What is entrepreneurship? Is it self-employment? Is it firm creation?

So let me just tell you a story. About twenty years ago, or maybe longer, a reporter went to Venezuela and wrote an article. He said, “Isn’t it wonderful there is all this entrepreneurship in Venezuela? They are all selling fruits on the corner. They are selling minutes on a cell phone”. And the answer was that all this was terrible, because the economy was doing badly and all these people had lost their jobs. The point of this story is what we think entrepreneurship is. If we think about it as self-employment, that’s actually not a good thing. People who work for themselves are usually less productive than if they work for an organization. The other interesting thing is that a lot of people define entrepreneurship as owning a business, that is, anybody who owns any sort of business, whether it is selling fruits on the corner or running General Motors, is an entrepreneur. But that is not really very helpful. From an economic point of view, entrepreneurship is about trying to create wealth, and to do that you have to change something in that economy. In connection with that definition, you can then identify three types of entrepreneurship: productive, unproductive, and destructive. In all these cases, I think of the entrepreneur as a person who is going to do something to make money. Whether you are going to help the country or not is an important question. Let us think of Jeff Bezos and Amazon. Jeff Bezos got rich, and as he got rich he made America richer too. That is productive entrepreneurship. In unproductive entrepreneurship, I use my abilities to take something from you. In this type of entrepreneurship, the country doesn’t get any better off. We just fight over what we already have. In destructive entrepreneurship, you make the country worse off. You are getting rich, but you are making things worse for the country. From a general point of view, the term is used today in a very vague way. Entrepreneurship means to undertake something, to do something. So, anyone who tries to undertake something can be thought of as an entrepreneur. Think of a rancher, someone who goes out into the Amazon, clears the land, starts a ranch, raises cattle. Generally speaking, people who produce something are usually thought of as entrepreneurs. If you produce something, you can make the country and the economy better off. Now, there are a lot of places where the entrepreneur, that person who does something, just wants to redistribute. In that case, they don’t really improve the overall well-being of the country.

How important is individual agency as compared to knowledge and institutions for entrepreneurship to contribute to economic growth?

We know that both knowledge and institutions are important. Institutions give direction or incentives to entrepreneurs. Institutions just create the rules under which people will take action. They determine the reward structure: who gets to create, who gets to keep the rewards. Overall, institutions determine whether you will have productive, unproductive, or destructive entrepreneurship. Good institutions encompass good property rights, good conflict resolution, and things like that. But they are just the rules, and they don’t create anything. Knowledge is how something is done. So knowledge is important. Institutions give agents the incentives and knowledge gives them the tools. You need both. Neither knowledge nor institutions are actors. The agent is the actor.