Baumol and an Innovative View of Entrepreneurship 9.0
Note: This post has been re-written in a more accessible and longer style. Please click here for link to Post 130, the better version.
Professor Baumol’s paper on entrepreneurship gave me an epiphany – a link between the two biggest problems in the Philippines, corruption and poverty. His paper also gave a hint at a possible solution to the problems in one go. This is why Professor Baumol is the first economist posted by SYNTHESiST.
The two problems are seemingly intractable. Corruption is seen as evil and solvable only by changing the spirit. Poverty is seen as deep-seated and solvable only by major changes in society.
My epiphany comes in four parts.
Firstly, there is an amount of entrepreneurship potential in all societies measured as inputs like creativity, native intelligence, initiative, and will. Filipinos have these in full measure (sadly, the evidence is more often seen from how Filipinos are overseas.) This is the good Professor’s first insight.
Secondly, based on the inputs above, one can say that the thieves who are never caught, the fixer (kotong) who regularly plies his trade in the halls of power, the survival entrepreneur like takatak boys who sell cigarettes on the street, and the successful businessperson are all entrepreneurs;
Thirdly, what makes them different is not inherent badness or goodness but – here’s Professor Baumol’s second key insight – the pay-off table of incentives and penalties they face from where they stand each day. The innovation in the Professor’s paper is that this pay-off table can be changed by a sound policy set. This policy set can start to open doors from poverty and close others to corruption.
Finally, when the pay-off table is changed, the congruent institutional re-alignments need to be also made for the pay-off table to happen. For example, countervailing institutions, among others, like the Fourth Estate (the Press?) and Fifth Column (civil society) have to be strengthened.
This approach treats corruption and poverty as problems to be solved in the present (and not good or bad things which is the domain of, sometimes, worldly priests). The solution need not tear our society apart. The long-term common purpose of improving our society can be used to pull people of different persuasions together. This is a tough political act but may be possible given the urgency of our common need.
From Cororaton (2002-01), the contribution of technical progress is not able to raise the country up (More, later). Only when an army of productive entrepreneurs is freed to contribute technical efficiency as suggested above will the country be able to free itself from poverty.
An army of entrepreneurs, out of a multitude of the willing, is needed to bring the Philippines out of its deep hole. Let us discuss how we can free up this potential.
(Please click the image or here for a hyperlink to the Journal of Political Economy, University of Chicago. The article appeared in JPE, 1990, vol. 98, pt.1).
__________________
Updated March 20, 2011: If you are interested to receive similar posts as this, please click ‘Like’ on Facebook SYNTHESiST page as below.
Click image to link to SYNTHESiST at Facebook.
Please click this image to move to Facebook.
As in Facebook, the Page allows more interaction among friends. You can also post status topics for discussion as you wish.
Finally, clicking on ‘Like’ will also send you notification of each new post.
Hello!! Here I am…
So the solution is to change the so-called payoff table of incentives and penalties. My simple mind interprets that to mean things like making it expensive for offenders to get caught — which implies a justice system that is working…but that in itself is corruption-ridden too. Another idea is to increase the salaries of civil servants so that they need not resort to corruption? Ganoon ba? Is that what is meant by payoff table?
JJ, You are half correct as there are two parts to the post. Part I refers to a system of incentives and penalties that (Part 2) favors moves toward innovation/entrepreneurship. Part 2 is just as important as Part 1 in writing policy, ie a salary increase as incentive is not a priority but is in fact counter-productive to turning citizens into entrepreneurs.Reducing business taxes so entreps become more indifferent to tax evasion is ok as incentivve. Strong penalty for corruption is recommended to narrow that door for unproductive enterprise. And so on …
No erasures, in addition, tighter rules like creating a special category of enterprise for professionals like lawyers, accountants, doctors to register and use to practice their profession (and pay the lower taxes) is a form of penalty. For example, this should require that offices be designated – even for home practice. This will drive enforcement of record-keeping and tax collection. I think it will force people to bbe entrepreneurs.
What you say about corruption is true that it can only be solved by changing the spirit. What you say about changing certain ways in our society or in our government though made me think. Though there can be some changes in society that could give benefit to those in power to give them an incentive not to resort to corruption and in turn causing poverty, there is no assurance that in changing the system of how things are done now that corruption still won’t manifest itself in our society. It’s true we have the makings of a great country yet it’s the corruption and the influences around us that are holding us back. As you might notice, most people who are elected are either well known actors or celebrities who appear in some form of media. This shows me questionable leadership and an easy way to get into high ranking position: Be Famous. One way to truly purge or at least lessen the blow to society is to select individuals who are competent and are known to value their morals. This can be done by looking at past projects done by the said individual and evaluating whether he/she is competent or not. This solution of course entails proper education or a good sense of judgement; the latter in my opinion, being more common at our present time. There is hope yet for this problem to be solved.
Shado, Democracy is hard work. Unless we make a real effort, the people gets the government it deserves. The question has a long history. Oddly enough, this long history is giving me some optimism that we will be able to work things out. Filipinos just happen to have a short history as a people.
Your concern was asked in 2AD by Juvenal in his Satires, “Quis custodiet ipsos custodes?” or Who guards the guardians themselves? At that time when rRome had guardians and slaves, the answer was other senior guardian leaders. In the present Phiippines, that does not seem to work.
In 1841, Thomas Carlyle said the Press was the fourth estate to provide checks and balance to the first three: the clergy, the nobles and commoners. In the present Philippines, that does not seem to work either.
Some accredit a Fifth Column for insurgents, but without a clear alternative ideology, that is not working either.
In modern times, John Kenneth Galbraith in 1952 presented the concept of “countervailing power” beyond the three branches of government and the press. This is a working model for us. Unfortunately, we have been able to use it for radical changes like the People Power revolutions.
The countervailing power will be ad hoc coalitions based on NGOs and civil society groups for specific issues. What we need are a cadre of coalition leaders who are convincing enough to put groups together in specific-issue coalitions as needed.
For example I have asked a friend to form an army of entrepreneurs to be one such group; I believe in coalition with other groups it can be a potent agent of change.
Maybe, I will organize innovators around the issue of a stable peso value to make innovation rewarding. So we will learn as a people to “agree to disagree” in incremental change rather than throw off the government in spurts. If we discover this formula and work hard, we are a long way to improving our governance as a democracy.