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Rethinking Economics as Social Theory

January 25, 2023


By Richard Wagner, Emeritus Professor of Economics, George Mason University, US

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Richard Wagner discusses his innovative look at the origins of economics in his new book Rethinking Economics as Social Theory

What is the object at which economists direct their analytical energies, concepts, and imaginations? By far the most popular answer these days is that economics is a science that addresses efficiency in resource administration. This answer places economics as an administrative science whose primary analytical tools are mathematics, statistics, and accounting in conjunction with formal modeling. Rethinking Economics as Social Theory explains how this administrative vision renders economics deeply incoherent because it assigns to economics analytical tasks that the discipline cannot truly address.

Sure, there are many situations that call for an administrative style of thinking for which ordinary principles of economizing action are suitable. The entire world of commerce provides a limitless menu of cases for which the marginal calculus and optimization more generally represents the epitome of reasoned action. One of the most charming of all economists, Philip Wicksteed (1844-1927) in his 1910 Commonsense of Political Economy explained how a mother could use knowledge of marginal productivity theory to distribute a bowl of mashed potatoes among her children. Without doubt, economic principles can be helpful to someone seeking to maximize the difference between the value someone expects an action to yield and the cost of the inputs that must be assembled to conduct that action. All the same, it must be recognized that a formal model alone cannot answer substantive questions, for answers can’t be supplied  without importing other presuppositions into the model.

Economics goes astray when its formal framework is used to address substantive questions that have political character. There is all the difference in the world in this regard between an administrative science and a science of society. An administrative science pertains to organizations that are organized and operated through the offices of private law. They are organizations for which all participation is voluntary. Conflict there can be among organizations, as befits the idea of competition. But the internal operation of privately ordered organizations is consensual, which means in turn that for such organizations there is general agreement about the boundary between efficient and inefficient actions.

 It is a huge category mistake to apply principles and concepts of optimization to political organizations. For commercial organizations, the magic number is two. This means that even the most complex of commercial organizations and transactions can be meaningfully illustrated by simple models of exchange between buyers and sellers. In contrast, for democratic polities the magic number is three. Where Carl Schmitt (1932) asserted that political action turned on the friend-enemy distinction, William Riker (1962) asserted all democratic action has coalitional character. With either of these schemes of thought, democratic competition, in contrast to commercial competition, turns on forming and supporting winning coalitions, an accounting of which shows that those winnings are financed by imposing loses on the rest of society.

Prior to the emergence of neoclassical economics late in the 19th century, economics under the influence of Adam Smith and the theorists of the Scottish Enlightenment had as its analytical object society itself, and not the administrative problems of some members of society. Smith and his compatriots observed that societies worked in that people were able to feed, clothe, and house themselves even though there was no person or administrative office whose responsibility was to ensure those outcomes. Those outcomes just happened even though no one had the duty to ensure them.

Smith and the other Scottish theorists realized that societies resembled icebergs in that what you saw on the surface was but a small part of the entire object. A theorist whose vision was limited to connecting points of observation would misunderstand a good deal of the sources of social orderliness. Smith’s two most notable books, Theory of Moral Sentiments (1759) and Wealth of Nations (1776) form a complementary pair in the process of rendering a theory of society as based on recognition that people invariably seek to be successful in what they attempt. Each person in society has a domain over which he or she exercises administrative responsibility. Society, however, is not just another such domain, but is a container that holds the domains that constitutes a society.

While Adam Smith initiated the study of society centered on recognition that people were actuated by their desires to be effective in their chosen actions, that classical scheme of economics gave way a century later to the neoclassical focus on resource administration. Again, there is nothing illogical about constructing a science of administration. It’s just that such a science will necessarily be inadequate as a theory of society whose primary object are the properties of people living together in close geographical proximity, which in turn brings into the analytical foreground both the potential gains from cooperative action and the potential animosities that might be unleased through the never-ending search after position and status that are alive in societies.

Rethinking Economics as Social Theory seeks to carry forward the social-theoretic vision of the Scottish Enlightenment. It seeks to do this, however, not through some act of restoring the Scottish scheme of thought but by importing such modern modes of theorizing as systems theory, complexity theory, evolutionary theory, emergent phenomena, and agent-based computational modeling. It is surely plausible to assert that the Scottish thinkers attempted to address questions that are more complex than their methods and techniques allowed them to address, and to recognize that modern analytical developments supply instruments through which we can make progress on their concerns about the qualities of societies. As thinkers, we should always realize that our ability to develop our intuitions depends on the analytical techniques at our disposal. Recent development in computer and related technology over the past half-century has multiplied our ability to think about societies as ever evolving entities whose direction of evolution is no matter of policy choice but rather is an exceedingly complex matter about which there exists no obvious one best way but for which that evolution is of intense significance for our ways of life all the same.

Rethinking Economics as Social Theory, by Richard E. Wagner, George Mason University, US is out now.

Read the introduction and other free chapters on Elgaronline

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Compiling the Handbook of Alternative Theories of Political Economy

June 10, 2022


Frank Stilwell, David Primrose and Tim Thornton give an insight to their latest publication
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Dementia and Cost-Benefit Analysis

May 20, 2022


Robert J. Brent, Professor of Economics. Fordham University, New York, USA

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Digital Entrepreneurship: What does it mean in the Digital Age?

March 30, 2022


Kisito Futonge Nzembayie explores how in the digital age, the micro-level activities of digital entrepreneurs in new venture creation continue to digitally transform and disrupt economic systems at macro-levels.

Pervasive digitization has raised significant implications for entrepreneurship in the digital age. Virtually all sectors of the economy have been affected by digital technologies to varying degrees. Not surprisingly, therefore, digital technology-based firms are today the main drivers of economic value creation. Among the top five companies by market capitalization in 2021, four were digital technology-based companies – Apple, Microsoft, Amazon, and Alphabet (Google). These companies have one thing in common – they are digital platform-based organizations.

However, if we journey back 15 years, the opposite is true. Traditional organizations such as ExxonMobil, General Electric, and Citigroup were among the top 5 companies, with Microsoft being the only digital technology-based company. What this shows is a seismic shift in the basis of economic value creation in about a decade. We are indeed in a Second Machine Age or Fourth Industrial Revolution, marked by the ‘digitization of just about everything’ as pointed out by MIT and Stanford scholars Andrew McAfee and Erik Brynjolfsson. In this new age, ‘software is eating the world,’ as Marc Andreessen figuratively puts it.

But does pervasive digitization imply that all new venture creation in the digital age is somehow digital entrepreneurship? Our answer to that is a resounding No! However, we are sympathetic to the fact that the blurring of lines between digital and traditional forms of entrepreneurship presents both conceptual and practical difficulties for those looking to engage with the subject. So what is digital entrepreneurship?

Digital entrepreneurship specifically refers to entrepreneurship in which digital artifacts and digital platforms (software-based products and systems) form the core of new venture ideas and market offerings. It manifests in two main typologies – pure and hybrid.

But what is the significance of making distinctions between typologies of entrepreneurship in the digital age? Without critical distinctions, we risk arriving at misleading generalizations in research and offering the wrong advice to aspiring digital entrepreneurs. In fact, upon realizing that traditional entrepreneurship models are not reflected in practice, digital entrepreneurs began to develop innovation models such as the Lean Startup, Agile Development and its variants such as Scrum, XP and Kanban, Customer Development and Design Thinking, which more accurately speak to practice in their world. The academic world found itself playing catch up. To understand why we must examine digital entrepreneurship in its own right, it is important to begin by identifying what unites all forms of entrepreneurship.

So, What is Common to all forms of Entrepreneurship?

Entrepreneurship is a complex, multidimensional process whereby individuals initiate ideas and act to pursue them as opportunities, leading towards various outcomes. Action, called new venture creation, is central to this process. It leads to outcomes such as new market offerings – manifested in new products, new organizations, and new markets. Higher-level outcomes may also result in new societal norms and behaviors. New venture ideas are often externally enabled by changes in the environments in which entrepreneurs are embedded – changing technology, consumer behavior, regulation, environmental and ecological conditions, and others. Entrepreneurs need not be fully aware of external enabling changes in order to initiate new venture ideas or to take action. Additionally, ideas are often motivated by the need to solve problems for segments of society through the creation of a product or service combination. Problems are therefore the needs and wants of consumers or customers. Given this problem-solution motive, the purpose of all productive forms of entrepreneurship is to create value for society.

There are several moving parts in this conceptualization – hence the complexity. But focus your attention on two main concepts here: New Venture Ideas and External Enablers. These concepts in the entrepreneurship literature refer to the objective WHAT of most entrepreneurial processes. Anyway, let’s return to digital entrepreneurship.

So, How is Digital Entrepreneurship Different?

  • The New Venture Idea – Digital Artifacts & Digital Platforms as Core

The new venture idea is a major differentiator of various typologies of entrepreneurship. It is that on which entrepreneurs act. New venture ideas are metaphors for new market offerings. Digital entrepreneurship is uniquely differentiated by the fact that digital artifacts and digital platforms form the core of digital business ideas and market offerings. When something is core instead of peripheral to an entity, it means that entity cannot exist without it.

Digital artifacts is a collective term for software-based products and objects. By ‘software-based,’ we mean software itself, such as mobile and desktop applications, Artificial Intelligence and machine learning algorithms, and more. It also refers to by-products of software such as media content and other types of digital content such as eBooks, infographics, and the rest. Meanwhile, a digital platform is a software-based system designed to host complementary offerings. Digital platforms are matchmakers. They match producers and consumers.

When entrepreneurship is based on the creation of software-based products and services, the HOW of traditional entrepreneurship gets upended. In fact, many business schools continue to teach entrepreneurship with underlying assumptions of the creation of physical and tactile offerings – with their corresponding spatial and temporal limitations. Such spatial and temporal constraints are seen to impose rigidity and undue linearity on entrepreneurial processes. However, when software-based offerings form the core of entrepreneurship, those limitations either evaporate or are greatly minimized. For these reasons, we need to place digital entrepreneurship in its own category and examine it differently.

The reasons for this distinctiveness can be explained by examining the characteristics of software-based objects and their implications for new venture creation. As we shall see, these characteristics translate into agility and extreme flexibility in new venture creation, which are possible but less feasible when creating physical products and tactile services. It, therefore, questions our core logic of how to bring such products and services to market and what constitutes success. For instance, do you begin new venture creation with a deliberate business plan or experiment towards an emergent one?

Software-Based Offerings and Implications for DigitalEntrepreneurship

Software-based products are digitized goods and services. By this, we mean they exist merely as bits of data in the form of ones and zeroes. Digitized goods are highly modifiable and instantly distributable over cyberspace. Together, these characteristics allow products and services to remain incomplete by design and subject to infinite expansibility. It explains why your software-based products tend to have an endless number of updates – Windows 8, 9, 10, 11, and so on. Also, software-based content such as eBooks or videos can be continuously edited, updated, and distributed at will over the internet. Compare that to a physical book or print media, which, once printed, is hard to edit without enormous costs. Physical products lack such extreme modifiability. Plus, they also suffer from the tyranny of distance – i.e., they need to be stored and shipped, and that takes time and added costs. Compared to software-based offerings, the result is limited flexibility regarding how new venture creation can unfold and how business models can be innovated.

Moreover, digitized goods are also decomposable and re-combinable. This is a product of the extreme modularity and granularity of the technology and its standardized protocols. Extreme modularity and standardization allow software-based components to be broken down into the tiniest possible bits and then re-combined later to form a finished product. This decomposability and re-combinability allow multiple participating actors to co-create a product concurrently. Furthermore, since decomposed components can be instantly distributed over cyberspace, multiple participating actors can create a software-based product at a time that suits their availability. The result is extreme agility, flexibility, and dynamism in new venture creation, unlike traditional entrepreneurship, based on the creation of physical and tactile offerings. Such instant, location-independent, and geographically dispersed co-creation supported by digital infrastructures (more on this later) enable digital entrepreneurs to concurrently enact new venture creation at velocities not observed in traditional forms of entrepreneurship.

Wait! It gets better. Software-based goods are characterized by non-rivalry. Non-rival goods can be consumed by many people simultaneously without being depleted. When you watch a YouTube or Netflix video, for instance, multiple people watch at the same time, yet the video is not being used up. That’s non-rivalry for you! Moreover, non-rival goods can be reproduced at nearly zero marginal cost. By contrast, physical goods such as a car and even your cup of coffee can only be consumed by a limited number of people at any given time. Non-rival goods may even get better as they are consumed as virality enhances their value. The more people watching that ‘Despacito’ video by Lius Fonsi on YouTube, the more valuable it gets (over 7.7 billion views as of this moment!) – more on network effects later. Similarly, the value of a digital platform improves when consumed. Software-based products never expire or perish like your groceries or medication.

What the non-rivalry of digitized products offers entrepreneurs is extreme flexibility in business model innovation. We are all too familiar with many software-based products being given away for free as part of a business model that captures revenue from advertising and other models. Try giving away too many free copies of your physical products, and you will soon be out of business. Physical products are characterized by rivalry and expensive costs of reproduction, storage, and distribution. Thus, the economics of physical products, unlike software-based products are different, leading to differences in business models and limitations on business model innovation. Furthermore, since software-based products are usually knowledge-intensive, costs tend to tilt in the direction of acquiring or coordinating individuals with relevant software-based knowledge and skills – programmers, graphic designers, digital marketers, and more.

Additionally, software-based products are traceable and interactive. Traceability is the ability to find digitized goods over cyberspace. This is usually done by specialized software-based products such as search engine algorithms. Search engines such as Google and Bing interact with, trace, and locate digital artifacts across the internet. Interactivity allows functions of digital artifacts to be activated without changing their underlying code. These characteristics together, assist in unlocking their value through data-driven operations. Similarly, human users can interact with digitized goods without changing their source code. For instance, when playing a computer game, you interact by dragging and dropping objects and so on. Usually, every interaction leaves a digital trail that can be traced, tracked, and analyzed. Data logs may reveal the journey a digital object takes through cyberspace and how it has been used. Traceability and interactivity are, therefore, the reason digitized products promote data-driven operations, which can unlock more value than the sale of standalone software. This, in turn, translates into flexibility in business model innovation that creates and captures more value. Typically, physical products are hard to trace once distributed. As such, their value creation potential gets limited to a single service and single transaction. Unless we turn them into smart connected products such as IoT devices. So valuable are the characteristics of software-based products that hybrid typologies of digital entrepreneurship increasingly seek to merge software and hardware to create ‘smart’ connected products that unlock greater value. Think about how your smart grid and smart metering help optimize electricity consumption and reduce waste. 

The characteristics of digitized goods and their implications outlined above, challenge our assumptions of new venture creation and performance. Speaking of performance, other metrics relating to network effects become more important at early phases than traditional growth KPIs such as profitability, break-even, and the number of employees. Network effects refer to the idea that the value of a service is enhanced by the number of people consuming it. If you were the only one with a phone, that phone’s value will be greatly diminished. Indeed, network effects drive some 70 per cent of the value of software-based companies. Facebook, for instance, derives much of its value from the over 2.7 billion active monthly users accessing the service. Data-driven value allows advertisers to target potential customers with pinpoint accuracy. The value for advertisers is the reduction in marketing costs and a potential higher return on investment (ROI). Consequently, growth in user base leading to positive network effects is often more of a priority than profitability at early stages, with the software being used as bait to gain traction. Companies such as Amazon and Uber grew their user base unprofitably for several years before turning a profit. Moreover, with disruptive innovations, first-mover advantage and market dominance are critical to ensuring that future profits can be harvested. Indeed, the digital environment promotes winner-take-all market dynamics. Digital marketing skills become critical to driving venture growth through network effects. Therefore, the skills we emphasize in digital entrepreneurship education also need to be carefully considered.

Digital Infrastructures as External Enablers

Now let’s turn to that other important concept in all forms of entrepreneurship called External Enablers. They are the result of changes in the environment that have the capacity to elicit a response from discerning actors. So digital entrepreneurs create and distribute software-based products. But software-based products cannot be created without enabling digital tools and systems. Digital infrastructure is the collective term for several enabling technologies such as the internet, broadband, 5G networks, microprocessors and storage, cloud computing and computing devices, and open technical standards. They are the primary external enablers of digital entrepreneurship. However, they are also external enablers of all typologies of entrepreneurship in the digital age. Today, almost every business is enabled by computers and the internet, but that does not automatically suggest that they are digital ventures. Of particular interest today is the role of cloud computing as a primary infrastructural enabler of current and next-wave digital entrepreneurship. It is one technology change that has truly democratized access to critical computing resources which were previously beyond the reach of under-resourced digital entrepreneurs. There is more to talk about on this subjectbut let’s just leave that for now and move on to discuss hybrid typologies of entrepreneurship.    

Hybrid Typologies of Entrepreneurship in the Digital Age

Yes, those hybrid typologies do blur the lines between pure digital and pure traditional forms of entrepreneurship. Software is indeed eating up the physical world. We identify two main hybrid typologies of entrepreneurship in the digital age – hybrid digital and hybrid traditional. Hybrid digital entrepreneurship combines software-based products with physical artifacts and tactile services to jointly form the core of new venture ideas and market offerings. Your smartwatch, such as Fitbit, Garmin, and similar IoT (Internet of Things) devices, make good examples of new ventures that emerged under this typology. Likewise, we have services such as Deliveroo and Just Eat in the food industry. These ventures are digital platform-based innovations that tightly couple a software-based service with a physical operation of food delivery which jointly forms the core market offerings.

As for hybrid traditional entrepreneurship, there is a subtle distinction in terms of the significant but peripheral development of software-based products, which mainly enhance the core traditional offering. For example, the traditional bank has leveraged software-based products such as a banking app and platform to deliver operational efficiencies for itself and its customers in a significant way. Similarly, a conventional technology such as a car has today been enhanced significantly by software-based services such as Android Auto and Apple Car Play, as well as AI-powered driving assistants. In these examples, the software-based component is significant but remains peripheral – meaning, without it, the essence of the core product remains intact. At the end of the day, your Tesla Model Y or S is still fundamentally a car in spite of its significant software ‘bells and whistles’. But when cars become fully autonomous, will that be hybrid digital or hybrid traditional entrepreneurship? That’s a good one for debate, isn’t it?

Under hybrid traditional and pure traditional forms of entrepreneurship, the main research interests include digital transformation and digital disruption. Such transformation is the result of software-based products ‘eating the world’. Today’s digital new venture ideas are increasingly motivated by the need to develop and apply software-based solutions to existing traditional industries, thereby rendering them efficient. There are all sorts of implications for the economy and society, which opens up new avenues for research. Take Uber as an example – a software-based new venture sets out to render more efficient, the process of hailing a ride, and an entire market system gets upended as a consequence. Even our vocabulary is changing. We no longer ‘grab a cab’, we ‘grab an Uber’. Likewise, we ‘google’, not just search online. Digital entrepreneurship has far-reaching consequences for society, making it paradigm-shifting and therefore research-fertile.

Summary and Conclusion

Through this short blog piece, we hope that we have helped you to begin wrapping your head around the complexities of digital entrepreneurship and, more importantly, to understand how it differs from other typologies of entrepreneurship in the digital age. In sum, digital entrepreneurship is new venture creation based on software-based products and services. However, like all forms of entrepreneurship in the digital age, it is externally enabled by digital infrastructures such as the internet and computing capabilities. By unbundling the role of the different types of digital technologies in entrepreneurship, conceptual fuzziness gives way to further clarity. As such, our framework gives academics and practitioners alike, an accessible approach to the digital entrepreneurship phenomenon.

Digital Entrepreneurship: Disruption and New Venture Creation by Kisito Futonge Nzembayie and Anthony Paul Buckley is out now

Read chapter one free here

Read more on the authors’ site here

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Open Access Publishing

January 13, 2022


iStock-1181533674 (1) (1)Editorial Director, Alex Pettifer discusses Elgar’s approach to assessing and publishing new Open Access titles.


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