Adam Smith argued that economic growth occurs through changes in the division of labor. The author defines entrepreneurship as human actions that lead to changes in the division of labor. Three articles are discussed that provide examples of how entrepreneurship changes the division of labor. The first discusses productive versus unproductive entrepreneurship. The second builds an economic model showing how individuals specialize production. The third highlights how knowledge spillovers from companies and universities lead to spin-offs that exploit innovations.

1. Copyright © 2008 Strategic Management Society
Strategic Entrepreneurship Journal
Strat. Entrepreneurship J., 1: 287–289 (2007)
Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/sej.31
DISCUSSANT COMMENTS
ENTREPRENEURSHIP, GROWTH, AND ADAM SMITH
STEVEN C. MICHAEL*
College of Business, University of Illinois at Urbana Champaign, Champaign,
Illinois, U.S.A.
In the canonical work of economics, Adam Smith’s Wealth of Nations, he explained that
nations grow wealthy through changes in the division of labor. Using Smith’s insight, entre-
preneurship can be defined as the study of human actions that lead to changes in the division
of labor. This definition gives theoretical and empirical meaning to studies examining new
venture formation and economic growth, and can be used by scholars for intellectual profit, as
illustrated by Baumol and Strom, Casson and Wadeson, and Agarwal, Audretsch, and Sarkar.
Copyright © 2008 Strategic Management Society.
Discussions about entrepreneurship and growth risk
running in circles. In the popular press, a loose defi-
nition of entrepreneurship is change of any kind:
change in business, change in society, change in
technology. This interpretation is only strengthened
by the writings of Schumpeter: ‘The entrepreneur
and his function are not difficult to conceptualize;
the defining characteristic is simply the doing of new
things or the doing of things that are already being
done in a new way’ (Schumpeter, 1947: 151). Now
the entrepreneur always undertakes to bring change
to improve his life and the lives of others. In the
popular mind, improvement, especially an improve-
ment in material well-being, represents growth. In
short, change leads to change, and we have created
a tautology.
For more insight, let us start from first principles.
In the canonical work of economics, Adam Smith
(1910) explained that nations grow wealthy through
changes in the division of labor. Refinements in the
division of labor in the economy lead to greater
specialization, and specialization leads to greater
efficiency and wealth. Efficiency can come from
three sources: the worker becomes more skilled in
his movements, the worker spends less time ending
one activity and beginning another, and machines
are developed to assist the worker.
Using Smith’s insight, entrepreneurship can be
defined as the study of human actions that lead to
changes in the division of labor. Two additional cor-
ollaries can further our analysis. In Smith’s famous
dictum, ‘the division of labor is limited by the extent
of the market’ (1910: 15). Larger nations, market
areas, or cities can support a finer division of labor
than smaller ones, and as a result create more wealth.
The spectacular success of free trade in raising eco-
nomic growth and the welfare of millions offers
empirical proof of this proposition.
Although Smith identified three avenues for spe-
cialization, according to Young (1928) the one with
the largest effect, in most cases, is the development
of machines. The process of the division of labor
leads to the disaggregation of complex processes
into simpler ones; simpler processes can be auto-
mated through machinery and tools. In addition, if
the extent of the market permits, the tool or machine
can be sold to others. These new tools and machines
form the basis for new firms, new industries, and
new markets.
Keywords: entrepreneurship theory; economic growth; divi-
sion of labor
*Correspondence to: Steven C. Michael, University of Illinois
at Urbana Champaign, College of Business, 1206 S. Sixth St.,
Champaign, IL 61820.
E-mail: smichael@uiuc.edu

2. 288 S. C. Michael
Copyright © 2008 Strategic Management Society Strat. Entrepreneurship J., 1: 287–289 (2007)
DOI: 10.1002/sej
Thus, the relationship between entrepreneurship,
the creation of wealth, and the growth of firms,
industries, and economies was explained years ago.
It remains for us lesser mortals to flesh out the
details.
In the three articles under discussion, each can
be viewed as an amplification of entrepreneurship
changing the division of labor. In the Baumol and
Strom article, they remind us of the distinction
between entrepreneurship that leads to a division of
labor and entrepreneurship that does not—in their
terminology, productive and unproductive entre-
preneurship. Productive entrepreneurship leads to
changes in the division of labor, and creates wealth.
Unproductive entrepreneurship leads to rearrange-
ment of wealth. Robbery, theft, piracy, brigandage,
litigation, lobbying, and most other activities under-
taken by knaves and lawyers are all examples of
unproductive entrepreneurship.
But efficiency requires a culture that encourages
the division of labor, as Baumol and Strom point
out. Changes in the division of labor are often under-
taken for rewards other than money. For example, in
ancient Rome, fame was the spur (Holland, 2005).
Individuals might (and did) achieve great wealth in
the service of the state—usually through military
command, but they hazarded the discomforts and
risks of military command to build the reputation
of their extended family or house. Thus, rewards
can be socially determined by an outcome of social
interaction and social forces, yielding either produc-
tive or unproductive entrepreneurship in different
societies.
Casson and Wadeson build an explicit model
of the process by which individuals act within
the economy to develop a division of labor, and
aggregate the results of these actions into a general
equilibrium. Individuals may choose to produce
the standard product, or to produce a specialized
product. Individual judgment becomes the crucial
variable: people can see opportunities for special-
ized products wrongly or miss such opportunities.
The model contains surprising predictions. For
example, the authors find a nonlinear relationship
between size and wealth, suggesting that larger
countries will be much more entrepreneurial than
small ones. This empirical prediction awaits a clever
empiricist. The centerpiece of the model is human
judgment, which is exactly where all scholars of
entrepreneurship would place it. It is no criticism
of their formal model to suggest that our learning
can be amplified by examining also the costs and
benefits of making good judgments in a less abstract
way. For example, wrong entrepreneurial deci-
sions can be punished with sanctions ranging from
bankruptcy, social opprobrium, debtors’ prison,
or criminal prosecution—or, in Silicon Valley,
sometimes with the vice presidency of a new
start-up.
The article by Agarwal, Audretsch, and Sarkar
highlights knowledge spillovers as a cause for
changes in the division of labor. In the course of
their normal duties, companies and universities gen-
erate innovations to change the division of labor that
cannot be exploited by the existing organization.
Such serendipity is an empirical claim, although it is
commonly asserted in the related literature of tech-
nology management (e.g., Nelson and Romer, 1996;
Pavitt, 2001). Spinouts (entrepreneurial start-ups)
are then required to exploit these innovations.
Start-ups create wealth for individual inventors,
but may or may not create wealth for society as a
whole. If these innovations were likely to simply sit
on the shelf unused and neglected—bastard step-
children in the otherwise happy family of the cor-
porate parent’s product portfolio—then developing
an orphanage makes good sense. However, busi-
ness practice certainly suggests that, far from being
ugly and unloved stepchildren, many such technolo-
gies are the apple of the corporate parent’s eye.
Companies go to great lengths to secure their
intellectual property and to assert a proprietary inter-
est in any technological development that occurred
on their watch. And, as a matter of practice, univer-
sities today (if not historically) are quite aggressive
about protecting their intellectual property rights.
Whether start-ups create wealth requires an analy-
sis of the role of institutions in the division of labor.
Institutions further the division of labor in society
by providing a conduit through which resources are
organized and ingenuity is mobilized. Institutions
were common in Smith’s time, but the change in
communication and transportation technology has
expanded the scale and scope of twenty-first century
institutions beyond the imagination of anyone in
the eighteenth century. So there is the need for an
understanding of institutions and the environments
for innovation they create. Institutions differ in their
decision-making mechanisms, their munificence, and
their reward structures (social as well as economic).
What factors within institutions facilitate changes
in the division of labor? As examples, do firms
suffer from bounded rationality in their choice of
projects? Do university faculties take or avoid risks?

3. Commentary 289
Copyright © 2008 Strategic Management Society Strat. Entrepreneurship J., 1: 287–289 (2007)
DOI: 10.1002/sej
The two institutions of academia and corporations
lead to a natural comparison, or even a natural
experiment.
And, as economists never fail to remind us, there
is no free lunch. The third institutional setting—
the start-up—may encourage, from the standpoint
of social wealth creation, a wasteful destruction of
resources. Forming and managing a firm is a big
effort. Distracting a productive scholar from his
or her primary task of research in order to attend
to mundane tasks of office politics and breakfast
Danish is surely a violation of the principle of divi-
sion of labor. Moreover, possibilities for great per-
sonal wealth may encourage too much innovation or
attempts at commercialization, especially commer-
cialization without judgment. Anyone who has spent
any time with entrepreneurs in a university research
park will recognize the salience of this risk.
It is important not to engage in the Nirvana fallacy
(Demsetz, 1969), a comparison of one institutional
reality against an unreality found only in econo-
mists’ theoretical models. It is quite possible that
innovations based upon knowledge spillovers require
the crucial, nonsubstitutable input of the inventor’s
effort, and that in today’s world only the carrot of
equity ownership is sufficient motivation. But it is a
question worthy of scholars and scholarship.
These minor issues should not distract us from
the main point: these articles represent a worthy
and significant fleshing out of the details of Smith’s
insights and wisdom.
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