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Working Paper No. 1403

William J. Baumol: Innovative Contributor to Entrepreneurship Economics

Working Paper
Henrekson, Magnus and Mikael Stenkula (2021). “William J. Baumol: Innovative Contributor to Entrepreneurship Economics”. IFN Working Paper No. 1403. Stockholm: Research Institute of Industrial Economics (IFN).

Magnus Henrekson, Mikael Stenkula

William J. Baumol was one of the most prolific economists of his generation, analyzing a broad range of central economic issues addressing real problems of the world. In this essay, we present and critically evaluate Baumol’s research contributions in entrepreneurship economics and point to areas for future research. Baumol contributed an impressive number of important insights, increasing our understanding of entrepreneurship from both a macro and a micro perspective. He also devoted a large part of his writings to discussing public policy, linking his theoretical insights with policy issues in practice. His analyses are rooted in contemporary mainstream neoclassical economics, and one of his main objectives was to integrate the entrepreneur into this tradition.

Today, Baumol is best known for his tripartite distinction between productive, unproductive, and destructive entrepreneurship and his associated idea that the institutional framework, “the rules of the game,” will determine how entrepreneurs allocate their time and effort across different—productive or unproductive—activities. An institutional environment that encourages productive entrepreneurship and spontaneous experimentation while disincentivizing unproductive activities becomes, through this insightful lens, the driving force of economic growth.

As an economist, Baumol was knowledgeable and well acquainted with earlier scholars and their writings about entrepreneurship. Baumol’s writings were greatly inspired by Joseph Schumpeter’s views on entrepreneurship, and he made several attempts to formalize Schumpeter’s concept of the innovative entrepreneur. Baumol was in all senses an innovative contributor to entrepreneurship economics. His work has inspired the research community of entrepreneurship scholars, but like all great scientists, he also encountered criticism.