Monday 2016-10-03

The Invention of Enterprise collated by David Landes, Joel Mokyr, and William Baumol

This book is both greater than and less than the sum of its parts. As a history, the span is greater than the sum; and simultaneously less than because they could not agree as to what entrepreneurship is or was.

We necessarily begin with a few remarks on terms as they are used here (although other authors may have used them in different ways elsewhere in this book). First and foremost, we see an entrepreneur as anyone who undertakes some economic activity on her own initiative on the basis of alert observation of an opportunity to enhance her wealth, power, or prestige. Particularly in more recent times, this activity most often involves the creation and organization of a new business firm. But the activity did not always take this form and, indeed, does not always assume this form today.
-- The Conclusion

This seems an un-useful definition as it ties in human motivation: even with a live human directly in front of us, it is difficult to ascertain their motivations, let alone people who have been dead for centuries.

That leaves "anyone who undertakes some economic activity on her own initiative on the basis of alert observation of an opportunity". We can drop "economic" as all decisions are made under limited resources. The crux then reduces to seeing something and then acting upon it. Since we're not interested in a history of people running from bears, it behooves us to define the range of "opportunity".

Entrepreneurs alter the cost structure of their economy. They either make something newly available, or they reduce the costs of providing an existing something. Note that many items in the economy's cost structure are related, i.e. reducing the cost of shipping affects all goods shipped.

Since the cost of producing everything oneself is high, we see throughout history many entrepreneurs operating at a small scale, serving a collection of households. Since they are common, our everyday shop-keeepers and plumbers are usually ignored as entrepreneurs. As are people working in larger organizations.

At the other end of scale are entrepreneurs who have reduced costs across wide swaths of the cost structure, e.g. railroads which can operate in all seasons, whereas canals ice over. However, for a large impact, there needs to be a significantly developed economy with an extensive cost structure.

To round out the use cases for the definition, look at the MP3 player. Someone first invented it, and placed it into the cost structure. Then Apple made it more usable, reducing its overall cost by reducing several different layers (easy to use, easy to buy songs for, easy to seem cool).

Ultimately, we don't care about the entrepreneur's name or whether they benefited from their labors. We just care that costs were shifted down, or something new was added. Adjusted for size and interdependence of an economy's cost structure, we would like to know which historical periods have seen more changes to that structure.

This book would have been better served by having the collators spend a weekend asking questions of the historians, and then assembling the essays themselves from the inquiry.

We gain a greater understanding of the institutions that drive entrepreneurship, from contract law to the patent system. We understand the tension between productive entrepreneurship that enhances the growth of the economy and unproductive entrepreneurial activity that exploits opportunities for personal gain.
We consider individuals to be engaged in enterprising activities if they devote their own independent efforts to the acquisition of wealth, power, and prestige. They do not do so as employees of others, and, in the entrepreneurial process, they display initiative to a considerable degree. It seems clear that two primary avenues have been followed in this undertaking, which we label, for convenience, redistributive entrepreneurship and productive entrepreneurship. Examples of the first are obvious: aggressive warfare, larceny, bribery and rent-seeking litigation, among many others.
The policy designer who reads this book will find a number of lessons that are likely to be helpful in suggesting what institutions and institutional modifications promise to contribute to the general welfare and to invention and innovation
Thus, Nordhaus has provided spillover calculations that show how little of the efficiency rent goes to innovators: Using data from the U.S. non-farm business section, I estimate that innovators are able to capture about 2.2 percent of the total surplus from innovation. This number results from a low rate of initial appropriability (estimated to be around 7 percent) along with a high rate of depreciation of Schumpeterian profits (judged to be around 20 percent per year).the rate of profit on the replacement cost of capital over the 19482001 period is estimated to be 0.19 percent per year
Rome's wealthiest and most prominent families sought to make as many clients, debtors, and slaves as dependent as possible through force, usury, and control of the land. This predatory rentier spirit led to the century-long Social War (13329 BC) that saw the Republic polarize economically, paving the way for the subsequent empire to give way to serfdom. One looks in vain for the idea that profit-seeking enterprise might drive society forward to achieve higher levels of production and living standards. No major minds set about developing a policy for society or even the oligarchy as a class to get rich by economic growth and development of an internal market.
From Babylonian times down through imperial Rome, commercial earnings tended to be invested in land. Yet there was no land speculation based on rising prices. At most, subsistence land was shifted to growing cash crops, headed by olive oil and wine in the Mediterranean, and dates in the Near East, harvested increasingly by slaves working at lower cost.
We do not find banking intermediaries lending out people's savings to entrepreneurial borrowers. Throughout the Near East, what have been called banking families such as the Egibi (described by Wunsch in this volume) are best thought of as general entrepreneurs. They did hold deposits and made loans, but they paid the same rate of interest to depositors as they charged for their loans (normally 20 percent annually).
Down to modern times, small-scale personal debt was viewed as the first step toward forfeiting one's property, a danger to be entered into only unwillingly. The dominant ethic was to keep assets free of debt, especially land.
MacMullen (1974, 5152) notes the increasingly agrarian focus of moneylending, citing Rostovtzeff's calculation that mortgage loans yielded either fields foreclosed or interest in the neighborhood of 6 to 8 per cent. The rate compared favorably with the 6 per cent (at least in Italy) that one might reasonably hope for from money invested in agriculture
Landowners needed managerial talent, but are not usually deemed entrepreneurs. A rental levy or property foreclosure is not profit earned in production, except to the extent that land use is upgraded (which did indeed occur, to date palms in the Near East and to olive growing in Italy).
A comparison of antiquity's leading families with the Forbes lists of today's richest individuals in many countries shows a common basis of well-placed families taking control of the land, mineral rights, and other enterprises from the state, and leasing them for a stipulated rent to be paid to the civic authority.
The Euphrates and Tigris carry abundant waters for irrigation, but they tend to flood their plains andunlike the Nile in Egyptdo so when water is least needed: at grain harvest time. Irrigation therefore is a precondition for farming in southern Mesopotamia.
One of the major problems for small producers was that taxes were increasingly payable in money rather than commodities. Given the limited marketing possibilities in more remote regions, farmers were burdened with produce they could not sell. The Neo-Babylonian tax farmer often established himself as the go-between, accepting commodities for the tax payment from the small rural cultivator, converting the crops to cash through transport and sale, thereby linking the producer and consumer, and then delivering the tax money to the crown. This stimulated market production by linking the producer and consumer and by organizing transport. The tax farmer made his profit in two ways: first, by collecting taxes in excess of what he paid the state, and second, by marketing the crops to consumers to raise the money.
Slaves could live and work independently of their master by paying him a mandattu fee. They basically were hiring or renting themselves from their master. As they had to earn much more than an average hireling, this was an option only for clever and well-trained slaves. In addition to paying their own mandattu, some privileged Egibi slaves also paid that of their wife so that she could accompany them.
Moreover, Neo-Babylonian society had the institution of undivided brothers comparable to the Hindu joint family,54 allowing the business to be kept running as a single entity for a considerable period of time after the father's death. Without any need for legal formalities, the eldest son succeeded to his father's business and represented the heirs collectively. This delayed the inheritance divisionan essential condition for a smooth transition. As long as brothers did not divide their father's inheritance, all business proceeds belonged to all of them according to their shares in the inheritance, regardless of who did the actual work.
Although information on Islam's early commercial expansions is scant, we know that when a ship carrying Middle Easterners arrived in a foreign land, representatives of its passengers negotiated with the ruler's side over trading privileges and settlement rights. The voyages that carried Middle Eastern merchants to uncharted foreign lands often resulted in the opening of new markets (Ashtor 1976, chap. 3; Abu-Lughod 1989, chap. 8; Chaudhuri 1985, chap. 2). The early waves of Middle Eastern settlers in East Africa introduced new commodities into the continent. Where commercially less advanced societies were involved, the process of market opening also required the diffusion of certain Middle Eastern institutions. Thus, in connecting parts of tropical Africa with global markets, Muslim merchants carried commercial regulations into places without written laws. They also introduced arithmetic, which simplified accounting, and metal coins, which facilitated payments and wealth accumulation. Further, they spread Arabic as a commercial lingua francaa facilitator of communication, and thus exchange and cooperation, among areas previously segregated by linguistic differences.
The absence of an Abu Taqiyya archive is symptomatic, then, of a fundamental characteristic of the premodern Middle Eastern economy: its dependence on atomistic and generally ephemeral commercial enterprises. If Abu Taqiyya did not establish a formal conglomerate that his descendants could maintain, and thus had no need for elaborate record keeping, a basic reason is that the prevailing commercial institutions of his region made it optimal to work through simple, small, and short-lived private enterprises.
In Abu Taqiyya's time, coffee producers, traders, and consumers encountered opposition based, formally, on the notion that black water amounted to bid'aa harmful innovation incompatible with Islam. This term entered Islamic discourse in the early days of the religion, to characterize practices unapproved in the brief period up to the Prophet's death in 632. It is thus the converse of sunnastandards introduced by Muhammad and his pious companions. In its strictest form, bid'aserved to dismiss as un-Islamic every commodity, habit, and idea unknown in Arabia during Muhammad's lifetime. Over the ages, conservatives and traditionalists have castigated as bid'a a wide range of innovations, including the table, the printing press, and football (Talbi 1960; Lewis 1993, 28384). The charge that coffee drinkers reap hell-fire represented neither the first nor the last time that opponents of innovation have sought legitimacy from Islamic tradition.
As of February 2007, Fortune's Global 2000, a list of the world's 2,000 leading publicly traded companies, included 14 companies from Malaysia, 11 from Turkey, 5 from Saudi Arabia, 3 from Egypt, 2 from Pakistan, and 1 from Jordan, for a total of 36 companies headquartered in a predominantly Muslim country.
The fundamental question is not which factors harmed economic advancement but why economically disadvantageous traits proved so persistent.
In certain spheres of life, innovators are fretting about whether they will be accused of introducing forbidden practices, still known in certain circles as bid'a.
The conquest of the medieval forest frontier from the ninth to the thirteenth century is perhaps the best demonstration of the power of entrepreneurial lordship: lords provided capital and incentives to peasants in order to capture their labor for a variety of objectives. Here lords-monasteries, princes, bishops, and so on-offered special privileges and power over newly won agricultural land. Such incentives caused settled rural communities to chip away constantly at the surrounding wasteland, bringing more and more of it under the plow. The second form of lord-peasant cooperation that helped revolutionize agriculture was the recruitment of settlers to lands newly obtained by conquest. To secure colonists, lords often drew up agreements with representatives of prospective settlers, offering terms far more favorable than those of the old population centers. In exchange for payment of a small tax per homestead, such colonists received much more power over the land they farmed as well as rights that amounted to personal freedom. One example was Wichmann, archbishop of Magdeburg (115292) who sent out locatores to make the pitch for settlers from among the relatively crowded countryside of Flanders and Holland. The attractions were considerable: freedom from all forced labor on the lord's land, and possession of land in return for a relatively small rent. By the late twelfth century, German speakers were settled in eastern Europe from Estonia to the Carpathian Mountains. Nor all were farmers. It was Germans who worked the gold and silver mines that were developed to exploit the mineral deposits discovered in the Slavic midsection of Europe (Bartlett 1994).
The most significant achievement of medieval southern businessmen was the super-company, a form of enterprise that most effectively combined the possibilities of profit in the thirteenth century and thus may serve as a suitable case study for our purposes. These organizations were unusually large and qualitatively different, engaged simultaneously in an exceptional range of activity-general trading, commodity trading, banking, and manufacturing-over a wide geographical area for an extended period. They all took root in the fruitful commercial soil of Florence, amid a competitive and contentious archipelago of cities. The demand for food generated by these urban populations challenged the entrepreneurs who formed these companies, which pooled capital in order to lock up long-term grain contracts with the Angevin rulers of southern Italy, and from that base diversified into long-distance trade and local manufacture alike. How were these large firms organized? Like most Italian firms of significant size, they were quasi-permanent multiple partnerships that did not dissolve upon the death or removal of the managing partners.
One of the most pervasive problems besetting medieval entrepreneurs was the rigidity of the money supply, and some of the most creative innovations were directed at alleviating that problem. In the thirteenth century, money in circulation was overwhelmingly in the form of minted coins.
Some changers acquired sufficient customers and enough specie on deposit that they recorded such deposits for safekeeping in terms of a standard money of account. Such book money began to be traded by merchants in place of the real thing (Murray 2005, 11977). In this manner, merchant money changers gradually became merchant-bankers, executing payments, not by issuing checks (at least not before the fourteenth century), but by transferring charges and credits in the accounts of their clients. This was the so-called giro system (from the Italian girare, to rotate), still in use in contemporary Europe. The system worked because the bankers and their merchant clients knew each other and gave their instructions orally at the banker's table, so that the entries could be made on the spot.
Indeed the entrepreneurial innovations that in many ways began with the Champagne fairs, that great meeting ground of south and north, were eventually captured and urbanized in Bruges by the fourteenth century, to be passed on and expanded by Antwerp and Amsterdam in turn.
The Italians also brought large amounts of cash, with which they purchased future wool clips and financed the English war effort (other Italian companies financed the French king). Step by step, the Flemish were forced to reorient their efforts away from the transport and direct trade in commodities, favoring instead the sedentary and stable role of broker, partner, and entrepreneur. The government of Bruges furthered this reorientation by sparing neither effort nor expense in building up the city's business infrastructure. Even before the city had a proper town hall, it boasted two major commercial buildings, several municipal scales, and the huge man-powered crane made famous by generations of Flemish artists. Bruges was also the first city in the Low Countries to ban thatched roofs in the heart of the city in an effort to contain that curse of medieval towns, outbreaks of fire.
The history of entrepreneurs across the medieval millennium (5001500) is instructive on a number of counts. First is the lesson that medieval society could be entrepreneurial (i.e., effective in achieving economic growth) often without visible individual entrepreneurs. This flies in the face of modern notions of the triumphant individual who grasps and exploits economic opportunities, quite apart from, indeed often challenging, social and political norms. What drove growth across the era was not individual profit maximization, but dedication to a variety of communal goals, all of which emanated from a church-defined mission of a Christian society.
Monasteries pioneered in management and record-keeping technologies, often overlooked, that refined and improved seeds and crops as well as the domestic animals so critical to maintenance of soil fertility. It was not accidental that monks tended the largest flocks of sheep in England, as well as the most valuable vineyards of France by 1200. Income from these innovations supported grand construction projects, investments in religious culture, and the trading networks that brought gold, silks, and spices to the liturgies and refectory tables of monastic Europe. Quintessentially long-term institutions, monasteries provided the important admixture of stability and investment necessary to settle and transform the European countryside across the medieval centuries.
The greatest entrepreneurial institution of all, the medieval city, owed its beginnings to the actions of lords, both clerical and secular, in generating the demand for goods and services that enabled economically specialized communities to gather around castles and monasteries. And beyond being customers, lords granted a variety of liberties and exemptions that unfettered trade in incipient towns, and lords acted as guarantors of markets and courts that served to attract outsiders and their money. This combination of production and distributive trade against a background of relative freedom and legal guarantees of property and exchange was the common denominator of the return of urban communities to Europe. Moreover, unlike cities in the Roman or Greek past, medieval towns and cities had at their center an entrepreneurial essence that made them the leading laboratories of economic innovation down to the present day.
Calvin himself had been trained as a lawyer, and deemed that to be an honorable calling, as were not only those of other professional persons (e.g., doctors, professors, theologians), but also businessmen, and thus entrepreneurs. Indeed that list implicitly includes merchants, financiers, industrialists, retailers, storekeepers, and also industrial craftsmen or artisans, all so necessary for the maintenance and prosperity of a well-ordered civil society.
In Tawney's view, the economic mechanism that lay behind this vast transfer of land to the gentry was the Price Revolution: in particular the variety of responses to this long sustained inflation, commencing just before 1520 and lasting until the mid-1650s.37 Tawney contended that the traditional feudal aristocracy were suffering from three related problems during the Price Revolution era. First, most aristocrats' estates were in the form of hundreds or more manors scattered across not just England, but across the British Isles. That scattering made estate management very difficult to undertake, all the more so since much of their estate income was in the form of fixed feudal dues and relatively fixed (nominal) rents for both freehold and copyhold peasant tenures. Consequently, their estate incomes did not rise with inflation. The second problem was that many of the aristocracy were still imbued with a feudal mentality that scorned any thought of commercial estate improvements and profit-maximizationcertainly not any form of agrarian capitalism, as Tawney envisaged itand also any thought of seriously disrupting the lives of their tenants, many so loyal to their lords over many generations. The third and related problem was that their political, military, and social statuses, so necessary to maintain their aristocratic rank, were becoming increasingly expensive to maintain, especially when many such costschiefly military and court serviceswere rising faster than the consumer price index, or the overall price level.38 Whether all or most of these factors were really true of the Elizabethan aristocracy, clearly many did opt for the line of least resistance in coping with inflation: namely, to live off their capital by selling lands, especially recently acquired lands that were not governed by aristocratic estate entails. That meant chiefly their lands of monastic origin, though many aristocrats were also finally forced to sell patrimonial estate lands as well. The Tudor and early Stuart monarchs were similarly forced to sell off crown lands, for the very same reasons.39 Many of the gentry, on the other handagain, in Tawney's viewdid not face such enormous demands on their time and energies. Furthermore, in having far smaller estates, often with only a few manors, they had a commensurately greater ability to engage in rational estate management, and indeed to engage in the enclosures that became so prominent in Tudor-Stuart and Hanoverian England, so that by the early eighteenth century about 70 percent of the cultivated arable land of England had been enclosed.
But consider, for example, the ingenuity and entrepreneurship of the Herefordshire gentleman farmer Roland Vaughan, who, in 1589, invented and then popularized the floating meadow (or water meadow). This capital-intensive innovation involved the use of sluice gates, dykes, and canals to divert water from streams or rivers to flood the meadows or parts of the arable in November, and then to drain them in March. That provided a thermal blanket, under the ice, to protect the underlying soil from freezing and to promote far earlier and more intense germination, yielding as much as an eightfold increase in hay production.
Coke-smelting became fully cost-effective and thus successful, indeed revolutionary, only with application of John Smeaton's piston air pumps (replacing bellows, ca. 1760) and then James Watt's steam engine to power them, in 1776.
The initial solution to that problem, and at the same time, the previously indicated second solution to the overall coal problem, came in 170910 with Abraham Darby's development of coke fuels. That fuel was the successful result of distilling coal into coke in an airless furnace, as a virtually purified form of carbon.
The combination of technological innovation and entrepreneurial ingenuity that physically and economically made this possibleindeed in a very major form of industrial capitalism for this early-modern erawas the development of the so-called Atlantic ship or full-rigged ship.70 Portuguese shipyards, responding to demands from those oceangoing mariners who had been unable to cope with the Atlantic trade winds off the African coast, had initiated this industrial and commercial transformation by copying and adapting the triangular lateen-sail rigging of the Arabic coastal ship, in fact, a very small boat, known as the dhow; but the result was a much larger ship (40 to 200 tonnes) known as the caravel, with correspondingly much larger masts. It was that lateen-rigging that provided the caravel with the maneuverability to cope with these Atlantic trade winds, and allowed Portuguese mariners, from 1434, to advance south of Cape Bojador (26 N), and thus to commence their commercial and colonial acquisitions along the West African coast, and ultimately to Asia (India and the East Indies) in a highly successful search for both gold and spices, with the aid of a much improved oceangoing ship.
Subsequently, some unknown Iberian shipyards made the next advance in ship rigging, perhaps in the mid-fifteenth century, by combining the large square canvas sails of the northern Hanseatic coggeproviding power and speedwith the caravel's lateen sails: a small lateen spritsail on the bow, the square sails in the middle, and a large lateen sail on the rear or mizzenmast. These full-rigged or Atlantic ships, better known as carracks and galleons, were much larger than the Portuguese caravels, expanding in size to 600 tonnes in the early sixteenth century and then to 1,500 tonnes by the 1590s. A major factor in that increased scale was the addition of naval artillery: up to fifty or sixty cannons, placed both on deck and below deck. It was this large, full-rigged, heavily armed ship that allowed Europeans to dominate the world's oceanic trade routes up to the nineteenth century.
The very first such overseas joint-stock trading company, the Muscovy or Russia Company, was established in May 1553, in the direct aftermath of the Antwerp crisis.73 It is also the first (historically verifiable) joint-stock company, a revolutionary new form of business organization.74 The founders of this new venture subscribed a capital sum of 6,000 through the sale of stock, that is, shares of ownership, with a par value of 25 (i.e., 240 shares). This capital was then invested, with additional expenditures of 4,000, in the purchase of three ships and trading goods. Two ships were lost in the ice of the White Sea en route to Russia (which then had no Baltic port); but the third, under Richard Chanceller, the expedition's leader, did reach Archangel.
The brilliant entrepreneurial success of the Levant Company was due principally to two factors. The first was skilful diplomacy, especially in negotiating better commercial relations and commercial services, in supplying better-quality textiles than those offered by its European and especially Venetian competitors.80 The second was much superior naval technology and naval tactics. By the mid-seventeenth century, the English were building far larger, far stronger oak-based carracks and galleons, which were also more heavily gunned than were those of any of their rivals in the Mediterranean basin. They proved to be largely invincible to both pirates and Muslim corsairswhich had for so long menaced the Mediterranean shipping lanes. While their freight rates were perhaps 10 percent higher than those of their competitors, their insurance rates were far lowerand above all the Levant Company's galleons offered the virtual certainty of delivering their cargoes.
Particularly puzzling about the Dutch Golden Age is the almost complete absence, as late as 1580, of entrepreneurs wealthy enough to finance large investments in agriculture, industry, and trade. Before the Dutch Revolt brewers, textile manufacturers, and merchants in the northern part of the Low Countries seldom owned more than a few thousand guilders (e.g., Brnner 1924). For example, in 1498 only five drapers in Leidenat the time the principal producer of woolen cloth in Hollandwere worth more than 5,000 guilders (Posthumus 1908, 278).
Even the largest investors in the VOC started with modest capital of only several thousands of guilders (Gelderblom 2000; see also Gelderblom 2003a). The limited data available on the wealth of other immigrant merchants, notably Germans, Portuguese Jews, and Englishmen, show a similar picture.
A more appropriate means to obtain long-term funding was to sell annuities secured by real estate. This instrument was first used in the Low Countries in the thirteenth century, and its importance increased considerably over the next centuries (Zuijderduijn 2009). Entrepreneurs who needed funds sold the right to an annual income (rente), in return for which they received a principal sum.
For one thing, the rente was not considered usurious. For another, the value of the underlying real estate was rather stable, especially once a growing number of houses were built in brick instead of timber.
Finally, the Dutch Republic was one of the first European states to command a standing navy that was used, among other things, to protect the merchant fleet (Bruijn 1993).
A major improvement in the settlement of disputes in the Dutch Golden Age emerged from a combined effort of magistrates and entrepreneurs. On the one hand, courts began to accept account books as legal proof for disputed transactions. On the other, businessmen increasingly kept detailed accounts of their commercial and financial transactions.38 It will come as no surprise that long-distance traders in the major ports of the Dutch Republic were trained to use double entry bookkeeping. However, the habit of keeping a paper track of one's money and goods spread much wider. Farmers, textile manufacturers, and retailers also kept detailed accounts of their operations. Indeed, women were trained to do so, witness several surviving account books from the seventeenth century (Sterck 1916; Boot 1974, 3233; Vrugt 1996). With the acceptance of these accounts in court, what was initially a monitoring device now doubled as a means to enforce contracts.
successful entrepreneur in the Industrial Revolution, as I shall argue, was not necessarily a many-sided person who could do it all, as maintained by Charles Wilson (1963, 175). What he represented was one side of the business (either technical or managerial),
The successful entrepreneur in the Industrial Revolution, as I shall argue, was not necessarily a many-sided person who could do it all, as maintained by Charles Wilson (1963, 175). What he represented was one side of the business (either technical or managerial), having the ability to identify a need or an opportunity, then cooperate with others who possessed a different comparative advantage to take advantage of it. Such cooperation often took the form of partnerships or market transactions at arm's length, although a personal element was rarely missing altogether. In other cases, it involved hiring an expert, a manager, an overseeing engineer, who could be trusted.
Given that third-party (state) contract enforcement was rudimentary at best, what was the source of the cement that held British economic society together? The answer is that besides the formal mechanisms of the state, invoked only as a last resort, there was a set of social norms that supported entrepreneurial activity to a point not fully recognized. These norms may be called the culture of the gentleman-entrepreneur.
What matters here is that if everyone could think of himself potentially as noblesse, everyone was oblig by a gentlemanly code of behavior.
In eighteenth-century Britain, a businessman's most important asset was perhaps his reputation as a gentleman even if he was not a gentleman. Landowning parasitic drones were no more gentlemen than sword-wielding medieval thugs were chivalrous.
By the middle of the eighteenth century, before the Industrial Revolution, the idea of a gentleman implies certain behavioral codes that signaled that a person was trustworthy. It was, above all, important not to come across as greedy and rapacious.
In eighteenth-century Britain, a businessman's most important asset was perhaps his reputation as a gentleman even if he was not a gentleman. Landowning parasitic drones were no more gentlemen than sword-wielding medieval thugs were chivalrous. The ideal and the reality were increasingly divorced. There were certain things that a gentleman did and others he did not; and while such norms were of course no more perfectly followed than formal laws, breaking the rules of gentlemanly conduct was costly.14 By the middle of the eighteenth century, before the Industrial Revolution, the idea of a gentleman implies certain behavioral codes that signaled that a person was trustworthy. It was, above all, important not to come across as greedy and rapacious.
The great legal scholar William Blackstone referred to Britain as a Polite and Commercial People.17 Politeness was widely equated with law-abiding behavior, and it was intuitively sensed that commercial success depended a great deal on politeness.
Richard Trevithick, the inventor of the high-pressure steam engine, and Richard Roberts, possibly the greatest mechanical genius of the early nineteenth century, were both failed entrepreneurs who died essentially penniless. These people, and others like them, created huge externalities in the sense that others were able to capture the fruits of their efforts even if they were not.
John Marshall, the Leeds flax spinner, left at his death in 1845 about 2,000,000; he inherited from his father exactly 9,000 (a tidy sum, to be sure).
John Marshall, the Leeds flax spinner, left at his death in 1845 about 2,000,000; he inherited from his father exactly 9,000 (a tidy sum, to be sure). The only manufacturer who left a known sum larger than that was William Crawshay, the ironmaster, but he was of course born into a successful business. In cotton, besides the textbook example of Arkwright, we know of the successful Jedediah Strutt, his erstwhile partner and son of a small farmer and maltser, who left 160,000 in 1797. John Horrocks (whose father was a small quarrymaster [Crouzet 1985, 131]) left 150,000, and quite a few lesser-known spinners left estates valued at 40,000 or more. Even those who died insolvent, as I argued above, should not necessarily be written off as failures. Some obvious candidates for failure in the cotton industry can, of course be found. One was William Radcliffe, a Derbyshire improver of cotton machinery, who bought Samuel Oldknow's mill after the latter's bankruptcy, and apparently died poor after a roller-coaster career. Another was Samuel Hall, a cotton-spinner and engineer who died in very reduced circumstances. The cotton merchant Thomas Walker had to live his final years from a bequest. Perhaps the most spectacular example of a failed entrepreneur was the highly eccentric Archibald Cochrane, Earl of Dundonald, who spent his family's fortune on an ill-fated chemical business. More than anything else, however, Cochrane was unlucky.37 Somewhat comparable was the case of Henry Fourdrinier, a well-to-do London stationer who gambled on the main innovation in papermaking of his age, Robert's continuous papermaking machine. He spent 60,000 on the business and failed in 1810. Both Dundonald and Fourdrinier are thus examples of a significant negative private return on entrepreneurship, hardscrabble lives ending in poverty that might have given the entrepreneurial career a bad name.
Furthermore, many young men of great ability chose to enter the church in search of spiritual rather than material rewards, with the risk-takers opting for missionary work overseas.
If there was a governing principle in early Victorian society, it was that advances in technology created the potential for sustained improvement in the standard of living. Unlocking this potential required good institutions, and since not all institutions were fully rational, institutional reform was required. The liberalization of markets emphasized by Smith was only one of the reforms required.
Prior to 1830, large projects focused on the enclosure of commons and the extension of agricultural estates, together with road improvements effected by turnpike trusts and the building of canals. These reforms improved the productivity of the land, and the local transport infrastructure, providing increased traffic that could be fed into, or distributed by, the railway system. Town improvementssuch as new slaughterhouses and cattle marketsalso helped.
Improvement was not just a question of raising the material standard of living, although alleviating poverty was certainly a major concern (as demonstrated by the Poor Law Report of 1834). Improvement was a moral phenomenon (Searle 1998). Material improvement was merely an instrument for alleviating the constraints on the moral improvement of the individual, and hence the moral improvement of society. The importance of morality is exemplified in the career of William Gladstone, who was prime minister on no fewer than four occasions in the Victorian period (Matthew 2004). While Gladstone's responsibilities involved economic regulation and national budgeting, he spent most of his time reading theology (on which he amassed an enormous library that can still be consulted today). His political speeches focused on the application of moral principles to contentious issues, and eschewed the type of propaganda about wealth-creation so familiar today.
In what was seen as a great indignity in the UK, Italians celebrated Il Sorpasso in 1990, as the GDP of Italy overtook that of the UK for the first time since the days of the Medici.
The two novel innovations in financial instruments were, first, the development of sale and leaseback finance by Burton (and later used by Jack Cohen) to fund rapid store growth and, second, the capitalization of consumer debt by the furniture retailers Drage's and Great Universal, enabling them to borrow on the strength of hundreds of thousands of weekly installment commitments (Scott 1994, 2009).1 Singer, the creator of mass installment sales, had never seen its consumer debt as a leverageable asset, for instance (Godley 2006).
The golden age, characterized by big government, big business and big unions, began to sour in the British economy during the 1960s and 1970s. Yet within this standard treatment of faltering postwar economic maturity, entrepreneurial inertia, and a relative decline in living standards, there remained an active hinterland of entrepreneurial dynamism. Indeed, with annual economic growth at 34 percent, such was the rate of change that opportunities inevitably emerged. Gerald Ronson, one of Britain's leading property entrepreneurs since the 1960s, suggested it was an easy time to be an entrepreneur because there was so little competition: You could make money falling out of bed.
The most spectacularly successful of all was Charles Clore, whose search for new property deals brought him to realize that traditional and conservatively managed retail chains were sitting on enormously undervalued property portfolios and were reluctant to allow their asset base to be realized. Clore decided that they should be forced to and so pioneered competitive takeovers in Britain with his hostile acquisition of the large, integrated shoe company J. Sears.
The most spectacularly successful of all was Charles Clore, whose search for new property deals brought him to realize that traditional and conservatively managed retail chains were sitting on enormously undervalued property portfolios and were reluctant to allow their asset base to be realized. Clore decided that they should be forced to and so pioneered competitive takeovers in Britain with his hostile acquisition of the large, integrated shoe company J. Sears. Sears in 1953 could be described as a stereotype of the conservatively managed, third- or fourth-generation British family firm; its entrepreneurial phase had finished several decades before (Jefferys 1954). It was one of Britain's largest firms and dominated shoe manufacturing, with the largest shoe factory in Britain. Its undervalued property portfolio of 920 shoe stores in every High Street in the land was the attraction to Clore (Clutterbuck and Devine 1987, 64). The
In fact the mostly anonymous Joseph Littman was the architect of sale and leaseback. Littman collaborated with Burton during the 1920s and 1930s. He died in 1953 (aged only fifty-five), and while he had amassed a considerable fortuneRubinstein (2006, 28689) ranks his estate as the fourth largest of all those dying between 1950 and 1954had he lived to old age, his achievements would have undoubtedly brought much greater recognition.
Especially the display of American machine tools at the Paris exhibition of 1867 and the news about mass production of guns and rifles during the Civil War had generated great interest among the more enterprising manufacturers. The great chance for a decisive leap forward came after the Franco-Prussian War of 1871. The Prussian military was absolutely determined both to equip its infantry with better guns and to acquire modern American gun factories as a backbone of future armament.
Serendipity had it that hydrocarbons are at the root of three major product families: dyestuffs, synthetic materials, and pharmaceuticals. In looking for one, chemists would inevitably find the others. They just had to find out what the properties of the respective stuff were they had hit upon. This was done by massive testing on a hitherto unprecedented scale by hundreds of professionals in the laboratories of the big three (Hoechst, Bayer, BASF) of the German chemical industry. In the words of Carl Duisberg, head of Bayer, there was nowhere any trace of a flash of genius in the labs, just academic toil and screening (van den Belt and Rip 1987, 154). Eventually his company found more than 10,000 synthetic dyestuffs before the eve of World War I, 2,000 of which were marketed. At the same time they had hit on dyestuffs that wouldn't dye but could cure ills. Many twentieth-century drugs are failed dyes, Valium being just the most profitable among them.
To the dismay of Rathenau, the postmaster general decided that the telephone would fall under the same royal privilege as the telegraph and would run as a state company. Eventually Rathenau was lucky. The next business idea imported from America worked: Edison's electric light. Again, Siemens was the partner to do the manufacturing in the jointly owned German Edison Company. The partnership with Siemens proved uneasy, however. Rathenau eventually took most of the business out of this partnership and created AEG (Wengenroth 1990).
An important group of entrepreneurs in Germany were state servants. While imperial Germany and most of its states had favored private enterprise during industrialization, there were some notable exceptions. In the case of postal services it was a royal prerogative that had been quite unceremoniously inflicted on the Princely Mail of Thurn and Taxis, a Frankfurt-based private mail service operating in Germany and its European neighbors. Thurn and Taxis were pro-Austrian, and when Prussian troops occupied Frankfurt at the end of the Austro-Prussian war of 186667 the company had to abandon its business to Prussia and its allies. Ever since, until privatization in 1995, postal services, including telegraph and telephone, were staterun in Germany. With the foundation of the German Empire in 1871 the Reichspost (Imperial Post) was created. Heinrich von Stephan, postmaster general until his death in 1897, was an entrepreneur rather than just an administrator. Son of a tailor and with nine siblings, Stephan was a good example of both upward mobility and nonmonetary rewards. Working his way up the career ladder of the Prussian post, he received an honorary doctorate from the prestigious University of Halle for his scientific publications in 1873, was eventually ennobled in 1885, became a member of the Prussian House of Lords, and was canon secular in the city of Merseburg.4 It had been his memoir to the Prussian court that suggested the forcible takeover of the Princely Mail of Thurn and Taxis as soon as this was militarily feasible. The growth rate of his business, which eventually included simple banking and savings services, was about ten times the growth rate of the economy. In the 1890s its annual budget was about $100 million and continued to grow. But the Reichspost was never meant to make large profits. Very much to the chagrin of Parliament and with strong support by imperial government, Stephan, a system builder par excellence, plowed back profits and subsidized peripheral regions of the empire through a system of standard rates. Among his many institutional innovations was the General Postal Union created in Switzerland in 1874, which very much simplified international mail services. Only three years after the Franco-Prussian War, Stephan had no qualms about agreeing on French as the working language of the Postal Union (Wengenroth 2000, 1045).
The great industrial families were resented by the reactionary elements of French society. The big employers were often members of religious minorities, Protestant or Jewish. Their attempts to enter the social elite, for example the corps of army officers, met with resentment and hostility. This was the making of the infamous Dreyfus affair, in which a French officer from a Jewish entrepreneurial family was unjustly accused and convicted of spying for Germany. The French found it hard to understand the quick enrichment of Protestant and Jewish families, just as they found it hard to comprehend the fast rise of German power, or of the Anglo-Saxon countries. French reactionaries were quick to blame France's loss of power and position on the supposed defects of republican government.
The socialist nationalizations of 1981 moved more capital into government hands. The state share of the industrial labor force went from 6 percent to 19 percent, and it controlled 90 percent of bank deposits. Now the state controlled thirteen of the twenty biggest companies in the country.
By the end of the 1850s roughly 800 steamboats serviced the interior rivers of the United States. Transit and turnaround times fell dramatically. Freight rates fell by 90 percent in real terms between 1815 and 1860 for the upstream trip and by nearly 40 percent downstream.
One of the first post-Revolution graduates of Columbia University, Clinton was appointed a U.S. senator in 1802. He resigned the following year to become mayor of New York City, a position he held for most of the next twelve years. Unlike many members of the (National) Republican party, Clinton favored canal construction. He became a canal commissioner in 1810, and the major canal bill passed the legislature in 1817, his first year as governor. In 1825, at the official opening in New York City, Clinton poured water from Lake Erie into the Atlantic Ocean (the Wedding of the Waters) to symbolize connecting the two bodies. The completed canal cost $7 million; the bill was paid with a combination of earmarked taxes, borrowing on state credit, and toll collection as sections of the canal opened. Citizens of New York purchased the initial issues of Erie bonds, but, once the success of the canal became evident, large investors and foreign buyers entered the market.31 The canal produced two significant externalities that could have justified federal involvement. First, as symbolized by Clinton's pouring of the water, it tied together parts of the country that effectively had been separated by the Appalachian Mountains. As early as 1775, George Washington worried about losing the land west of the mountains to France or Canada unless the mountain barrier could be over- come.32 Second, the canal trained a large number of engineers who ultimately would help to build the nation's canals, railroads, and sanitation systems.
In the popular imagination, railroads symbolize the spirit of the antebellum period. They further reduced transportation costs and opened the country. As Alfred Chandler (1965) emphasized, the railroads were the nation's first giant enterprises. Their management problems and methods proved instructive to all U.S. industrial entrepreneurs. Their securities dominated commodity trading in the growing U.S. capital markets for some time.40 Robert Fogel (1964) and Albert Fishlow (1965) attempted to assess the contribution of the railroads by asking the counterfactual question of how the United States might have developed had there been no railroads.41 They argued the contribution of the railroad can be determined by what was termed the social saving, the difference between how much it would have cost to haul an equivalent amount of freight on the least expensive, alternative transportation route and the actual cost of using the railroads. With respect to freight, rates by water were lower than rates by rail, but the advantage was lost when all costs were included (e.g., additional wagon hauling, transshipment, cargo lost in transit, a reduced season of navigation, and the need to carry additional inventory because deliveries were slower). With respect to passengers, the calculation emphasized the time saved by taking the railroad. Both Fishlow and Fogel found that the railroad's social saving was on the order of 45 percent of GNP. This
Holland Thompson argued that Roman ploughs were probably superior to those in general use in America eighteen centuries later (1921, 111). A common plow in use at the time of the Revolution (and in Illinois until the War of 1812) was essentially a small tree limb with a crooked end on which a piece of iron was attached with rawhide.
Simeon North, another Connecticut arms manufacturer, more thoroughly developed the idea than did Whitney. North's 1813 contract with the government, in fact, stipulated interchangeability.66 In addition, a great deal of work was done at the Springfield Armory, a federal facility, under Roswell Lee, who introduced an assembly line and piecework wages.
By the 1830s, what came to be known as the American system (interchangeability, standardization, and division of labor in lengthy production processes) had begun to permeate industry. The common denominator of this evolution was the use of specialized machines.
Although the golden age of pirates and smugglers was a century earlier, one notable exception in the antebellum period was Jean Lafitte. Born in France, Jean and his brother Pierre established a blacksmith shop in New Orleans in 1809 that also trafficked in smuggled goods and slaves. A year later, recognizing there was more money in procuring than selling contraband, Lafitte became the de facto leader of the Baratarian pirates, named for their home base in Barataria Bay, Louisiana. When, in September 1814, it seemed likely the British would attack the port of New Orleans, Lafitte assisted the American victory in the Battle of New Orleans. After the war, he returned to piracy from a new base near present-day Galveston, Texas. When the Americans retaliated against his attacks on their ships, Lafitte moved south to the Spanish Main. Some have viewed Lafitte as a successful merchant, but his entrepreneurial methods clearly can be categorized as unproductive.
In spite of his legal problems, Whitney left an estate in 1825 worth just under $3 million in today's dollars. Isaac Singer, who died fifty years after Whitney, left an estate worth one hundred times that of Whitney. Reputedly, the wealthiest man of the antebellum era was John Jacob Astor. Born in Germany, Astor arrived in the United States shortly after the Treaty of Paris ended the Revolution. He entered the fur trade and, from the start, invested the profits in New York City real estate. By the early 1790s, Astor was the leading American fur trader in the Montreal and London markets, and, with time, helped open the Great Lakes region, the Pacific Northwest, and trade with China. At his death in 1848, Astor was worth over $250 million in today's dollars.
Indeed, in the late nineteenth century to be an employee (even a genteel, white-collar employee) was to forsake a life of striving for a condition of dependencyitself a sign of moral failing.4 This was the era when social Darwinist ideas were in the ascendancy, and they were more influential in the United States than anywhere else. According to this view, businesspeople were engaged in a competitive struggle. Only the fittest would succeed. Moreover, because Americans of the time thought the qualities that determined who was fittest were the Protestant virtues of hard work, thrift, and probity, success was taken to be a sign of a man's moral worth (Hofstadter 1955; Wyllie 1954; Hilkey 1997). Judgments of creditworthiness during this period were primarily judgments of character. Men who failed in business had not only proved themselves unfit in a Darwinian sense, they had demonstrated serious moral deficiencies (Sandage 2005; Olegario 2006, 80118).
Beginning in 1862, Congress passed a series of National Banking Acts that induced most existing banks to exchange their state charters for national ones. The legislation taxed the notes of state banks out of existence, but national banks could issue currency in the form of national banknotes backed by holdings of U.S. government bonds. The federal government thus aimed to achieve two policy goals at the same time: to create a market for its war debt; and to provide the country with a uniform currency that, unlike the hodgepodge of state banknotes that had made up the bulk of the money supply in the antebellum era, would circulate everywhere at par. Although the creation of a uniform national currency undoubtedly lowered transactions costs and facilitated the growth of a national market, the National Banking System suffered from serious structural flaws that increased the financial instability of the economy. The flaws were a direct result of the political influence that interested groups had exerted during the process of drafting the legislation. For example, at the behest of large northeastern (particularly New York) banks, the legislation specified that ordinary banks could hold their reserves in interest-bearing accounts in banks in designated reserve cities, which in turn could hold their reserves in interest-bearing accounts in banks in New York City (Gische 1979). The result of this pyramiding of reserves was to increase the vulnerability of the entire system to bank failures in New York.
The information problems that plagued the securities markets allowed opportunistic entrepreneurs to make money at the expense of the unwary, but they also created opportunities for entrepreneurs who could cultivate investors trust. During the depression of the 1890s, for example, members of the New York Stock Exchange (NYSE) responded to the declining profitability of their brokerage businesses by instituting important rule changes, most notably requiring firms whose securities traded on the exchange to file annual reports. The new rules made listing on the NYSE an imprimatur of quality, and not surprisingly, paid off in a dramatic rise in the price of a seat on the exchange (Neal and Davis 2007). To give another example, the private banker J. P. Morgan assiduously cultivated a reputation for financial probity and fair dealing, which he was able to exploit when he reorganized a number of bankrupt railroads during the 1890s. Morgan's method in the early stages of a reorganization was to establish a voting trust for investors stock that would be under his personal control and give him the power to monitor and shape the railroad's business practices. When the trust expired at the end of some agreed-upon period, Morgan continued to protect investors interests by keeping one of his partners on the railroad's board.
Henry Bessemer, a British inventor, was only one of several talented individuals who around the same time figured out how to produce steel by blowing hot air or steam through molten iron. In 1863 Alexander Lyman Holley purchased the U.S. rights to Bessemer's patents on behalf of a partnership consisting of himself, an ironmaster, and a banker. By that time, Bessemer had already secured control of most of the competing processes, and Holley finished the task, negotiating a settlement with another group of Americans who controlled a set of patents still outstanding. The result was the formation of the so-called Bessemer Association, which pooled the two groups U.S. patents (Misa 1995, 1920). Holley himself was an innovator. He redesigned Bessemer's production process, shrewdly adapting it to the needs of the American railroad market, and then licensed the resulting patents to the Association and, through the Association, to a small number of producers. Virtually all the steel mills built in the United States during the 1860s and 1870s were designed by Holley and used technology licensed by the Association
After 1877, however, they began to limit the number of steel mills they admitted to the pool, using their control over the technology to prevent competition from eroding their returns (Misa 1995, 2021; Temin 1964, 13338; Meyer 2003).
Gustavus Swift, an East Coast butcher who had migrated west to become a cattle dealer in Chicago, realized that he could reap enormous cost savings if he could slaughter cattle in the Midwest and ship the beef to eastern markets in refrigerated cars. Packing meat in Chicago would enable him to capture economies of scale and would obviate having to feed and water cattle in transit. He could avoid paying freight on the inedible parts of the animal (more than half the weight of the carcass) and could escape losses from animals losing weight and even dying on route to markets.15 Swift faced a lot of opposition to his plannot only from butchers and wholesalers whose business he threatened, but also from the railroads, which already had extensive investments in cattle cars and feeding stations. As a result, he was forced to build his entire distribution system from scratch. He sunk all the capital he could raise into the construction of a small fleet of cars, managed to get one railroad to carry them, and plunged into the business.
Such pursuits not only increased the sales of new consumer electronics devices like VCRs both domestically and internationally, but laid the groundwork for huge new illicit lines of business when the Internet was commercialized in the early 1990s-for online gambling and trafficking in pornographic images and in drugs. Many such businesses were too unsavory for large centrist organizations to touch, leaving a large market that nimbler and less socially vulnerable enterprises could exploit by operating outside the law-including pirate radio stations, organized crime, and Native American reservations. Similar developments occurred in the financial community. Once deregulated, savings-and-loan institutions, for instance, took advantage of Federal Deposit Insurance covering accounts up to $100,000 to make imprudent investments in search of higher yield. By 1988 more than 500 S&Ls had achieved the dubious distinction of insolvency.
While there is general consensus on the closing gap between officials and elite merchants by the eighteenth century, scholars do differ on the degree to which the gap remained, or if there was a blurring of social status between the two. For example, one recent study on merchant philanthropy observes that from the growing use of the term shenshang (lit. gentry-merchants), there was not only an increasing blurring of their social class distinction, but also a clear indicator that merchants as merchants were increasingly visible and respectable (William 1984, 98106, 24647; Smith 1998, 422).
In my own study on a similar topic for the late nineteenth and early twentieth centuries, I note that the difference in social status separating ordinary merchants and officials was still great. Many officials, for example, had taken up business ownerships, but would remain anonymous by using made-up or such-and-such house (mouji) names, and assumed passive roles by hiring managers to carry out the actual operations and entrepreneurial decisions.
Even back in Ming China, those long-distance traders did not transport their goods by themselves. They would seek out special brokers, called baoren (lit. guarantors), and pay them a fee to arrange for the hiring of reliable boatsmen and their boats to carry their goods along specific river routes, and of master porters and their crew on overland routes. Thus, a well-respected baoren was someone very knowledgeable about the transportation market and the carriers, so that in exchange for his fees, he offered the prospect of safe delivery of the consigned goods, and agreed to reimburse the traders for losses due to negligence (Brook 1998b, 67). In such a case, the baorencombined his brokerage role with his entrepreneurial role as an insurance agent. Probably the best-known brokers in nineteenth- and early-twentieth-century China were the compradors. They began as licensed clerks and distributors of goods working for the Cohong merchants, but with the demise of the Canton trade system, the European and American companies in the Chinese treaty ports hired them to be their resident brokers, treasurers, and guarantors of their Chinese staff. Their role as guarantors then extended to all business transactions between their foreign employers and any other Chinese merchants who conducted business with their foreign firms. Like the baoren of the transportation business, the compradors had to have sound knowledge of the market, good networks, and a fine business sense to succeed in these roles. And, therefore, it is not surprising that as they grew in importance alongside the growth of foreign trade, they became better known as wealthy independent merchants conducting business of their own while remaining in the service of the foreign firms. Yet even as independent merchants, they continued their brokering role in helping other Chinese investors adapt Western-style managerial practice and a factory production system to their modern-style enterprises (Hao 1986).
One illustration is a program undertaken during the Meiji Restoration period, showing how restructuring of the prevailing institutions can affect entrepreneurial activity. There, reformers chose to commute peasant rice payments to the samurai into government bonds and tax the peasants in money to pay the interest on the bonds. The samurai were encouraged to become bankers and investors (with the Tokyo and Osaka Stock Exchanges founded in 1878, almost at the same time as the issue of the bonds). Thereby, the samurai were led to eschew combat and to become entrepreneurs and capitalists.
In recent years, entrepreneurship has become a popular and seductive term even in Japan. The word, however, tends to be bandied about somewhat randomly. Some people use it in reference to individuals who set up businesses, others to describe an individual who introduces new technologies or business models. In this chapter, following the pioneering works of Joseph A. Schumpeter, we define entrepreneurship as the ability to carry out innovation that constructively destroys the status-quo and leads to new economic development (Schumpeter 1934). In short, the capacity to innovate, we believe, is a core concept of entrepreneurship.
By the middle of the nineteenth century, however, the nascent conflict between new economic activities and the feudal system had reached critical proportions, and the excessive debts and rampant defaulting of the samurai and farmer classes had become a major social issue. Serious crop failures, meanwhile, brought famine, and, in 1855, Edo was struck by a major earthquake.
The growth of the industry, however, raised questions about the feasibility of securing sufficient coal resources and in April 1881, Yataro began operating a mining business in Wakayama to supply the Mitsubishi fleet. The supply of coal from Wakayama was not enough to meet the demands of Mitsubishi's growing shipping business, however. At the time, Mitsubishi was also buying coal from the Takashima coal mine in Nagasaki, and in March 1881 Yataro decided to bring this mine into the Mitsubishi fold. The Takashima coal mine was bought by Mitsubishi with the assistance of Fukuzawa Yukichi because Yataro anticipated that the business would not only provide a stable supply of energy for the Mitsubishi shipping arm, but that it could also profit handsomely from the exportation of excess. Yataro's predictions proved correct, and Mitsubishi began shipping its spare coal to Shanghai, Hong Kong, and Singapore
Innovative, unproductive entrepreneurs are those enterprising individuals who employ new approaches to rent-seeking, criminal, and other unproductive or even socially damaging activities. These are the entrepreneurs who seek to obtain a larger slice of the pie for themselves, rather than increasing the size of the pie for everyone. Prototypes include the enterprising individual who finds an unrecognized avenue to enter the bribe-taking bureaucracy or the lawyer who recognizes an opportunity to undertake a novel and potentially lucrative lawsuit. Even more extreme examples are the creators of firms that are part of organized crime or the warlords who create private armies. These individuals may be as innovative as the founder of a factory engaged in manufacturing legitimate products, but they fail to contribute to the economy and may even detract from its output.