How Institutions of Liberty Promote Entrepreneurship and Growth

Introduction Because of its aggregate nature, much of the economics of growth seems “individualless,” growth being driven by the accumulation of capital along equilibrium growth paths and/or fuelled by investments in research and development with (probabilistically) known outcomes. Yet, individuals, and particularly entrepreneurs, are central to the growth process, a process propelled by individuals who exercise their judgment in the recognition, evaluation, and exploitation of opportunities for profit in the face of uncertainty (Knight, 1921; Mises, 1949; Foss and Klein, 2012). There are rather large differences in the supply and allocation of entrepreneurial activity across countries and time (Blau, 1987; Blanchflower, 2000). For example, France and Australia differ dramatically with respect to formation of new firms. Given such stylized facts, two highly pertinent questions are: 1) how do institutions affect the supply of entrepreneurship; and 2) how is entrepreneurship linked to growth? These are the two overall questions that we deal with in this chapter, starting from and summarizing our own work (Bjørnskov and Foss, 2008, 2012). We answer both questions by arguing that entrepreneurship is a main mediator between institutions and growth. Although Baumol (1990) rightly points out that entrepreneurial creativity need not necessarily be socially beneficial, new products, processes, ways of organizing—all essential aspects of the growth process—are outcomes of entrepreneurship (Schumpeter, 1911; Rosenberg, 1992). Recognizing this, economists have over the last two decades or so increasingly tried to integrate entrepreneurship with the economics of growth (Aghion and Howitt, 1998; Baumol, 1993; Wennekers and