I knew him for both of these things, but there’s an even better reason that readers of Spoiler Alerts should be familiar with Baumol: He wrote one of the greatest papers on entrepreneurship, and it has never been more relevant than in 2017.
Baumol’s 1990 Journal of Political Economy paper, “Entrepreneurship: Productive, Unproductive, and Destructive,” makes an elegant but oft-neglected point about the relationship between entrepreneurs and society. Growth slowdowns are often attributed to a dearth in entrepreneurship. Baumol’s observation was a simple one: The problem was not necessarily the supply of entrepreneurs but how the rules of the economic game directed the energy of entrepreneurs:
Entrepreneurs are always with us and always play some substantial role. But there are a variety of roles among which the entrepreneur’s efforts can be reallocated, and some of those roles do not follow the constructive and innovative script that is conventionally attributed to that person. Indeed, at times the entrepreneur may even lead a parasitical existence that is actually damaging to the economy. How the entrepreneur acts at a given time and place depends heavily on the rules of the game — the reward structure in the economy — that happen to prevail. Thus the central hypothesis here is that it is the set of rules and not the supply of entrepreneurs or the nature of their objectives that undergoes significant changes from one period to another and helps to dictate the ultimate effect on the economy via the allocation of entrepreneurial resources.
Baumol suggested that the rules could be structured in such a way so as to enable entrepreneurs to profit from their connections with the state. This could range from lobbying for rules that privilege the entrepreneur to securing a state-sponsored monopoly. Baumol described this as “unproductive entrepreneurship.” Others might call it rent-seeking.
This kind of entrepreneurship is obviously different than the more productive forms of entrepreneurship associated with, say, Silicon Valley:
If entrepreneurship is the imaginative pursuit of position, with limited concern about the means used to achieve the purpose, then we can expect changes in the structure of rewards to modify the nature of the entrepreneur’s activities, sometimes drastically. The rules of the game can then be a critical influence helping to determine whether entrepreneurship will be allocated predominantly to activities that are productive or unproductive and even destructive.
Unfortunately, it would appear that the kind of entrepreneurship he has unleashed is the unproductive kind. Consider, for example, this New York Times story on what Jared Kushner’s family business did this weekend in China:
On Saturday afternoon, Mr. Kushner’s sister Nicole Meyer made a pitch to attract $150 million in financing for a Jersey City housing development, known as One Journal Square, to more than 100 Chinese investors gathered at the Ritz-Carlton Hotel in Beijing.The money would be provided through a much-criticized government program known as EB-5 that awards foreign investors a path to citizenship in exchange for investments of at least $500,000 in American development projects.Speaking in a ballroom, Ms. Meyer said the project “means a lot to me and my entire family.” She mentioned her brother’s service as chief executive of Kushner Companies, the family business from which he resigned in January, saying he had left to serve in the Trump administration.
It should be stressed that Jared Kushner has stepped away from any role in his family’s firm. The thing is, as the Washington Post’s Emily Rauhala and William Wan note:
The event underscores the extent to which Kushner’s private business interests have the potential to collide with his powerful role as a top official in his father-in-law’s White House, particularly when it comes to China, where Kushner has become a crucial diplomatic channel between Beijing and the new administration.While Kushner has reported divesting from elements of the family business, including the specific project that his sister pitched in Beijing, the session Saturday demonstrated that the company is perceived as enjoying close ties to the Trump administration. Ethics laws prohibit government officials from profiting personally from their public-sector work.
Well, I’m sure that investors are told that the Kushner business wouldn’t have any preferential treatment under President Trump. Oh wait:
A follow-up New York Times story by Keith Bradsher, Ailin Tang, and Jesse Drucker makes the allure for Chinese investors pretty clear:
Like many American firms that come to China looking for money, Kushner Companies tried to woo a Shanghai audience with promises of big returns and a path toward living in the United States.But for Bi Ting, who attended the Kushner event on Sunday, part of the appeal was political: Jared Kushner is the son-in-law of — and a powerful adviser to — President Trump. Virtually unknown in China just months ago, he is now recognized here as a deeply influential figure in American politics.“The Trump relationship is an extra point for me,” Ms. Bi said, adding that she and her husband had not decided whether to invest.
So, to review: Kushner Companies is marketing clients on the idea that they can act as a broker to facilitate a pathway to U.S. citizenship, and that their family connections to the Trump administration are an asset. It would appear to be legal, but don’t kid yourself. This is a pretty blatant example of unproductive entrepreneurship.
I don’t mean to pick on the Kushners as the paragons of rent-seeking in the Age of Trump. Even in the first hundred days, there are additional examples ranging from Carl Icahn to Trump himself. The more disturbing prospect is whether these observable forms of casual corruption will beget additional efforts to rewards unproductive entrepreneurship and weaken the norms that constrain it.
There is an irony here. For eight years, conscientious conservatives argued that President Barack Obama’s preference for a bigger state widened the opportunities for corruption, graft and rent-seeking. It would appear, however, that when it comes to unproductive entrepreneurship, Trump has finally found a way for his administration to outclass his predecessors.