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November 07, 2012

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Tim Worstall

"It could be that the costs of organizing production through market contracting has fallen relative to the costs of organizing internally. "

I think that argument could be made, at least in part. Telecoms now cost, essentially, nothing, something that certainly wasn't true 30-40 years ago.

Anonymous

Oh if only life were black and white!

Sometimes the reasons cited by Rick are right, other times Luke is correct. It all depends on the individual and their circumstances.

From a corporate point of view, the decision to employ or to contract (hierarchy v market) is a variant of the "make or buy" decision.

If the market option is selected then (non-trivial) search costs may be incurred. Transaction costs in the form of contract specification, monitoring and invoice processing will also be incurred.

I suspect Rick, who is in HR, would prefer the hierarchy option. His status, power and salary depend on the existence of a large and employed workforce. HR managers are diminished in firms which adopt the market option. It is not in Rick's interests to favour the latter so I would expect him to favour hierarchies over markets.

Hayek was right

Self-employment and entrepreneurship are not the same. The latter is unlikely to happen without a spell, perhaps only briefly, of the former, but the majority lack the latter but seek the former as the end result.

FromArseToElbow

Re Tim's point, the major technological change of the last 40 years has been containerisation, which facilitates offshoring rather than onshore sub-contracting. The growth in developed economy entrepreneurs (whether self-employed contractors or micro-businesses) is negligible compared to the growth of developing economy industrial labour.

The current orthodoxy of buy over build rests on the corporate management fashion for "core competency" and lean production, which came to the fore in the 70s/80s. Both are dependent primarily on supply chain and process efficiencies rather than a thriving ecosystem of Internet startups.

Neil

The main guiding impulse of any sensible small-to-medium enterprise is to tart itself up sufficiently that it'll they can be bought by one of the big players as soon as possible. It's called your exit strategy and it's first thing you write.

The ones that don't do that mainly spend their time down the bank, begging for a bridging loan so they can meet the payroll.

Either way: So much for "control their own destiny".

Jackart

My father, having run an SME bashing metal in the East Midlands once advised me to find a business with no customers, stock or employees. Wise words.

I am self-employed. I have agency. The right to tell corporate drones to fuck off, or remind the compliance department who pays the fucking bills, is worth any loss of earnings.

I am therefore happier.

And I am not sure I am earning less, as I capture more of my productivity.

Luis Enrique

Entrepreneurs are a subset of the self employed, very different from freelancers and such like. It doesnt make sense to conlate the two. Plus I think he's talking about people trying to found large companies, not sole traders. He talks of hundreds of new enterprises, not tens of thousands, which suggests to me larger firms.

chris

@ Luis etc - I don't think the distinction between entrepreneurs and the self-employed is as sharp as you might think:
1. V. few tiny firms/one-man businesses actually do become large ones.
2. The skills of the self-employed - spotting the best markets for their skills, bearing risk etc - are the skills of entrepreneurs.
3. It is possible that an entrepreneur can raise enough capital to start up a big firm, but this isn't likely for the new graduates Luke is talking about. These will often be one-man firms, at least initially.
4. A big source of demand for new firms and for self-employed freelancers is the same - firms' desires to outsource.

Cityunslicker

You just can't ignore the dominance of the service economy in all of this and the move to technology and away from manufacturing.

This will go hand in hand with the points made above by all to a bias towards buy rather than make and also to small services co's rather than big production lines.

But it will lead to underemployment as society is heading that way anyway with technology and robotisation reducing the need for labour to deliver increases in productivity.

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