BOOK REVIEW -
Department of Economics and Business
Randall G. Holcombe
New York: Routledge, 199pp.,
ISBN: 978 0415 770 903, $170.00 (hb), 2007
Someday, someone somewhere will write the deﬁnitive treatise on entrepreneurship and economic progress, and
the book under review will ﬁgure prominently in that author’s bibliography.
Randall G. Holcombe, the DeVoe Moore Professor of Economics at Florida State University, does not presume
to bring us The Last Word on entrepreneurship and economic progress, but he lays a solid foundation for further
inquiry in a very tightly packed 199 pages (including notes and references).
Future generations of scholars will owe Professor Holcombe a debt of gratitude for his work clarifying exactly
what is meant by economic progress and for highlighting the importance of different types of entrepreneurship.
An excellent question that I’ve heard attributed to Tyler Cowen by Peter J. Boettke is ‘what are you reading that
you’re learning from?’ This is a book that I learned from. Like many books of this type, Entrepreneurship and
Economic Progress is based on the author’s previously-published work. Holcombe bases his work on several of
his earlier studies, including a 1998 contribution to the Quarterly Journal of Austrian Economics of which I am
particularly fond, and assembles a short, accessible volume that considers different conceptions of
entrepreneurship, different theories of economic growth, evidence on the role of economic freedom in creating
economic progress, and the implications of each for numerous sub-ﬁelds in economics.
Holcombe’s use of ‘economic progress’ rather than ‘economic growth’ is both intriguing and deliberate. He
contrasts the two because economic growth, which consists of increased production of the same kinds of output,
is a proper subset of economic progress, which includes not just more output, but better output. The key to
economic progress, in his view, is entrepreneurship of the right kind. Throughout the book, Holcombe criticises
the traditional Ricardian view of economic growth, which relies on increasing the stock of inputs, and contrasts
it with an entrepreneurial focus.
The weakness of the Ricardian framework is that inputs (land, labour and capital) have been with us forever
while sustained economic growth is much more recent. There must be something more, and this ‘something
more’ for Holcombe (and for Austrian economists more generally) is the entrepreneur.
Holcombe explains two views of entrepreneurship. The ﬁrst is Kirznerian entrepreneurship, which is a response
to disequilibrium, and the second is Schumpeterian entrepreneurship, which creates disequilibrium. But where
do entrepreneurial opportunities come from? Misalignments in the structure of production create opportunities
for entrepreneurs to increase the value of resources (p. 76). The only way proﬁts can be competed away is if
they emerge to serve their signalling role in the ﬁrst place (p. 76). Holcombe ‘identiﬁes three major categories of
factors that create proﬁt opportunities: (1) factors that equilibrate the market, (2) factors that enhance
production possibilities, and (3) entrepreneurial activity that creates additional entrepreneurial possibilities’ (p.
76). Entrepreneurship can itself be endogenous in part because prior entrepreneurship alters what Hayek called
‘the particular circumstances of time and place’. Understanding entrepreneurship’s role in economic theory
requires that we (quite literally) think outside the Edgeworth Box. Holcombe argues that entrepreneurship is
essential to the microfoundational structure of the macroeconomy, and he makes an important Hayekian–
Misesian argument that monetary disturbances interfere with entrepreneurial calculation. This distorts the
mutual adjustment process that leads to equilibrium.
He suggests that ‘[r]egardless of the source of the disruption, policies that encourage entrepreneurship can help
reequilibrate an economy and stabilize the business cycle, and policies that interfere with Kirznerian
entrepreneurship – such as tax and regulatory policies – can slow the adjustment to an efﬁcient allocation of
resources’ (p. 104).
However, the analytical problem is that entrepreneurship ‘cannot be analyzed within an equilibrium framework
where ﬁrms and individuals react to known parameters’ (p. 106). In part, entrepreneurial action is the process by
which the parameters themselves are formed. Holcombe’s ninth chapter, ‘National Income Accounting and
Public Policy’, applies the entrepreneurial paradigm to important policy debates.
He points out – correctly – that most economic progress consists of changes in the composition of what is
produced rather than increases in the amount of output produced. Product differentiation is the essence of the
competitive process, and it strikes at the heart of the practical problems associated with national income
accounting. Further, he borrows directly from James Buchanan and asks whether government spending should
be included in GDP (pp. 135–136). Buchanan argues that since governments do not sell their output, it should be
valued at zero for purposes of national income accounting.
In addition, as Holcombe points out, government accounting that values government spending on the basis of
cost rather than the value of output necessarily overstates the government’s contribution to national output.
Holcombe argues that ‘[f ]or consistency, highways, police and ﬁre services, and national defense should not be
included in GDP for the same reason home production is excluded: they are not sold in the market’ (p. 136). The
policy implications are particularly intriguing as he points to ‘increases’ in income as government spending
replaces home production in some places (p. 137). While there are problems upon problems with gross domestic
product as a measure of welfare, I am still left asking what would be superior.
GDP is imperfect, but it is still sufﬁciently highly correlated with what we would really like to measure that it is
serviceable for most uses. It’s good enough for government work, yes, but it can be profoundly misleading.
Holcombe contrasts the ‘production function’ approach with the entrepreneurial approach in government
regulation, which takes little account of the development of new markets as a result of entrepreneurial
innovation. The debate over the Whole Foods Market–Wild Oats Market merger is one example.
US government authorities have argued that this merger would create too much market concentration in a
particular segment of the market that does not even have an entry in the North American Industrial Classiﬁcation
System. Similarly, Google has attracted attention from antitrust authorities in spite of the fact that they ‘control’
the market for a product that did not exist as recently as when antitrust authorities were persecuting IBM, to say
nothing of when the theory of antitrust was developed in the early twentieth century.
Holcombe’s exposition of the entrepreneurial paradigm has important implications for the design and
implementation of economic institutions. A Hayekian message emerges: while Friedrich Hayek has argued in
several places that we cannot make speciﬁc predictions about the outcome of a complex order, we can arrive at
general conclusions about the institutions that are conducive to the emergence of order. Entrepreneurial alertness
adjusts the structure of production and rearranges resources into a pattern that is more able to satisfy the wants
and needs of consumers.
For governments, the policy implication is clear. A government can encourage entrepreneurship by reducing
barriers to trade (pp. 118–119). This assumes that economic growth is part of the government’s objective
function. However, as economists have argued and as Professor Holcombe noted explicitly in his 2008
Presidential Address to the Public Choice Society, what maximises the ruler’s income is not always what will
maximise economic growth. In the twentieth century, capitalism was criticised because of the ‘separation of
ownership and control’ inherent in the corporate structure. The state, however, only carries the problem to
another, more intractable level.
We have to ask as well about how state intervention alters incentives and returns to different types of
entrepreneurship. As William Baumol argued in a classic article, institutions can encourage productive,
unproductive or destructive entrepreneurship. Increasing the relative importance of the state in human affairs
means increasing the relative returns to unproductive or destructive entrepreneurship. Industrial policy, for
example, has a checkered past littered with rent-seeking, waste and failed attempts by governments to pick
winners and losers (see pp. 118–119).
Holcombe asks us to consider Anne Krueger’s exploration of the political infrastructure in India, where ‘some of
the best and brightest individuals were employed not doing anything to add to the productivity of the economy,
but rather to deal with cumbersome government regulations and to try to produce some personal monetary gain
by working those regulations to their advantage’ (p. 123). Instead of creating economic progress, they were
investing in human capital that was speciﬁc to a certain rent-seeking infrastructure.
Holcombe also contributes to the growing body of literature on the foundations of economic growth, noting
that while countries like the USSR directed resources toward basic research, they remained poor because they
sharply restricted the institutions of exchange that could have turned this basic research into wealth (p. 119).
Further, state intervention in the market for basic science creates a rent-seeking infrastructure that dissipates the
beneﬁts associated with the research.
Before concluding, Holcombe treats us to a chapter on how the political environment inﬂuences entrepreneurial
behaviour. The key difference between economic and political entrepreneurship, he argues, is that the economic
sphere is the sphere of voluntary exchange while the political sphere is the sphere of coercion (p. 143). His
thesis (p. 143) that there will always be opportunities for political entrepreneurship suggests that ordered
anarchy is an unstable equilibrium – a point he has made elsewhere. Nonetheless, a growing body of research
into the economics and politics of anarchy suggests that this is unresolved (this work is summarised in a paper
by Benjamin Powell and Edward P. Stringham in Public Choice). Arguments based on externalities and public
goods provide convenient pretexts for state expansion (p. 145).
Holcombe’s book assembles and integrates the theory of entrepreneurship and theories of economic growth and
progress into a more coherent whole. Much work remains to be done, but Holcombe lays an impressive
foundation on which future scholars will build a more systematic entrepreneurial theory of economic progress.
Scholars interested in the entrepreneurial paradigm as well as ‘the foundations of the market economy’ more
broadly will ﬁnd this to be a welcome and useful addition to their bookshelves.
Department of Economics and Business