represent the power differences between politics and incumbent industry. Politicians seem to place more value at the moment on keeping the status quo to appease industry and the public. Social movements (like 350.org)  play a critical role of mobilizing support to change perceptions of appropriateness of fossil fuels.

If the battle can be won, and a carbon tax installed, this would have profound implications for environmental entrepreneurs (people blending environmental and commercial values). As people learn of the new ‘rule’ their knowledge and ability to reflect on the changes allows for new activation. Some well positioned or motivated individuals will see new opportunities resulting from cultural change and promotes new ways of producing emission free energy, and products and services with a low carbon impact.

Coming full circle, as entrepreneurs under the new regime begin to take small chunks out of current markets and replace them with more socially valuable products and services, they add value to an economy. The positive feedback begins as more investment and more entrepreneurs enter into competition, driving down the costs of emission free products and services and adding economic growth.

Reflecting upon the processes of entrepreneurship taking this holistic cultural view, we see that entrepreneurship is a response, as opposed to technological solutionism,  to changing cultural beliefs and preferences in how we value the natural environment. Just as leaders of social movements rally support for environmental ideals, entrepreneurs can rally support of commercial interests. Their actions close the loop and bring profound cultural and technological change to society. Though, sustainability standards will become necessary to ensure that dirty fossil fuels are not replaced with other forms of environmental degradation.

So, get out there and support your local environmental group and let’s see a world wide tax on carbon and a movement towards valuing the natural environment!

Anthony Giddens’s Structuration Theory

Much of what underlies a cultural approach to entrepreneurship depends on existing sociological and anthropological theories. One important theory is Anthony Giddens’s Structuration Theory (ST). I’ve been thinking a lot about what the implication of ST are for understanding the nature and processes of entrepreneurship.

Entrepreneurship flourishes globally – its just not the right type

Business people in the United States love to proclaim that the country has the most entrepreneurial citizens in the world. This popular myth has traveled the globe where it is widely held in Europe. Here, politicians often debate how to bring struggling economies out of recession and how to promote entrepreneurship. Yet, what if I said entrepreneurship is flourishing in these countries, indeed in every country in the world at more or less the same rate? Crazy, right?  

In 1990, economist William Baumol published a seminal article outlining three distinct types of entrepreneurship – productive, unproductive, and destructive. Productive entrepreneurship are individuals working in the open to create value in an economy by offering some new product or service that someone else would like. “Value” here does not have to mean a strictly economic value, profit and jobs, it can also mean helping to solve complex environmental and social problems that all of us value. When we speak of entrepreneurship in academia or in the public, its this kind of entrepreneurship that receives praise. A thriving private sector, made up of a healthy balance of small and medium enterprises and large enterprises is widely viewed as discouraging monopolies, lowering prices, and benefiting everyone. 

Baumol argues that unproductive entrepreneurship, on the other hand, adds no value to the economy or society. People who seek to maximize their own material wealth by exploiting or creating loopholes in laws and regulations, take enormous fees for questionable services, and demand bribes for basic services do not add value to a society. Instead, this form of entrepreneurship takes value out of an economy by removing finances that could have gone to more productive resources. Multinational corporations, for instance, often hire lawyers to act as entrepreneurs to identify global tax loopholes, which has been the subject of considerable debate recently.

Lastly, destructive entrepreneurship can be associated with black market opportunism, the mob, and the like. In this case, individuals not only seek to maximize their wealth but they do so by selling social disastrous products and services. A case in point are the drug cartels competing for market share in Mexico. Entrepreneurs in these cases employ others to protect supply chains, subvert international law and order, and offer products that are addictive and socially destructive.

Notice, though, that all three types of entrepreneurship are entrepreneurship.  They have passionate, creative, visionary people who identify some opportunity to meet the ‘needs’ and ‘wants’ of a community. The social entrepreneur who founds an NGO that supply fresh water technologies to impoverished communities, the lawyer who charges an extraordinary fee to creatively reduce taxes for its multinational client, and the human trafficker who manipulates and terrifies women into the sex industry all have something extraordinary in common – their ability to critically think, find opportunities, and leverage others for resources. 

What Baumol teaches us, those interested in entrepreneurship as an engine of social change, is that what is important in entrepreneurship is not so much the individual and their mental capabilities, but the institutions – political, economic, cultural – that they are embedded in. Here a ‘cultural turn’ in entrepreneurship research can help focus outwardly towards understanding the history of a trade in a particular place, the political organization, laws and regulations, economic incentives, and cultural habits that direct individuals towards productive, unproductive, and destructive forms of entrepreneurship. Surprisingly, the academic field of entrepreneurship is dominated by psychologists and economists who aim to understand entrepreneurship by removing her from her institutional context.

Taking an outward, cultural approach helps to glean situations where the state and big business collude, as is the case in much of the Middle East, promotes unproductive or destructive entrepreneurship. The intertwining of politicians and big business men working within (un)democratic political institutions are entrepreneurs, exploiting the game to their own ends. Unsurprisingly, the marginalization of communities via the stripping of culture, unequal economics, and weak political institutions directs more people into destructive forms of entrepreneurship to make ends meet. 

Entrepreneurship is alive and well across the globe – its just the type of entrepreneurship that varies.

 

 

The Myth of Objectivity and Positivism in Entrepreneurship Research

Entrepreneurship scholars, by in large, research the entrepreneurship process and its outcomes primarily through measurement of some indicators, thus relying on assumptions of (big O) Objectivity and Positivism. Recently, and with considerable hype, these social science academics have developed the Global Entrepreneurship Monitor (GEM) with the aims to survey potential entrepreneurs on their potential to start new businesses, the actual start-up of new businesses, and linking these to economic growth indicators across many nations. In this first blog post, I aim to convince the reader that, as opposed to Objectivity and Positivism underlying entrepreneurship scholarship, the understanding of entrepreneurship and its role in revolutionizing culture demands a cultural approach.

Objectivity is, few would argue against, foundational for modern scientific thought. Whether it be discovering and measuring the inner workings of atoms, bacterial eco-systems, animal behavior or even solar systems, what is important is the ability of the scientist, or scientific team, to accurately and precisely measure the object under question without their own bias and motivations playing a key role. Any theory of causality – where something influences another thing – is said to be only knowable by science if we can build models to explain a phenomenon repeatedly. Indeed, a belief in objectivity reigns supreme in not only the natural sciences but also most social and political sciences.

Comte argued that, much as the physical world operates according to gravity and other absolute laws, so also does society. Many sociologists, economists and political scientists attempt to explain and predict socio-economic conditions or political elections based on a series of ‘objective measurements’. Their Positivist goal is to find universal ‘laws’, like the natural sciences, that connects actions or policies to some significant outcome. Theodore Porter in his book Trust in Numbers points to the dominance of Objectivity and Positivism in social science when he writes: “Objectivity arouses the passions as few other words can. Its presence is evidently required for basic justice, honest government, and true knowledge.” Today, objectivity and positivism are also the scientific mode of choice when researching something even as fuzzy as entrepreneurship.

Leading scholarship in entrepreneurship promotes the idea that opportunities for entrepreneurship are ‘out there’ just waiting to be seen and captured by visionary people. And, to a large extent this is true. There does seem to be many inefficiencies in markets where basic needs and wants of people are not being met, even though they would be willing to pay a price if someone would come along and offer it. Yet, this basic argument for objectivity and positivism misses a number of critical insights into the nature of entrepreneurship (ontology) and whether entrepreneurship is objectively measurable.

Entrepreneurship is action. It is a series of decisions and practices set up to champion some opportunity. The decisions and practices setup during activities, whether its to find a buyer or build a new organization, are what it means to act entrepreneurially. Yet, these actions are contingent upon context; the physical material necessary to make products, the people needed to provide a service, what types of products and services, who has the resources, etc. These actions are linked to the particular ‘need’ or ‘want’ of a community. What is more, what people in society crave or need varies widely across cultures.

In East Asia, for example, people place considerable value on rare African rhinoceros horns that are seen as a remedy for a variety of health issues. The value is so high that illegal entrepreneurs work to poach these animals, obtain their horns, and sell them on the black market. This cuts to core of how these two distance cultures, East Asian and African, view these animals and their inherent value to others. In another example, in the US states of Colorado and Washington marijuana has been recently granted legitimate status, prompting entrepreneurs to rush to offer it to a pot-smoking sub-culture. Meanwhile, in Amsterdam, marijuana has a decriminialized status – a gray area between legal and illegal – where entrepreneurs start up ‘coffeeshops’ to meet an international pot-smoking sub-culture. How these two cultures view marijuana isn’t static, but dynamic leading to vastly different ways of acting entrepreneurial. As a result, comparing entrepreneurship across cultures and nations as in the GEM database seems paradoxical and problematic.

Defining entrepreneurship as the nexus of individuals and culturally produced opportunities means that comparing entrepreneurship processes across opportunities compares apples to oranges. The first pillar of discovering precise and accurate measurements for Objective and Positivist science has its cracks.

Just as significant, what a community ‘needs’ and ‘wants’ often is historically bound. The rise of the internet has created a new platform for entrepreneurs to sell products and services on a global marketplace. This did not go unnoticed as entrepreneurs, supported by Silicon Valley culture, flooded the marketplace with new organizing practices, products and services in the early 2000s. After the dotcom bust, many of these opportunities were shown to have significantly less value than previously thought. Elsewhere, such as in Africa and Latin America, the internet is only now gaining access and influence, which has translated into a number of new concepts and businesses harking back to the Silicon Valley dotcom days. Yet, if we compare ICT entrepreneurship in 2001 in California to ICT entrepreneurship in Nairobi in 2013, we can see different uses, different products, different opportunities and challenges. This complicates objective entrepreneurship research as history, place, and culture play a significant role in constraining and enabling entrepreneurship. Thus we may not be able to compare entrepreneurship across time and place as easily as the GEM database would lead us to believe.

Additionally, identifying what others ‘need’ and ‘want’ involves a complex mix of emotions, knowledge and empathy, which points to the subjective aspects of entrepreneurship as well as the researcher herself. First, the evaluation of one’s own surroundings and situation, cultural and economic, vis-a-vis a another in a potential market is an internal act. Perception of circumstance, life history and orientation, play a key role in identifying and acting to meet some ‘need’ or ‘want’. What is ‘in here’ cannot be capture accurately and precisely across individuals in the aggregate since identities change and so does circumstance. Second, when entrepreneurship researchers ignore the sentiments and identities of entrepreneurs, they insert their own interests and beliefs into the research findings.

Objectivity in entrepreneurship research is a myth – it is used to invoke authority on the topic and to professionalize the area in relation to other disciplines.

Connecting what is ‘out there’ to what is ‘in here’ demands a cultural approach to entrepreneurship.

A cultural approach to entrepreneurship warrants some perspective of the thorny concept of culture. I have recently used the Institutional Logics Perspective (ILP) developed by Pat Thornton, Willy Ocasio, and Mike Lounsbury in an attempt to bring a structuralist and systematic approach to entrepreneurship and culture. While many scholars argue for a more contexutalized approach to entrepreneurship, few have been able to identify an approach that challenges economic and psychology orthodoxy.

Born out of Anthony Giddens’s Structuration Theory, the ILP approach provides a way to conceptualize culture, identify key institutions (rules, norms, beliefs), define them, and build expectations of how individuals and organizations will use and react to them. What is interesting is the way individuals can subvert salient institutions, build collectives, and  bring about cultural change. We see this, for example, with entrepreneurs challenging fossil fuel extraction orthodoxy by supplying customers with renewable forms of energy.

Using this approach to culture, one can being to understand how entrepreneurs make sense of their cultural surroundings, identify opportunities, organize to champion opportunities in a particular time and space.

It is my hope that the field will take a ‘cultural turn’ much like other social science disciplines. If it loses its trust in numbers at the aggregate and focuses on entrepreneurship in context, the future looks bright for the field.

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