Entrepreneurship: Productive, unproductive, and destructive—Relative to what?

Abstract

We identify an ambiguity surrounding institutions and entrepreneurship. While entrepreneurship creates social value at the economy level in the appropriate institutional environment, individual entrepreneurs may create or destroy value in any institutional environment. This raises the question: under what conditions does entrepreneurship create social value? Social value creation depends on the entrepreneur's next best alternative, and institutions are constraints on the relevant alternatives. Hence, society is better off when entrepreneurs navigate poor institutions relative to reduced entrepreneurial activity. Furthermore, entrepreneurs engaging in seemingly “productive” activity need not create social value. We illustrate the argument with two examples.