Municipal Entrepreneurship and Energy Policy

A Five Nation Study of Politics, Innovation and Social Change

Alison E. Woodward, Jerry Ellig, Tom R. Burns

• Publisher: Routledge
• Year: 2019
• ISBN:
  9780429560644
• Edition: 1
• Topic: Business
• Subtopic: Energy Industry
• Index: Business

Originally published in 1994. The energy crisis of the 1970s provided an opportune climate for public sector entrepreneurship to develop. The authors present case studies from six innovative and diverse municipalities in Denmark, France, Germany, Sweden and the United States. The studies document problems these communities encountered while implementing new ideas in energy conservation and changes in energy supply and municipal planning. Each community was selected on the basis of its early, vigorous response to the energy crisis, and then followed up to examine roadblocks along the way to innovation in the public sector. The case studies highlight the challenges policy entrepreneurs face and the tactics they employ, revealing crucial differences between public and private sector entrepreneurship.

Part I

POINT OF DEPARTURE AND RESEARCH APPROACH

Chapter ONE

Action, Entrepreneurship and Energy

In cities as diverse as Davis, California, and Saarbrücken, Germany, local officials crafted innovative entrepreneurial responses to the energy crisis. But what does this statement really mean? For better or worse, there are almost as many definitions of “entrepreneurship” as there are social theorists using the term. A careful look at the meaning of entrepreneurship in the social sciences reveals a distinct type of creative activity that has only started to receive attention in the analysis of public decision making.

Economists first applied the term “entrepreneur” to describe actors in the private marketplace. As a result, the economics literature on entrepreneurship provides a useful backdrop for our case studies. The entrepreneur has alternately been identified as a salaried manager, an independent business owner, a capitalist, a merchant, an innovator, a risk-taker and an uncertainty-bearer.¹ While some of these definitions identify the entrepreneur as a specific person—more or less a category of skilled laborer—others place more emphasis on entrepreneurship as an aspect of all human behavior. The first notion of entrepreneurship fits well within traditional neoclassical economic theory, with its emphasis on optimization within given constraints; such a framework can easily accommodate entrepreneurship as “just another factor of production.” On the other hand, the view of entrepreneurship as an aspect of all behavior is more in keeping with social science theories that emphasize the role of creative human action in altering the constraints themselves. This concept of entrepreneurship can be found in both sociological and economic literature, particularly among scholars influenced by market process or “Austrian” economics. This creative notion of entrepreneurship more aptly describes the way in which our six selected municipalities responded to the energy crisis.

THE ENTREPRENEUR AS OPTIMIZER

For most of this century, the classic problem of economics has been the study of how people satisfy unlimited wants with limited resources. This conception of the economic problem, usually attributed to Lionel Robbins (1932), places a premium on the allocation of economic resources to their most highly valued uses. In keeping with this emphasis, much of modern economics investigates precisely how rational individuals and collectives go about allocating resources in an optimal fashion.²

This research program involves more restrictive assumptions than may at first appear to be the case. In its strongest form, it assumes that decision makers already know what all of the resources are, that they know the least costly ways to convert raw materials into consumer goods, that they know all of the alternative uses of resources, and that they can rank the importance of these uses. Consumers then purchase the bundles of goods and services that yield them the highest level of utility, given their incomes and product prices. Business firms produce the mix of goods that maximizes profits, given a set of product prices, input prices and production technologies summarized in a production function.

If consumers and firms lack the perfect information they need to perform their calculations, it is not for lack of trying. If information is imperfect, decision makers acquire only the optimal amount, given the known costs and benefits of acquiring it. Information thus becomes a commodity much like any other, and individuals are assumed to know enough to buy the right quantity (Kirzner 1985, pp. 1–14).

Within such a framework, if the term “entrepreneur” is to have any distinctive meaning, it makes the most sense as a label applied to some particular subset of calculating agents. Thus, the manager who calculates the business firm’s optimal output might be called the entrepreneur, or perhaps the owner-operator of the firm, or the capitalist might be called the entrepreneur. In any case, the term becomes a convenient label for a particular occupation or job category, much like butcher, baker or light bulb maker.³

Of course, such a definition hardly encompasses the rich panoply of roles that social scientists have assigned to the entrepreneur. A variety of scholarly analysts—and quite a few laymen—regard the entrepreneur as a bold innovator who creates new needs and finds new ways to fill old ones. But in a world of perfect, or at worst optimally imperfect, knowledge, there is no place for such creativity. As William Baumol (1968, p. 66) has noted, in the context of most economic models, “the theoretical firm is entrepreneurless—the Prince of Denmark has been expunged from the discussion of Hamlet.” Restoring the prince to his throne requires relaxing the strict informational assumptions that have turned economics into the science of optimization, and that is precisely what the notion of entrepreneurship as innovation does.

THE ENTREPRENEUR AS INNOVATOR

Genuine innovation sparks changes that were previously unanticipated by most people. The entrepreneur is the agent of such change. The more innovative or creative the entrepreneur, the less likely that the outcome of his actions can be predicted in any strict sense. At best, one might identify a corridor of possible outcomes, but even in that case unknown surprises may lurk behind the corridor’s dimly lit doorways.

In terms of its effect upon society, entrepreneurial change can be either coordinating or discoordinating. When a resource becomes more scarce, for example, someone has to discover that fact and find ways to cope with the problem. Friedrich Hayek (1980 [1945]) demonstrated that in a market economy, rising prices convey the information that a resource has become more scarce, but that argument still leaves unsolved the problem of finding the most effective ways to deal with the increased scarcity. Hayek (1980a, 1978) addresses this type of problem by stressing the importance of competition as a discovery process, in which entrepreneurial individuals explore alternative ways of satisfying human needs. Profits reward those who find the alternatives that consumers judge to be best, and losses force entrepreneurs with bad judgment to relinquish control of resources.

In nonmarket economies and the public sector, where market prices are frequently not available as guides, other means of even communicating the increased scarcity must be found. After political entrepreneurs take action, feedback comes through the political process. Successful political entrepreneurs receive more support at the ballot box or in the barracks, depending on the polity’s particular institutional arrangements. Failed political entrepreneurs lose votes, military muscle, and sometimes even their heads.

When entrepreneurial talent responds to change, it can fulfill a coordinating role, for it helps better match production and consumption decisions with the underlying state of the world. Kirzner (1973, 1985) has developed an extensive theory along these lines, stressing the entrepreneur’s role as one who exploits arbitrage opportunities and moves markets closer to equilibrium.

On the other hand, the entrepreneur may create a new product or process that virtually destroys the demand for an old product or process. In this sense, entrepreneurship can be discoordinating. Joseph Schumpeter (1942), of course, coined the term “creative destruction” to describe this type of entrepreneurship, and he saw it as the most effective form of competition and the main source of economic development.⁴

In both types of cases, the entrepreneur must act based on his perception of current conditions and his projection of the future. Entrepreneurship requires an ability to imagine the world as somehow different from what it is today, to ascertain whether it is possible to get from here to there, and to implement a plan for effecting the change. As James Buchanan (1982, p. 17) has expressed it,

We must acknowledge that in many aspects of their behavior, men conform to laws of behavior such that such behavior becomes subject to scientifically testable prediction and control through the external manipulation of constraints. But we must also acknowledge that men can choose courses of action that emerge only in the choice process itself. Men create value by the imagination of alternatives that do not exist followed by the action that implements the possibilities imagined.

Successful entrepreneurs are thus those who possess superior alertness, creativity and judgment (High 1982). Those who exercise these abilities skillfully gain control of resources; those who fail find themselves separated from the control of resources.

Viewed in this light, entrepreneurship stems fundamentally from uncertainty. As Frank Knight (1971 [1921], pp. 197–232) and Ludwig von Mises (1966, pp. 106–116) so carefully pointed out, this uncertainty is not a form of statistical risk that can be insured against, for then there would be no need for entrepreneurs. Rather, there would only be insurance companies, who would diversify by undertaking or funding many different entrepreneurial projects. A known percentage of these projects would fail, but by diversifying the company would convert the uncertain losses of many individual projects into a certain loss, or fixed cost, for the group of projects as a whole.

The entrepreneur exists precisely because uninsurable risks exist. Entrepreneurial uncertainty cannot be insured against because it usually deals with unique events that cannot be grouped together into homogeneous classes with calculable probabilities of success and failure. Indeed, it may not even be possible to identify a subjective probability distribution of possible outcomes for a single event. Typically, the entrepreneur can imagine several alternative results from his innovation, and he can feel that some have a greater or lesser chance of occurring. However, innovation also generates unforeseen results; the entrepreneur may know that unforeseen consequences can occur without being able to identify their precise nature, magnitude or probability of occurrence (Dosi 1988, p. 1134; Kirzner 1985, pp. 107–109; Mises 1966, pp. 106–113). As a result, entrepreneurs dare where insurers fear to tread.

Viewed in this light, entrepreneurship is not restricted to the business world. Rather, it is an aspect of most human behavior. In Mises’ (1966, p. 253) formulation, the entrepreneur is “acting man exclusively seen from the aspect of the uncertainty inherent in every action.” A large proportion of human activity implicitly or explicitly deals with uncertainty, because society is continually buffeted by exogenous shocks and transformed by unpredictable innovations.

In fact, it is far from clear that most entrepreneurial talent is even concentrated in business firms. Individuals who possess alertness, creativity and judgment may be attracted into any walk of life by a combination of financial and psychic rewards.⁵ Despite this fact, it is business entrepreneurship that has attracted the most analytical attention. But given the growing role of national, regional and local governments in the Western world, surely entrepreneurship in government deserves attention as well.

PUBLIC SECTOR ENTREPRENEURSHIP

Despite a large and growing literature on economic theories of government, public sector entrepreneurship is just beginning to gain attention as a field of study. In large part, this result stems from the fact that many economic theories of regulation represent straightforward applications of neoclassical economic theory, where preferences, constraints and technology are already given and known.

George Stigler (1971) fueled an extensive literature in this field with his argument that regulation usually arises at the behest of the regulated industry, which seeks regulation to curtail competition. For economists, this was a revolutionary insight. With a few notable exceptions, such as Buchanan and Tullock (1962), economic study of regulation had traditionally concentrated on devising optimal regulatory regimes without asking whether public officials might ever have incentives to implement such schemes. Indeed, economists acted as if they were proffering advice to philosopher kings, rather than ordinary human beings trying to cope with ordinary interest group political pressures.

Peltzman (1976) broadened Stigler’s theory with the recognition that policymakers usually have to balance the interests of various pressure groups in order to maximize political support. An observed regulation, therefore, may benefit the regulated industry by curtailing competition, but the regulator may force the industry to share some of its profits with consumers (see also Hirshleifer 1976; Tollison 1989, pp. 2–5). Alternatively, regulation may benefit some subsets of consumers by lowering the prices they pay—at the expense of other consumers (Posner 1971). Even outsiders may capture regulatory rents, to the detriment of both producers and consumers in the regulated industry (Hazlett 1991). Becker (1983, 1985) integrated these ideas by developing rigorous models that explain the overall pattern of taxes, subsidies and regulations as an equilibrium determined by the available technology and various groups’ political influence.⁶

Of course nothing in this approach rules out the possibility that politicians, bureaucrats and regulators may comprise interest groups in their own right. Indeed, just as economists have argued whether a business firm’s managers maximize profits or maximize their own utility, a lively debate exists over exactly what government officials maximize. Potential candidates for maximization include political support (Peltzman 1976), budgets (Niskanen 1971), personal wealth (McCormick and Tollison 1981) and ideological objectives (Kau and Rubin 1984). All of these approaches share a common characteristic: the government official is treated as a maximizer rather than an innovator.

Other analysts, however, have begun to develop the notion of the government official as a creative entrepreneur. Breton and Breton (1969, p. 201) raise the possibility that “social entrepreneurs” may capture monetary profits or utility from spotting emerging demands for social change and providing a concrete program of action. More recently, McChesney (1987) discusses a process of “rent extraction” in which government officials, instead of merely responding to interest groups’ demands for wealth redistribution, actively try to create demands for their services by enacting broad statutes from which interest groups will seek exceptions. Tollison (1992, p. 9) emphasizes that the officials do not necessarily know beforehand exactly what demands they will generate: “a useful way to think of this sort of governmental behavior is by analogy to fishing—the government is simply trolling for business.”

Coppin and High (1992, p. 4) offer a concise definition ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Contents
• Introduction to the Series
• Preface
• Part I Point of Departure and Research Approach
• Part II Case Studies
• Part III Analysis and Conclusions
• Bibliography
• Index