William Baumol’s Innovative View of Entrepreneurship 130.0

Corruption and poverty are problems to be solved

Professor William J. Baumol gave me an epiphany. His 1990 journal – Entrepreneurship: Productive, Unproductive and Destructive - showed me a link between the two biggest problems of 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 was the first economist posted by SYNTHESiST in Post 9.0.

(Note: This is a re-write of a significant early post in the more recent style and after taking out an earlier self-imposed constraint on length. I have an ongoing project to rewrite all significant posts in this friendlier, SYNTHESiST style.)

Two problems. For the Philippines, 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 through radical changes in the class structure of society.

Corruption is often defined as evil by some purveyors of sanctimony (though many of this ilk are just intellectually indolent, I think). As such, they consider corruption is embedded in Filipino values and thus solvable only by a change in spirit or culture.

The good Professor points to a third way where a change in policy set (and stricter implementation -my take) changes behavioral norms. The evidence of overseas Filipinos adapting to a more systematic environment proves to me the correctness of Baumol’s insights.

Unfortunately, changing the policy environment to one that is more meritocratic and systematic threatens these purveyors as it attacks their favored position in the current society. Hence, they point to an alternative solution that has almost no chance of working as it is not of this world. Cleverly, it enhances their position as arbiters of good and evil and relies on charity, rather than empowerment and equal opportunity, to move the country forward.

The epiphany. My epiphany comes in four parts:

Firstly, there is a similar amount of entrepreneurship potential in all societies measured as inputs like creativity, native intelligence, initiative, will and tenacity. Filipinos have these in full measure but 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 fixers (kotong) who regularly ply their trade in the halls of power, the takatak boys who sell cigarettes on streets, and the successful businessmen are all entrepreneurs.

Thirdly, what makes them different is not inherent badness or goodness– here’s Professor Baumol’s second key insight—but the pay-off table of incentives and penalties they wake up to every morning. The innovation in the professor’s journal is that this pay-off table can be replaced by a sound policy set that can open doors to meritocratic work that leads out of poverty and close other doors to corruption. I share this optimistic view of human nature as latently good.

Finally, when the pay-off table has been changed, the congruent institutional realignments also need to be put up and supported for the pay-off table to become reality to all, the fount of realizable opportunity. Corruption needs to be investigated case-by-case and punished according to the law. Countervailing institutions like the Fourth Estate (the Press) and the Fifth Column (civil society) have to be strengthened to make sure this happens. Incentives for innovative entrepreneurship to reinforce merit included into policy.

The Third Way. This approach treats corruption and poverty as problems to be solved in the present and not good or bad things to be rewarded after death that is the domain of some, often worldly clerics (Excuse me, real pastors of the flock!).

Also, this solution need not tear our society apart as is the hidden assumption behind ideological dialectics.

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.

Only when an army of innovative entrepreneurs is freed to add value as total factor productivity in an environment of meritocracy as suggested above will the country be able to free itself from poverty.

This army of innovative entrepreneurs, out of a multitude of the willing, can bring the Philippines out of its deep hole.

Please click here for a hyperlink to the Journal of Political Economy, University of Chicago. The article appeared in JPE, 1990, vol. 98, pt.1.