 What I'll be speaking from today is just a manuscript that I've recently put together called Entrepreneurship and Economic Growth and I start out considering the question of what causes economic growth. At the risk of over simplification the answers that economists have given to this question can be divided into two broad camps one following the ideas of Adam Smith and the other following the ideas of David Ricardo. Smith's overriding goal was to try to understand the wealth creation process and the title of his treat as the wealth of nations illustrates that and the first lesson that we get in the wealth of nations is that the division of labor is limited by the extent of the market. As Adam Smith saw it as markets grew entrepreneurship would lead to innovation that would lead to an increasing division of labor and increased productivity. Ricardo in contrast viewed output as being a function of inputs. He viewed that the income of a nation was produced by the inputs of land labor and capital. He took a production function approach to the question of economic growth. Investment could produce more capital which in turn could increase economic growth but because of diminishing marginal factor productivity and the existence of fixed factors in particular land population growth would always dominate economic growth and population most of the population would remain at a subsistence level of income. The ideas of Ricardo and his friend in contemporary Malthus pushed this idea on economics and ended up giving economics the name the dismal science. It sounds none too good the way Ricardo was describing it but this contrast sharply with Adam Smith's view of entrepreneurship and innovation that would lead to ever-increasing economic growth through an increased division of labor. Through hindsight we can see that Smith's vision of economic growth was more accurate than Ricardo's but as it happens the economics profession has followed Ricardo's views more closely than Smith's. I think a big part of that especially if we look at 20th century growth theory has been the comparative statics nature of economic models. Because of the comparative statics nature of economic modeling it's a lot easier to take the production function view of economic output and economic growth and it's a lot harder to model things within that framework to model innovation the increased division of labor and so forth. So as economics has become more and more scientific over the 20th century we've increasingly tried to model the economic problems that we've been looking at within this more mathematical more scientific approach and that's led us to focus more on the aspects of the economy that we're better able to parameterize that we can better fit into general equilibrium models and it's been a little bit more difficult to take that approach looking at the division of labor entrepreneurship and innovation and so forth because it doesn't really fit into that that production function approach and that general equilibrium approach so well. So you've probably heard the joke in fact Roger tells me everybody's heard the joke about the guy who's the night you know he's looking around on the sidewalk here somebody comes on you know can I help you what's going he says yeah I lost my ring and he said where'd you lose it and the guy says well over there across the street he says well why are you looking here so well the light's better over here and in a sense that's the way that economic modeling of economic growth has taken place that we've got models that are amenable to looking at problems in particular ways and so we're we're looking at the for the answers to those problems where the light is better rather than where it's actually more likely that we'll end up finding the answer. If we take that production function approach along Ricardian lines with output being a function of land labor and capital it really seems like the way to get economic growth is through investment and so a lot of the advice that economists have given over the last half century as to how to get economies to grow has been to invest. However the Smithian approach to economic growth focuses more on innovation than investment and in considering these problems it occurred to me that Israel Kersner's ideas of entrepreneurship fit in well with the Smithian idea of economic growth and the wealth of nations and that it might be possible to to incorporate Kersner's vision of entrepreneurship into more standard views of economic growth and perhaps get some better answers. In Kersner's view entrepreneurs act by seizing on previously unnoticed profit opportunities but these profit opportunities have to come from somewhere and as I'll discuss in more detail later on I think the most common source of profit opportunities is the prior activities of other entrepreneurs. Entrepreneurship itself creates profit opportunities which then opens up the opportunity for further entrepreneurship. One distinction that I want to make this was a distinction I made a little bit earlier in some comments is the distinction between looking at the process of economic growth versus the environment that produces economic growth of the environment within which economic growth can occur and I think there's good reason for considering both but what I intend to look at more today is the process of economic growth rather than the environment within which economic growth occurs. In fact I guess there if we divide up an examination of economic growth that way we've got a pretty good balance here on the panel because I think the Betkin Olsen papers more were involved with the environment with in which economic growth can occur whereas Garrison's paper and my paper deal more with the process by which economic growth is produced. I think it's worthwhile to look at the environment and in fact there's been a lot of interest lately at looking at the environment. Jerry Scully has a couple of things he had an article in the JPE a few years ago and has recently come out with a book essentially advocating market institutions and suggesting that economic freedom leads to additional economic growth. Barrow has done a little bit of work along those lines of course your work and I'll also advertise again the book that Pete Betkin mentioned by my colleague Jim Gortney along with Bob Lawson and Walter Block this year put out a book on measuring economic freedom and they have drawn out they've gone through a lot of care to draw up indexes of economic freedom and shown how a higher index of economic freedom leads to more economic growth and I might say one of the things that they did that I think has not been done in this literature so much in the past is they've got a pretty comprehensive index of economic freedom they look at a lot of of the components of economic freedom stable monetary policy freedom of exchange protection of property rights and other interesting variable that they include in economic freedoms that might be worth some discussion later on is the size of government they find that smaller smaller governments lead they call that more economic freedom and show that that's correlated with economic growth and the interesting thing about their work is that they really focus on economic variables there's been a lot of empirical work though barrels work that I've seen has drawn on this index that's been put out by gas deal Scully's work uses that same index and that index has a lot of of political type freedoms how democratic a country is you know if you have the right to vote and and so forth excuse me and Gortney and his colleagues explicitly leave out any of those political various variables to look specifically just at economic freedom so well I see some good reason for looking at the institutional characteristics that lead to economic growth nevertheless most of what I'm going to focus on is going to be with the process of economic growth contemporary growth theory perhaps starts with the solo model at least most economists who are familiar with growth theory will will be able to trace it back at least to the to the solo model where again using that Ricardian production function approach we find that growth is a function or output is a function of capital and labor and in some way time so we've got some solo residual presumably the time itself doesn't cause economic growth but there's something that's correlated with time that that leads to higher levels of output over time and there's there's been a lot of interesting results out of this literature the the idea of some golden rule of growth was popular at one time the idea of convergence where growth rates across countries ought to converge is an interesting idea and in fact has led to further developments in growth theory because as a matter of fact when we look at growth rates across countries we find out that they don't converge that some countries seem to have persistently low growth rates other countries seem to have persistently higher growth rates and so that's opened up the question of looking at why it is that convergence doesn't occur when we consider something like the solo model we look at the relationships among output capital and labor it's relatively easy to to model those things and despite some measurement difficulties it's relatively easy to measure capital and labor and output so we can estimate production functions and so forth and the effect of time in the solo models a little bit more problematic it's been associated with technological change we think that in some way or another probably technology advances over time and so that's how time ends up having its impact but nevertheless that's that's pretty nebulous and it's hard to measure and it's easier to measure capital and labor so as a result I guess that's where the light is better we focused in on on capital and labor as a result and you know lest we think that we've just done that for for simplicity because these things are easier to measure or that we're using it as some sort of a framework for economic growth or something like that these Ricardian type growth models have been taken pretty seriously by economists and policymakers and they've been considered to be pretty policy relevant so that in the decades after World War two when economists have offered policy advice as to what we can do to get less developed economies to grow looking at something along the lines of the solo model we've advised them to invest and you know if we can get more capital in the economy increase the capital labor ratio that would help other economies around the world have developed economies have developed through industrialization so that seemed like a good plan we have advised less developed economies to industrialize invest in in industries and try to bring them along to become competitive on the world market but the advice turned out not to be very good advice and despite the fact that following the investment advice of the World Bank and a bunch of consulting economists and so forth that that investment was the key a lot of money has gone into less developed economies and in many cases they've remained underdeveloped even though it would appear that investment would be the key in the solo model and so that that leads to looking in in other areas try to figure out well okay maybe if investment isn't the key maybe there's other things that we might be able to do and again looking at this the nebulous effect of time if we think the technology might have been the answer the technology is what advances over time then maybe what we can do is increase the level of technology available maybe increased research and development might make economies more productive over time or again looking within the Ricardian framework if in part you would expect R&D in developed countries to spill over to less developed countries maybe that's not the answer either and economists have recently noticed that somewhat neglected variable there if we think that output is a function of capital and labor and somehow output advances over time well we forgot to notice labor so maybe labor really is the key and not and not capital but it hasn't been so much labor like the number of bodies itself that economists have focused on recently but rather human capital and it may turn out that it's human capital that leads to economic growth and Lucas has been one of the pioneers here in his paper in 1988 talking about forces that lead to economic growth was one of the early mainstream economists to suggest that maybe labor is the key and specifically human capital and so if we invest in human capital and education that that's a good thing to do and I have to say I really like that argument myself because working in a state university you know I'm thinking yeah if we invest more in education that's probably going to spill over into the well-being of college faculty and so I don't know if it'll really help growth or not but but I'll push the argument just for my own my own self-interest in contrast this Ricardian view the the Smithian view of economic growth has focused less on the quantities of factors of production going into the production process and more on the process itself I mean even from the beginning of Smith's wealth of nations when he has that nice example of the pin factory and he talks about how much more productive people are due to the division of labor what he's really thinking of is not inputs into the production process we've got the same raw materials the same people making pins so Smith isn't talking about inputs into a production process he's talking about the process itself and how we might be able to alter and develop the production process in order to make us more productive with the same inputs and this idea has been noticed occasionally throughout the 20th century there's a nice paper by Alan Young in 1928 on increasing returns in economic progress and Young explicitly builds his ideas on Adam Smith and develops the idea that there may be increasing returns and it's increasing returns that leads to economic growth and economic progress that's a very Smithian way of looking at the idea of economic growth however increasing returns doesn't really work that well all the time in a general equilibrium model so at the same time if you've got these general equilibrium models of growth you're trying to build on the on the solo model which essentially is an equilibrium model increasing returns might not fit in so well and there is an article I remember reading in in graduate school which I was fascinated at about at the time by Nicholas Calder in 1972 called the irrelevance of equilibrium economics and Calder's article built upon Alan Young's article which in turn goes back to Adam Smith but Calder was arguing that in fact increasing returns really is the answer to economic growth but that doesn't really fit in too well with the general equilibrium framework that most economists are using so Calder's answer to this was just to throw out general equilibrium analysis all together actually some of these general equilibrium economists have gotten a little bit better at building in some of these ideas of increasing returns and it may well be it's problematic if you have increasing returns in particular industries because then you end up getting all kinds of corner solutions and indeterminacies and that sort of thing and and excuse me you know we we really like determinant interior solutions to our models right so about two weeks ago I got a little ill and I still have this residual cough so I break into a hacking cough in the middle of my talk it's but lately economists looking at the idea of economic growth have gotten more into the idea of increasing returns and especially it could be modeled pretty well if instead of having particular industries having increasing returns if the increasing returns are economy-wide even though they're decreasing returns in particular industries and that occurs by having spillovers so you might have some kind of technology spillovers or information spillovers or knowledge spillovers and Paul Romer has put together a few models that show how this can work so in each individual sector you have decreasing returns to scale and yet because of these spillovers across sectors of the economy you end up having increasing returns Romer also focuses on the role of human capital so human capital has become has really replaced physical capital as I think the the darling of mainstream growth theory these days anyway and Romer shows how additional research research and development activity can promote more economic growth because there might be increasing returns to R&D and it also could be that that these returns might be localized there might be more localized spillover so you can have geographic concentrations of areas where because of spillovers there ends up being higher growth rates other areas have lower growth rates so we can sort of massage the the Ricardian approach to economic growth in order to fit some of the facts like non-convergence and so contemporary models even though these models I think fit into what I would consider the Ricardian growth framework nevertheless fit the empirical facts a little bit better if we if we look at the facts of economic growth I think they have to weigh against the idea of inputs into the production process causing economic growth of course this occurred to Ricardo right away because of the problem of decreasing returns but over the history of the world there have been lots of economies that seem to have had the inputs in place that would have led to economic growth and yet where economic growth hasn't occurred I think earlier we had mentioned the idea of China that had a lot of physical capital a lot of human capital they were technologically advanced and yet the economy didn't take off and didn't grow the pyramid the pyramids in Egypt still remain as a monument to the physical capital that they have there but I'm not sure it was really directed into sectors that might have caused the most economic growth you know knowledge has been developing over this the the centuries you gotta be inspired by guys like Leonardo da Vinci yet for for all of his genius in the knowledge that he had it really didn't lead to economic growth which is a relatively recent phenomenon fact if you extrapolate backwards today real GNP is about 37 times as large as it was in 1874 it's about seven times larger than in 1919 is more than three times larger than in 1950 if we extrapolate backwards extrapolate this growth backwards we can see we don't have to go back very far a couple of centuries perhaps before we get to a point where we'll be at the subsistence level the economic growth that we have today could not have occurred over a very long period of time it's a relatively recent phenomenon and despite the fact that the inputs to the production process in a lot of cases were in place again China seems like a good example so it's probably not the inputs into the production process but rather changes in the process itself not it's the Smithian view of growth rather than the than the Ricardian view of growth that really explains why we have economic growth and the Austrian the Austrians seem to fit well into that Smithian tradition Bombavirk depicted a structure of production that was picked up by Hayek and later by Garrison and incorporated into into economic models where we look at the at the structure of production we look at at more roundabout production processes what we're really focusing in on there is the process by which economic output is produced as opposed to the inputs into the production process per se and this idea remains current in the Austrian theory in fact I think that Roger's presentation this morning is a good example about how we can get some pretty interesting results by looking at the process of production as opposed to focusing on the inputs into the production process if we consider the role of entrepreneurship and technological change in the in the neoclassical framework even if we consider more recent growth models like those of Lucas and those of Romer where there is some focus on the process and technological change and research and development are important still it seems to me that those models go back to the Ricardian framework in other words if we think the technological advance is good we can produce technology through R&D then what we do is we combine resources into the production process and we produce research and development in those models the same way we produce other output so we're really not focusing on the process of production at all but rather we're looking at inputs into the production process but instead of focusing so much on physical capital like we did in the 1950s and 60s now we're focusing on human capital or knowledge or research and development or something like that so what's the alternative well what alternative is Kersner's model of entrepreneurship Kersner views that entrepreneurs are people who are alert enough to spot previously unseen profit opportunities and then act on them so in Kersner's view the activity of entrepreneurship is noticing something that nobody's noticed before and I think Kersner's ideas build on on Hayek's ideas and especially in his 1945 article the use of knowledge in society where everybody has some specific knowledge of time and place knowledge is specific to their activities and what they're doing that other people don't have and if given the proper incentives people then can act on this this these the specific information of time and place that they have in order to be entrepreneurial how does it happen that people can spot entrepreneurial opportunities that nobody's seen before economic theory really biases us against thinking that this is possible because in the neoclassical competitive equilibrium all of the profit opportunities have been competed away in fact if we if we think about that joke Roger told me not to tell any jokes but if we think about the joke that forms the title of your your paper man sir about finding the the the big bills on the sidewalk is everybody know that joke if we think about that joke you know I mean the reason why it's funny to economists and I found in telling the joke it's not funny to anybody but it comes but but the reason why it's funny to economists is it shows you in a sense how ridiculous the equilibrium theory that we advocate is you know you know but but where do these profit opportunities come from and I don't think that Kersner really gives a very good answer to this question actually it's not that that interested in answering the question in his book competition entrepreneurship he really focuses on entrepreneurship as an equilibrating mechanism and shows how the activities of entrepreneurs can help bring an economy into equilibrium so he's not so much interested in where the profit opportunities come from or how they get noticed but the fact that entrepreneurial activity is an equilibrating function let me give you my answer to that question I think that most profit opportunities get noticed by entrepreneurs because they're new they spring up they're new something that that wasn't there before people tend to notice it and entrepreneurs tend to act on those profit opportunities and that's what initiates the the Kersnerian entrepreneurial process perhaps you have to have some special insight to really see what those profit opportunities are in hindsight they're perhaps easier to see than in foresight but nevertheless if we consider famous entrepreneurs and see the way that they've acted Andrew Carnegie who built his fortune in US Steel was quick to notice that the Bessemer process was a more productive way of producing steel and capitalized on that new process it's not like it was sitting around for centuries and all of a sudden Carnegie notices it it's a newly developed process that Carnegie is able to capitalize on Henry Ford who was entrepreneurial in developing the assembly line and producing automobiles through assembly lines could only do that when there was a mass market for automobiles in order for there to be a mass market for automobiles there had to be the service stations the roads others had to be other automobiles around so it wouldn't really have been feasible to have assembly line production of automobiles before the the environment was was the way it was in Ford's time so Henry Ford sensing a profit opportunity and acting on it this wasn't something that had gone unnoticed for centuries things had changed the environment had changed the profit opportunity was a relatively recent opportunity Bill Gates who became a multi-billionaire producing micro computer software was able to do that because micro computers suddenly became possible it's not like micro computers were sitting around for centuries with no decent operating system and all of a sudden it occurs to Gates I mean he was one of the first people there on the scene to see that that profit opportunity so it's not like there I mean it's not like these twenty dollar bills are lying around on the sidewalk for us to notice but as soon as they're dropped people pick them up pretty quickly the profit opportunities are noticed because they're new there's something that wasn't there before the people hadn't seen before because they weren't there before another good example is is Ray Cronk and McDonald's you know who had the good idea of hey we can make the food before the customers show up and then we can give it to him really quickly and the original McDonald's sold almost entirely to drive-in customers but there was a particular kind of market that had to exist at that time when America became more mobile more people are traveling by automobile they can stop in and pick up their their hamburgers and so forth the opportunity is right in fact it wasn't even Ray Cronk that that started McDonald's McDonald's was going concerned at the time and Ray Cronk was a guy who was selling like blenders milkshake makers and this McDonald's restaurant ordered a whole bunch of these things and Ray Cronk is curious he just you know he's gonna fill this order but he thought I'm gonna go out and look at this restaurant because I want to see what kind of a restaurant is ordering so many of these things and so he looked at the restaurant and actually saw an opportunity that perhaps the McDonald's who started the restaurant didn't see it was bought up the chain and and was very entrepreneurial about it but that's an opportunity that that was a relatively recent opportunity it's not that opportunity wasn't sitting around for centuries or even decades the the market environment had changed and really as soon as that opportunity was available for the picking Ray Cronk took advantage of it a lot of these entrepreneurial activities excuse me entrepreneurial activities arise because of the activities of other entrepreneurs we see that that Bill Gates made pretty good fortune in producing micro computer software but that's only because some entrepreneurs had a good idea to produce micro computers and you remember the the story of Apple computer and these you know Steve Jobs trying to sell this idea of computers to established companies and they thought well this ridiculous nobody's gonna want little computers like this so they started up Apple computer by themselves an entrepreneurial insight again and if they hadn't been entrepreneurial Gates wouldn't have had his opportunity but we can take that a step further back you couldn't have made these personal computers without micro processors the microprocessor wasn't very old before companies started making micro computers so one entrepreneurial insight one innovation leads to another one bit of entrepreneurial activity creates more entrepreneurial act opportunities for other people so where do these entrepreneurial activity opportunities come from they come from the activities of other entrepreneurs one of the big ideas these days in standard growth models is increasing returns economists are trying to build in increasing returns through things like knowledge externalities that's a big idea where people develop knowledge and then there's not there are knowledge spillovers into other industries and these knowledge externalities end up creating increasing returns for the economy as a whole so it's not individual firms or individual it's not individual firms that have increasing returns but rather the economy as a whole and that's a very Smithian kind of idea you know Smith argued that the division of labor was limited by the extent of the market so as we have additional firms we have economic growth that leads the market to grow which leads us to have the opportunity to have increased specialization which opens up additional entrepreneurial activities that idea is is pretty clear in the for example Romer's models of economic growth but but the the idea of knowledge externalities is there without it without really discussing the process by which by which these knowledge externalities get produced and so it's it's worth asking the question what conditions have to exist in order for these knowledge externalities to be to be produced and we've discussed the role of market institutions in creating a fertile environment for knowledge externalities so if we ask ourselves the question what's the process that generates these positive externalities that lead to economic growth I think the Kersnerian theory of entrepreneurship fits in pretty well and we can point to Kersnerian entrepreneurship as the process that leads to these knowledge externalities that produces economic growth if essentially when you when economic growth is viewed this way it becomes endogenous because entrepreneurial activity creates economic growth which generates additional entrepreneurial opportunities which leads to more economic opportunity entrepreneurial activities which creates more economic growth if you have a very static economy if you have something like a traditional economy I think one reason why the the Chinese economy was stagnant didn't exhibit economic growth as it was organized along more traditional lines and was in fact a relatively static economy and when things don't change very much from year to year from generation to generation obviously there's not going to be very much in the way of economic opportunities or entrepreneurial opportunities it's the same thing as if we look at the economy in a general equilibrium model in a general equilibrium model there aren't any entrepreneurial activities because all of the profit opportunities have already been competed away so there's really no room for Kersnerian entrepreneurship in a general equilibrium now if the general equilibrium is disturbed for some reason or another then profit opportunities arise then entrepreneurial activity can can start up looked at in this way you see the engine of economic growth the engine of innovation in an economy is entrepreneurship and that's different from the more standard neoclassical models that point to things like investment in human capital and research and development it's it's interesting you know when you you consider I mean I think well isn't that really the same thing though that that entrepreneurship leads to innovation and which creates the incentive to gain additional knowledge and so forth but if you consider it within the Ricardian framework of production function approach and you think that the answer really is research and development technological change human capital this isn't something that we just figured out today in fact it was well known in centrally planned economies decades ago and isn't that exactly the strategy that the Soviet Union tried to follow and they were pretty heavy into research and development they invested in human capital they invested in physical capital and yet they didn't have economic growth and the reason why I would assert is there there weren't any entrepreneurial act opportunity see so so what I'm trying to do here is to draw a contrast between the Kersnerian view of entrepreneurship and them and the more Ricardian view of research and development is something that can be produced you know you have inputs into a production function where you can produce research and development and end up getting additional economic activity if we take the Kersnerian framework and look at economic growth in the Kersnerian framework research and development isn't the cause of economic growth it's the effect the reason why people engage in research and development is because they see that their profit opportunities and so they engage in research and development to try to capitalize on those profit opportunities so research and development is the effect of economic growth the effect of entrepreneurial activities rather than the cause of economic growth and again to see the contrast consider an economy like the former Soviet Union where they they invested in research and development they invested in human and physical capital and yet they didn't have economic growth so where does this entrepreneurship come from it comes from past entrepreneurship as I've suggested before we don't have a static setting in the economy in this case we have a dynamic setting where every entrepreneurial opportunity opens up additional entrepreneurial activities for new entrepreneurs there are several different factors that might lead to economic growth once we take ourselves out of an equilibrium setting one one is that when an equilibrium is upset that creates profit opportunities because we're in a disequilibrium situation which can lead to additional entrepreneurial activity a second factor that can lead to entrepreneurship and economic growth is increases in income itself if income is growing then if we go back to Adam Smith's dictum that the division of labor is limited by the extent of the market a growing income leads to a bigger market and as the extent of the market increases we can end up having a finer division of labor and and we can have increased income as a result a third factor and I think this is really the most important factor is that entrepreneurial insights create new markets and as a result provide new opportunities for entrepreneurship that go along with that innovation and and this is really the key to to economic growth if we if we take it from a Kersnerian foundation you know if we consider for example an innovation like if you all tried an infrared mouse for your computer and use an infrared you don't have to have the court you just use an infrared mouse and that's an entrepreneurial insight and again like the examples I gave before the only way that you could really have that insight of the infrared mouse is if you somebody came up with the idea of using a mouse to begin with with the personal computer and the only way somebody could have that insight is if somebody had developed the personal computer to begin with again these entrepreneurial opportunities aren't just laying around waiting for people to discover them in fact pretty rapidly after the opportunities arise entrepreneurs spot them and they act on them and if we consider this example of the infrared mouse as a as an innovation and think about where it came from and consider the three factors that I'd concerned considered before it wasn't that entrepreneurship occurred because there was a disequilibrium situation it's not that the market was disequilibrated that created the opportunity for the infrared mouse it's that the new good the personal computer was available so disequilibrium isn't the explanation also rising incomes that's not the explanation rising incomes which increases the extent of the market in fact it's Kersnerian entrepreneurship the fact that somebody had the idea to begin with that you could work your computer with a mouse that's a better way to do it it's this Kersnerian insight this innovation that leads to the opportunity for the next innovation so we end up having entrepreneurial activity that's the result of past entrepreneurial activity if we consider using Kersner's model of entrepreneurship as a foundation for economic growth I think there are a couple of advantages to this first of all I think it adds some insight into Kersner's model of entrepreneurship and second of all I think it helps us to understand the process of economic growth a little better in Kersner's model of entrepreneurship he talks about these profit opportunities he's previously on notice profit opportunities but he doesn't really discuss where they come from and again I think that's because he's more interested in the equilibrating effects of entrepreneurial activity and so his idea is here's a profit opportunity that exists let's see how entrepreneurship leads toward market equilibrium but if we consider Kersnerian entrepreneurship within the context of economic growth then we endogenize the origin of these profit opportunities you know where do these profit opportunities come from to begin with well they come from the past entrepreneurial activities of other individuals you can see at the same time that we get some insight into into where the entrepreneurial activities might arise we see that for example if we have relatively stagnant economies we have economies that that aren't growing aren't developing there's not going to be very many entrepreneurial opportunities so we're not going to have very much Kersnerian entrepreneurship on the other hand in growing economies here's where the increasing returns comes to comes to play when you have growing economies more entrepreneurial act opportunities are created which leads to more entrepreneurship which leads to more economic growth so instead of just taking these entrepreneurial opportunities as as given or just available to entrepreneurs now by putting this in a growth framework we can see where the entrepreneurial insights actually come from they come from past entrepreneurship at the same time the putting Kersnerian entrepreneurship in is the engine of economic growth helps to give us some insight into growth theory because it it shows us how innovation takes place in the economy it focuses more on the Smithian idea of economic growth it focuses in on the idea that it's not more or better inputs that lead to economic growth but rather it's a better environment for entrepreneurs and this really leads back to the ideas of considering the environment of economic growth we think about market institutions stable money protection of property rights and so forth and all of those are our environmental factors that lead toward returns to entrepreneurs and so as a result if we have a setting that's conducive to entrepreneurship we're likely to get more economic growth and again this this contrasts with the neoclassical idea that I think has has kept up through the Lucas models and the Romer models and so forth of economic growth where it's the inputs into the production process now human capital and R&D are fashionable rather than physical capital but nevertheless we really don't see the process by which human capital or additional research and development lead to economic growth and the problem with that is that from a policy standpoint we run into the same problems that we ran into back when we thought that physical capital was the answer so that now the advice that we're that we're giving countries instead of invest in these infant industries and try to get them to grow so that you end up getting inefficient industries and developing economies that continue to drag the economy down because they continually have to subsidize the economy now instead we say well invest in human capital that's the answer you know if you invest in human capital but one ends up happening a lot of times you invest the economies invest in human capital but there's no real good way to apply human capital there's no entrepreneurial opportunities and a lot of times the human capital that less developed economies invest in goes overseas to economies where there are more entrepreneurial act opportunities so by using Kersner's entrepreneurship as a foundation for growth theory we see that it's not the inputs into the production process that are the key it's the process itself and its innovation and entrepreneurship that leads to economic growth so we need to create an environment that's conducive to economic growth and then we see that investment in physical capital research and development activities investment in human capital those are the results of economic growth we don't need to tell people to invest in research and development or human capital if entrepreneurial activities opportunities are there and it's profitable to do so then there's the market incentive for that type of investment to take place so that's really not good policy advice to begin with the policy advice is create institutions that are amenable to entrepreneurship and economic growth and at the same time you know if we take the Ricardian models of economic growth it still leads to bad policy advice as far as advising the investment in human capital physical capital research and development and so forth focusing on the inputs into the production process rather than the development of the process itself since the days of Ricardo when we focused on the inputs in the production process first of all we get pretty pessimistic results we end up producing the dismal science that shows us how we can never have economic advancement yet for two centuries since Adam Smith's insights we have and the reason why is as Smith told us the important thing is the process itself the institutional environment that creates an environment that that is conducive to economic growth it's the process not the inputs into the process