SUMMARY & ANALYSIS

William Baumols article entited, Entrepreneurship: Productive, Unproductive and Destructive, is an

interesting body of research of work that chronicles the growth, evolution and path taken by entrepreneurs
throughout the centuries. The central argument put forward by Baumol is thatwhile the total supply of
entrepreneurs varies among societies, the productive contribution of the society's entrepreneurial activities
varies much more because of their allocation between productive activities such as innovation and largely
unproductive activities such as rent seeking or organized crime. This allocation is heavily influenced by the
relative payoffs society offers to such activities.
At the core of this theme was the motivation of relative payoffs. Baumols view is that while the
evolution of the entrepreneurs can be linked to several factors, profits/money/earnings stands as the key
factor determining their entrepreneurial path. The article substantiates its hypothesis by highlighting the
various rewards and incentives that have impacted entrepreneurs in different times and within notable
historic economies.
Baumols article makes reference to the Schumpeterian model as a means of propelling his
position. The notion of whether Entrepreneurship is Productive, Unproductive and Destructive spawns from
the Schumpeterian model - the tenet that defines and encompasses the path of the entrepreneur.
According to Schumpeter, the entrepreneur embraces and follows a series of innovations which the article
defines as the carrying out of new combinations. These include an introduction of new products, deriving
a new method of producing the goods/services, creating a new market, developing new supply sources or
new firm and industry organizations all of which are deemed as productive forms of entrepreneurship.
However, Baumol posits the view that Schumpeters model does not adequately go the distance in
explaining why entrepreneurs engage in their activities. To Baumol, Schumpeter should have to extend his
assertions to also include why entrepreneurs are allocated to a certain task/area, in other words what
motivates them. Baumol believes that entrepreneurs pursue the benefits i.e. they follow the path that best
leads them to the rewards.
Baumol then mentions several notable occurrences throughout history to corroborate the notion
that, the allocation of entrepreneurial activities are preceded by the potential rewards as well as a set of
rules govern how those rewards are acquired. To Baumol, entrepreneurs follow a path; if they believe there
is a rule that dictates how wealth and profits is acquired, they will embrace this path and take it. This
underscores the first two propositions put forward by Baumol. The propositions that were asserted are:

1. The rules of the game that determine the relative payoffs to different entrepreneurial activities do
change dramatically from one time and place to another. In other words, the rewards pursued by
entrepreneurs are not constant; they evolve and vary in different times and places.
2. Entrepreneurial behavior changes direction from one economy to another in a manner that
corresponds to the variations in the rules of the game.

Baumol supports these propositions with notable periods throughout history, Medieval China,
Ancient Rome and periods of growth within the Middle Ages. In China, productive entrepreneurship and the
route to wealth and prestige was through imperial examinations, whereas status was denied to those
subjects that engaged in commerce or industry. Consequently, the ambition and quest of the populace was
to be able to sit those examinations as a means of social mobility. Political money making was the primary
activity in Rome with the political path being the main route to prestige and wealth, while commerce and
industry was typically pursued by former slaves (freedmen). The pursuit of wealth and prestige in the
Middle Ages followed the route of military activity, as this was a prime gateway for land acquisition. As such,
this was the direction of those seeking to acquire and amass their fortunes.
From the articles reference to notable historic occurrences, we can deduce the importance of the
systems within the economies and the rules of the game that governs how rewards are acquired. Baumol
asks the logical question, that is, if entrepreneurship were more focused on the quest towards position and
status and little on the means to get it, then the structure of the eventual payoffs would be the determining
factor that affects entrepreneurial activities. As such, Baumol believed it was the laws of the game that
defined whether the activities were deemed productive or unproductive and even destructive.
From this position, Baumol puts forward his third proposition:

The allocation of entrepreneurship between productive and unproductive activities, though by no

means the only pertinent influence, can have a profound effect on the innovativeness of the
economy and the degree of dissemination of its technological discoveries.

Once again, Baumol makes reference to the economic events of ancient times to support this proposition.
In was noted that in China and Rome, while the latter had most advanced technologies, they were not used
productively. Again, Baumol sees the reason for this being attributed to the rules of the game and the fact
that these rules did not favor productive entrepreneurship.

Baumol concludes by once again highlighting the deficiencies of the Schumpeter Model. It wasnt
denounced; Baumol merely believed it was inadequate and it required an extension to encompass factors
that determined allocation of entrepreneurship to be complete. Baumol again reaffirmed his stance that it
was the rules of the game or the systems within the economies that determine the benefits/payoffs that
would be received. And these rules also dictated the path taken as well as what would be defined as
productive vs unproductive entrepreneurship.