Where Einstein Meets Edison

Exploring the Economic Experiment (I): Hypothesis Development

Exploring the Economic Experiment (I): Hypothesis Development

May 10, 2010

Why do societies need entrepreneurs? The question might sound naïve. However, the great Schumpeter himself seems to have doubted. In his early work, the famous economist celebrated the courage associated with the Unternehmergeist(entrepreneurial spirit) that he saw as driving innovation and modernity in nations1. Later on in his career though, as a Harvard professor, Schumpeter apparently changed his mind and argued that large companies are more apt to innovate than entrepreneurs since they have the resources to do so2.

Professor Scott Stern, visiting MIT from Northwestern University, has a clear opinion on why entrepreneurs benefit society: entrepreneurship is crucial for economic growth because it constitutes an “Economic Experiment” covering three dimensions. Indeed, entrepreneurs often come up with (1) new technologies, (2) new markets, and (3) new organizational forms3. This idea is being built upon by MIT Sloan Professor Fiona Murray in her current work on Science Policy4. Professor Murray is also using this idea as organizing framework for a new Sloan Fellows course “Managing New Ventures”.

In the first installment of this two-part article, we build on the experiment analogy and describe how the role of the entrepreneur mirrors the role of the scientist, who is developing hypotheses about the world. In the companion article, we focus on how entrepreneurs test their theories. Like the scientist, the entrepreneur comes up with original ideas and attempts to prove their value through experimentation: only in this case, the entrepreneurial venture is the experiment.

Creative Thinking

Both the scientist and the entrepreneur attempt to develop original approaches to existing problems. Such a task is not straightforward. We are all prisoners of our old intellectual frameworks whose stability is crystallized in the idea of “paradigms”5,6. These frameworks include a number of assumptions about the world, and both the scientist and the entrepreneur attempt to free themselves from the old frameworks in order to find better solutions to scientific and/or commercial problems.

The scientist who generates real breakthroughs is the one that manages to emancipate him or herself from the existing paradigm. “I do admit that at any moment we are prisoners caught in the framework of our theories,” wrote Karl Popper, also noting that “if we try, we can break out of our framework at anytime” and get closer to the “‘objective truth’”7.

It is difficult not to notice the similarity of Popper’s theory to the Austrian approach to entrepreneurship, which describes entrepreneurs as visionaries. For this stream of research, entrepreneurs constantly push the economy toward equilibrium by using an information advantage8, as well as their creativity and courage9, in order to make a profit. The Austrian approach, then, “postulates a tendency for profit opportunities to be discovered and grasped by routine-resistant entrepreneurial market participants”10.

Hypothesis Generation as Entrepreneurial Strategy

The ability to think creatively is then crucial for both scientists and entrepreneurs. Indeed, both attempt to come up with new solutions to problems that are scientific and/or commercial. For the scientist, the proposed solution is referred to as a hypothesis. For the entrepreneur, there is also theorizing and hypothesis development11. However, in this case, the same exercise of theory building is generally called “generation of an entrepreneurial strategy.”Every entrepreneur is betting on an unproven theory about the market. If this theory were universally accepted, there would be no risk and no entrepreneurial opportunity.

In both cases, there exists an audience that will judge the quality of the new solution. The scientist’s forums are lecture halls or the academic conferences, where his ideas are discussed and debated. The entrepreneur’s forum is the customer’s or the investor’s boardroom, where he similarly presents a case for a new theory and its supporting evidence. Just as scientists may create whole new fields with a major breakthrough, entrepreneurs may create whole new industries with a major breakthrough, be it market-related, technological, or organizational.

The Entrepreneur as a Scientist

Scientists and engineers, whose domain has been the lab, and who have limited business experience, often consider entrepreneurship a new territory. However, entrepreneurship has a lot more in common with the scientific process than has previously been acknowledged, and both engineers and business people can gain insights by thinking about it in these terms.

Viewing entrepreneurship through the lens of the scientific method is important for several reasons.  First, it is important to understand exactly what hypothesis and assumptions form the core of the entrepreneurial strategy. This clarity allows the founding team to gain legitimacy more quickly since following this method illuminates the bet that is being made by investors and partners. Second, it enables the founding team to make sound predictions and judgments about “what is going on” in the market and how to refute more efficiently or to validate the main hypothesis, thereby saving time and money.

In entrepreneurship, just like in science, explicit hypothesis generating, testing, and modifying is a paramount determinant of success. Aspiring entrepreneurs should keep that in mind, by fear of being selected out. In the “Economic Experiment,” the failure rate is high.

This is the first part of a 2-part series (Part II).

This article has been written jointly by Michaël Bikard and Charles E. Eesley (MIT Sloan Ph.D.’09)Michaël Bikard is a Founding Editor of the MIT Entrepreneurship ReviewCharles E. Eesley is an Assistant Professor at Stanford University. 


References

  1. Schumpeter, J. A. 1911. The Theory of Economic Development.
  2. Schumpeter, J. A. 1942. Capitalism, Socialism and Democracy.
  3. Stern, S. 2006. Economic experiments: The role of entrepreneurship in economic prosperity. Melbourne Review: A Journal of Business and Public Policy, The 2, no. 2: 53.
  4. Huang, Kenneth G, and Fiona E Murray. Entrepreneurial Experiments in Science Policy: Analysing the Human Genome Project. Research Policy Special Issue (forthcoming).
  5. Kuhn, T. S. 1970. The structure of scientific revolutions. University of Chicago Press Chicago.
  6. Dosi, Giovanni. 1982. Technological paradigms and technological trajectories : A suggested interpretation of the determinants and directions of technical change. Research Policy 11, no. 3 (June): 147-162. doi:10.1016/0048-7333(82)90016-6.
  7. Popper, K. 1970. Normal science and its dangers. Criticism and the Growth of Knowledge 4: 51–58.
  8. Hayek, F. A. 1948. The Use of Knowledge in Society”(1945). Individualism and Economic Order: 77–91.
  9. Von Mises, L., and B. B Greaves. 1949. Human action: A treatise on economics. Yale University Press New Haven, CT.
  10. Kirzner, Israel M. 1997. Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach.Journal of Economic Literature 35, no. 1 (March): 60-85.
  11. Felin, T., and T. R Zenger. 2009. Entrepreneurs as theorists: on the origins of collective beliefs and novel strategies.Strategic Entrepreneurship Journal 3, no. 2.

About

One comment

  1. Dear Michael,

    I like the general idea that you’ve put forward here, which draws an analogy between “the entrepreneur” and “the inventor.” But I would challenge you, in your efforts here, to be more careful in your adaptation of the word inventor to this new purpose. By saying that the entrepreneur is an inventor, you are clearly saying that he “creates.” But leaders of all types create. Artists and musicians create as well. However, there is something fundamentally unique about the entrepreneur’s creation, things that distinguish it from the creations of political leaders or military leaders –or whomever the actor may be. It seems to me that you are saying that the entrepreneur is the inventor of new paradigms… new logics… new institutional arrangements… for economic activity ?

    There is one other thing that is fundamentally different between the entrepreneurial invention and the invention of the technologist/engineer. The entrepreneurial invention, involving the construction of strategy, is a social invention that seeks to manipulate the social world. Manipulation of the social world –a fuzzy substance, who’s form is invisible, and whose reality only exists in any objective form in differing degrees of statistical significance — is something that is fundamentally different in nature from manipulation of the natural world –which obeys the laws of physics. In his theory of economic development, Schumpeter argued that the only man that the entrepreneur needed to convince in order “lead the means of production” was the banker who was finance him. In this assertion, Schumpeter was wrong. Today’s World of skeptics requires the entrepreneur to convince men over and over again.

    Best Regards,

    Jared Merlo

Leave a Reply

Your email address will not be published. Required fields are marked *