February, 2016

Baumol's Productive and Unproductive Entrepreneurship after 25 Years

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William J. Baumol’s “Entrepreneurship: Productive, Unproductive, and Destructive” has become a modern classic in development economics and political economy. With the publication of his paper, Baumol forced the economic profession to pay closer attention to the institutional structure within which human action takes place. Institutions are the rules of the game of society, the ultimate determinants of the incentive structure faced by entrepreneurs alert to profit opportunities. Economic development is a function of whether the incentives favor productive activities (such us those aimed at mutually beneficially exchanges) or whether they encourage rent seeking, theft, and conflict. In this paper, we restate Baumol’s simple but radical insight and apply it to the process of economic transition of Soviet Russia from communism to a free market economy. This case study illustrates the explanatory power and the limits of Baumol’s argument.