Austrian economics often focuses on the vital role the entrepreneur plays in driving the economy, through the constant arrangement of the capital structure, in order to provide consumers with a constant stream of goods and services. But the question of what happens when government tries its hand at the same function of ownership, uncertainty-bearing, and decision-making is not addressed much in Austrian theory (see the literature review in the link). To try and close this partial theoretical gap, Joseph Salerno and I recently co-authored a paper on the subject of political entrepreneurship, available for download here.

What we attempt in this paper is to provide a theoretical framework with which to analyze government investment decisions, and furthermore, to see in what sense government can be entrepreneurial. An implication of our argument is that by looking at government in an entrepreneurial way, we can gain additional insight into the nature and effects of government activities. Events of recent years, such as the de facto nationalization of General Motors for example, take on new significance when viewed as acts of political entrepreneurship. What such cases imply is actually a transfer of the entrepreneurial function from the market to government, along with the emergence of problems closely associated with government management, e.g. the lack of recourse to economic calculation, bureaucratic inefficiency, and so on.

There is a great deal of research, both theoretical and applied, which can be done on this topic, and we hope the paper spurs fruitful discussion.

Economists never tire of proclaiming that “incentives matter.” The statement is trite, but the underlying truth of economics which it reflects is important: behavior often changes when the perceived costs and benefits of action change.

In the last few weeks, this has been amusingly and eloquently demonstrated at a local trivia night I attend. The old bar which used to host weekly trivia closed, so our team relocated to a new venue. Here, trivia is run by the same people and the same teams compete every week. The only differences are the rules of the game (we might say that the institution which creates the incentives has changed). Two rules in particular inspired interesting behavior.

The first is quite simple. In the old bar, the team names were the same for months, even years at a time, because there was little motivation to change.  The names, most of which should not be repeated in mixed company (or in any company for that matter) tend to revolve around puns and wordplay, and it is often difficult to invent clever new ones. So when you have a good name, you don’t really have much motivation to change it.

The new bar however has a special rule: every week, the team with the most creative and original name wins a free pitcher of beer. The result is not surprising: whereas before teams prided themselves on keeping a winning name over a long period of time, now there has been an instantaneous and complete change. Every team has a new name every week, and a vigorous competition has ensued over the weekly pitcher. A little motivation goes a long way: the monetary value of the beer is only about $5, as compared to the personal value of a team tradition and the mental effort of coming up with a new name. But apparently such concerns disappear with the possibility of a free drink.

The second new rule is that the team finishing with the lowest score at the end of the night receives a free round of shots of their choice. This is where things get really interesting. Consider the incentive: if, going into the later rounds, your team has little chance of placing among the top three (the prize winners), the incentive is for the team to play as poorly as possible, because last place is the only other remunerative option. The key is to not be one of the mediocre teams, who receive nothing.

In this case it is more difficult to tell whether behavior is actually changing, but there have been some promising signs. Several teams show up midway through the game, when it is impossible to finish in the top three. They simply play as well as they can from this point, possibly reasoning that they cannot do better than the teams who have been around for the duration of the game. This way they don’t have to intentionally answer incorrectly, and can be successful but lose at the same time. Similarly, some teams begin the game, leave during the middle rounds, and return at the end, ensuring their score remains low. In any case, there does seem to be a sort of race-to-the-bottom competition involved, which makes sense given that the round of shots has a monetary value of around $30, which is at least as great as the monetary rewards for winning (sometimes greater). Strategic behavior is indicated by the fact that halfway through the game, the point distribution tends to be fairly even, because most teams make an effort until they really feel as if their chances of winning are small. By the end of the game however, the spread has widened considerably, with clusters of teams at the top and bottom, but relatively few in between. This is a significant change from the old distribution, where the cluster of scores tended to be in the mediocre range at the end of the game, as could be reasonably expected if everyone is really trying.

Ultimately, the simple lesson is that when incentives change, people find certain actions more attractive than before, and they pursue those actions. It should come as no surprise to economists that necessity is the mother of invention. And, at least among the trivia crowd, alcohol is most certainly a necessity.

Some of you may remember a British television show from the 1980s, Yes, Prime Minister. It was (and is) a delightfully funny look at all the problems both of bureaucracy and of (especially democratic) government in general. After a twenty-year hiatus, the creative minds behind the original show, writers Antony Jay and Jonathan Lynn, have reunited to bring Yes, Prime Minister to the stage. I recently had the pleasure of seeing the new play at the Gielgud Theatre in London, and I can say that the liberty-minded will find it quite appealing.

Much has happened since the original television series Yes, Minister and Yes, Prime Minister were first aired, but the play seamlessly adapts itself to current world problems. Every important issue in contemporary economic policy is ruthlessly dissected, from the European Union and the European Central Bank, to the financial crisis, bailouts, global warming, and the BBC. I’m not sure if it’s because the writers are older and wiser, or perhaps because the world itself is even more absurd now than it was twenty years ago, but this new presentation of Yes, Prime Minister is even more libertarian than its predecessor. I will not say anything of the plot other than to add that it involves a more serious moral conundrum than any of those faced in the original shows.

The biggest concern for fans of the original may be the casting, which I am happy to report is a success. David Haig replaces the late Paul Eddington in the role of Jim Hacker, the bubbling prime minister whose incompetence has ensured him the top position in British government. Haig looks and sounds just like a young John Cleese, bringing both familiarity and novelty to the character. Henry Goodman plays the role of Sir Humphrey Appleby (originally performed by the brilliant Nigel Hawthorne), the verbose and conniving civil servant determined to consolidate power in the central bureaucracy while steadfastly resisting any sort of reform. Jonathan Slinger is Bernard Woolley, the overly-literal private secretary of the prime minster, who constantly tries to navigate between his duties to the prime minister and to the civil service. Unfortunately the Bernard character is somewhat underplayed in the script, and we miss out on some of those classic moments where Sir Humphrey explains to Bernard in crystal clear terms just how government really works. All of the characters give us just enough familiarity to make us laugh and remind us of the old days, while at the same time providing us with enough novelty that we don’t feel as if we’re watching a pale imitation of the original material.

If you have not seen Yes, Minister or Yes, Prime Minister, then I urge you to rent or buy them if possible. And if you happen to visit London in the near future, you must not miss this hilarious and thoughtful take on government and its innumerable failings.

Joseph Schumpeter’s first major work, Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie (1908), has finally appeared in an English edition, translated as The Nature and Essence of Economic Theory. I use the word “English” lightly: this translation is surely one of the worst in economics. The language is consistently garbled, and is often completely incoherent.

Take, for instance, the following passage, where Schumpeter is discussing the worth of economic science:

“The reader might want to judge that for himself but we want to mention in advance that we will accomplish want we wanted, in a quite surprising fashion: A whole bunch of controversies simply disappear. If one does not deal with them with general arguments but really analyzes what they really are about, one finds out that there really are no roadblocks but one can easily avoid them. All others—and I really think all of them— can be rewritten in such a way that the sticky points do not have be touched upon at all and can therefore be neutralized. All objections that I know of can be taken into consideration and anybody who appreciates the meaning of the exact discipline of human actions will be ready for a sacrifice that is necessary in every cleansing process.” (p. 18)

What?!?

Every page contains sentences which must be read and reread, and random quotation almost certainly reveals some typo or grammatical error. Throughout, the translator’s sentence structure is unfathomable, his word choice impenetrable, his use of the comma, abysmal.

This would have been especially offensive for Schumpeter, who was one of great stylists in the history of economic writing (if not the greatest). Not surprisingly, no translator is named in the book, only an editor.

All that aside however, this book is important, representing as it does the first formulation of Schumpeter’s economic theory. Schumpeter’s peculiar views on methodology, for example, comprise the early sections of the book. It is revealing that even at this early stage Schumpeter calls for methodological tolerance. This is not surprising, considering his battle cry, “to understand all is to forgive all.” (Perhaps he would have abandoned his credo after reading this translation). Nevertheless, it is interesting to read his views on such subjects as “methodological individualism,” a phrase he coined.

This work also greatly clarifies Schumpeter’s position in the history of economic thought. This is not an “Austrian” book except by the loosest definitions, but is rather an attempt at synthesizing what Schumpeter considered the worthwhile elements from several traditions in economics. It is in this volume Schumpeter presents his model of the static economy, upon which the “dynamic” model of The Theory of Economic Development (1911) is based. Essentially all of Schumpeter’s later ideas are either worked out or implied in these first two books. Careful reading is warranted for those with stomach for it.