GEM Latest Vintage: More Institutional Analysis

For those who are interested in entrepreneurship studies, the Global Entrepreneurship Monitor 2007 executive report just came out a few weeks ago (see here). I have had reservations about the goal of the GEM in the past (see here), but this new vintage is more interesting than before. It includes the usual measures of entrepreneurship that the GEM has developed over the last decade (nascent entrepreneurship, early-stage entrepreneurship, etc) along with an interesting discussion of the role of institutional conditions (GEM looks at domestic conditions as well “global institutions” such as WTO, etc). GEM claims to be more than just about startup rates: it attempts to measure the “entrepreneurial spirit” and entrepreneurial activity at different stages of a business life.

Interestingly for Kirznerian economics, GEM tries to account for entrepreneurial perceptions, perceived opportunities, and entrepreneurial intentions. Although I am not sure how much of these issues can be accounted for empirically (and the report provides a lengthy discussion of the relationship between perception and activity), an attempt to get some data might offer interesting insights into what people currently do.

While GEM is by and large a good idea, it is clearly founded on the idea that measurement is the (only?) source of scientific knowledge. As Austrian economists understand it, the phenomenon of entrepreneurship is largely a phenomenon of the mind. It is about alertness, perception, and imagination. What can be measured is only the tip of the iceberg and may give a partial and/or false account of what really goes on (in the entrepreneurial market process).

Comments

[matthew mueller]

This is somewhat off topic, but since you mentioned "Kirznerian economics", I thought I would share with the blog what I have found interesting recently in the literature.

I just finished reading Coase's article on the Nature of the Firm and in it he uses the entrepreneur as an agent who is the distinct opposite from those who conduct their transactions through the market. In a Coasian world, a world in which transaction costs are taken into account, the entrepreneur is someone who has superseded the market and directs the allocation of resources not through traditional economic forces, but through administrative control. The entrepreneur, in this sense, is the very antithesis of market exchange.

Now this interpretation seems to me to be the correct one. After all, the entrepreneur directs in a hierarchical fashion the allocation of resources. The market, on the other hand, operates through a series of transactions that are guided by the price system. It is important to remember that entrepreneurs exist because in some areas it is more economically prudent to ignore the price system and organize hierarchically. Kirzner would seem to be incorrect in suggesting that entrepreneurs use the price system to bring the market closer to equilibrium by eliminating errors that exist but hitherto eluded the attention of other market agents. Now Kirzner does attack Coase's analysis near the end of his "Competition and Entrepreneurship", but does raise the points I have articulated here at all.

Did Kirzner simply miss what Coase was really trying to say or is my interpretation of Kirzner and Coase's work incorrect?

[libertyfirst]

O.T. Weeks ago Prof. Boettke suggested the reading of Kirzner's "The meaning of the market process". I finished it yesterday and it's a wonderful book. Thanks for the advice.

[Frederic Sautet]

Coase's view of the entrepreneur is a traditional one. The entrepreneur is a manager who organizes resources within the firm. Kirzner looks at the entrepreneurial *function* and argues that this function is about discovering gaps between the prices of factors of production and potential output. Coase doesn't look at this function at all, he just argues that there is a cost to using the price mechanism and once this cost is taken into account, it may make sense to internalize the organization of production. But Coase's view is compatible with an equilibrium approach, ie. a situation where the gaps in prices have already been discovered. Kirzner's analysis looks at how we get there in the first place. See chapter 1 of my book for a detailed analysis of Coase and Williamson vis-a-vis Kirzner's theory.

[matthew mueller]

Mr. Sautet,

Thank you for the reply. I think your description of Coase's and Kirzner's understanding of the entrepreneur is correct. Kirzner is very much concerned with the "entrepreneurial function", and this is why his work is so insightful and rich.

However, I think you are mistaken in your interpretation of Coase's view of the firm. I am saying this just from the sentence you posted above and not from your published work which I am sure is far more detailed and complete. Let me just go off what you wrote above.

You write that Coase's view "is compatible with an equilibrium approach, ie. a situation where the gaps in prices have already been discovered." I am not so sure this is correct. In section II of Coase's 1937 essay he gives the following two reasons for the existence firms:

1. The cost of discovering what the relevant prices are; and

2. The cost of negotiating and concluding contracts.

Now clearly the first reason provided by Coase for explaining the existence of firms is inconsistent with your view that Coase's understanding of the firm is an equilibrium one, that is, one in which the relevant prices HAVE been discovered.

Now this error (forgive the strong language) on your part is in some sense understandable. Coase for some reason chose to spend the rest of the essay concentrating on the costs involved in establishing and enforcing contracts. Now while this is a very important point, it makes little sense to discuss these costs without first resolving the problem of discovering what the relevant prices are. Coase just briefly mentions this point and then ignores it completely in the rest of the essay. In my view, it makes little sense to speak of the costs of contractual arrangements when the relevant prices are still unknown. How are we to know the exact costs of competing market arrangements when the relevant prices have not yet been discovered?

This to me is a far more important point, and one that I would be happy to discuss with you in greater detail, either on here or through email.
(miller888sd@yahoo.com). I would like to hear your thoughts on this. And I do plan to read your book. I have been meaning to purchase it for some time now. Thanks for the reply. I look forward to your comments.