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Within this brief elucidation in regard to entrepreneurship, adaptation and legitimation a macro behavioral perspective.
Journal of Economic Behavior and Organization 8 (1987) 175-189. North-Holland
ENTREPRENEURSHIP, ADAPTATION AND LEGITIMATION
A Macro-behavioral Perspective*
Amitai ETZIONI
George Washington University, Washington, DC 20052, USA
Final version received April 1986
Societal patterns often lag behind the constantly changing environment. Entrepreneurs, by
seeking new ways of doing business, enhance societal adaptation towards the changing
environment. This process of destroying old patterns and replacing them with new ones is
usually not revolutionary, but instead involves the accumulation of numerous small adjustments.
Entrepreneurship is thus studied as a societal function, not individual attributes. The degree of
change entrepreneurs bring about in any particular society reflects the extent which entrepre-
neurship is legitimated in that society.
1. Introduction
Entrepreneurship is studied here as the force that promotes societal reality
testing. Societal patterns (institutions, organizations, rules, etc.) tend to ossify,
lagging ever more behind constantly changing environments. Entrepreneurs,
by promoting new patterns, help bring society and its component units in
touch with reality. Unlike many discussions that focus on entrepreneurs as
individuals, exploring their traits or personalities or decision-making styles,
the focus here is on the contribution of entrepreneurship to the society at
large and the economy embedded within it.
Legitimation is a major factor in determining the level of entrepreneurship
that is found within one society as compared to others, and in different
periods within the same society. The extent to which entrepreneurship is
legitimate, the demand for it is higher; the supply of entrepreneurship is
higher; and more resources are allocated to the entrepreneurial function.
Many phenomena, treated in the literature on entrepreneurship as distinct
subjects, in effect directly reflect the pivotal role of legitimation. For example,
both the extent to which individuals entering the labor force are educated
and trained to seek to become entrepreneurs, and -the tax incentives the
*This article won the first annual competition of the Society for Advancement of Behavioral
Economics in 1986 and is a product of the Socio-Economic Project, supported by The George
Washington University and the Center for Policy Research. I am grateful to Benny Gilad for
comments on a previous draft and to Kenneth Cobb and Janet Shope for research assistance.
0167-2681/87/$3.50 @ 1987, Elsevier Science Publishers B.V. (North-Holland)
176 A. Etzioni, Entrepreneurship, adaptation and legitimation
government provides to encourage entrepreneurship, directly reflect the
extent to which entrepreneurship is legitimated.
It is thus a single factor that affects significantly many facets of economics.
It does not shape them single-handedly; but it affects them all deeply as we
shall see.
2. A societal view of entrepreneurship: Promoting adaptation
2.1. Overcoming lags
The societal function of entrepreneurship is to provide adaptive reality-
testing; that is, to change existing obsolescent societal patterns (of relations,
organization, modes of production) to render them more compatible with the
changed environment. For example, introducing the production of small cars,
when the consumers tastes have changed to favor such cars, but oligopolistic
manufacturers keep mass producing large cars.
Entrepreneurs are persons who serve this function. While their function
can be clearly defined, their characteristics cannot. They will differ according
to the specific historical context in which the function is served. For instance,
ability to circumvent the bureaucracy may be more important in the USSR,
and having access to risk capital more important in the USA. Far from
being 'adapted' to the constantly changing environment at all times, societal
patterns most times lag, i.e., are slow to adapt and resist adaptation.
Evidence that societal units faced with new environmental challenges fall
back on existing 'routines' rather than develop new ones is provided by
several researchers [Allison (1971), Halperin (1974), Perrow (1981) and
reviewed by Stern (1984a)].
A major reason for the prevalence of lags is that societal changes are
highly taxing; it takes large efforts to develop a consensus and establish a
pattern. Hence once achieved it tends to become entrenched; i.e., to resist
change even when the pattern is no longer highly adaptive. An economist
may state that adaptation will occur when the gains to be achieved by
adaptation exceed the costs involved. However, societal patterns are upheld
well beyond that point by individuals and groups that benefit from the
entrenched patterns (the so-called vested interests), groups that will be
replaced when the patterns are adapted (e.g., steel makers, by chip makers).
Hence there is a built-in need for a special societal group, the entrepreneurs,
to support the forces of adaptation.
The position advanced here is in sharp contrast to equilibrium theory in
which there is no systematic place for entrepreneurship. The received theory
of the firm is based on profit maximization and comparative statics of
equilibrium states, and '... as a result of this very fact the theory is deprived
of the ability to provide an analysis of entrepreneurship' [Baumol (1968, p.
68)]. Business people are simply 'profit maximizers'. Such a theory lacks the
A. Etzioni, Entrepreneurship, adaptation and legitimation 177
ability to explain dynamic changes [Casson (1982, pp. 9ft); Ronen (1984)].
Above all, the concept of meta-adaptability, i.e., ability of a system to change
itself while it is adapting to a changing environment, is alien to such theories.
Finally, the position suggested here directly conflicts with the view that all
organized business activity is entrepreneurship.
'To the extent that behavior in a business firm is organized (formally or
informally), to that extent we have entrepreneurship; to the extent that it
is disorganized, random, or self-defeating, to that extent entrepreneur-
ship is lacking' [Aitken (1963, p. 6)].
This approach sacrifices a useful term by equating management with
entrepreneurship.
The position followed here may seem at first blush to be quite akin to that
of Schumpeter (1934) who saw the entrepreneur as a master innovator, as the
force behind economic development. Note, though, that Schumpeter thought
that innovation is most fertile when the economy approaches equilibrium
(because then the future is easiest to foresee and the risks of the innovators
smallest). As we see it, equilibrium is a never-neverland and the need and
reward of innovation are highest when the prevailing patterns are highly
obsolescent, i.e., when equilibrium (with the environment) is particularly
remote. Most important, Schumpeter was preoccupied with the psychological
origins of entrepreneurs (their dreams, impulse to fight and joy of creating,
1934, pp. 93-94) while we focus on their societal function. Individuals with
very different psychological profiles may fulfill this function, depending on
the details of the societal context.
The position followed here has some similarities to that advanced by
Kirzner (1973,1979). Kirzner basically sees the economic world as in a state
of disequilibrium if not anarchy and views the function of entrepreneurship
as unscrambling the chaos. The difference is that according to the view
evolved here, order -albeit often obsolescent if not ossified -logically
precedes entrepreneurship; entrenched patterns often persist for long periods
of time before attempts are made to adapt them to a reality long changed.
[The notion of obsolescent patterns is akin to Leibenstein's (1978) notion of
X-efficiency. He refers to 'obstructions' in the economic pathways which
entrepreneurs may overcome.] To put it differently, the more ossified the
prevailing patterns, the more a changing reality has rendered them obsol-
escent, the greater the societal need for entrepreneurship.
2.2.
Most adaptation is evolutionary
Entrepreneurship may be revolutionary; this occurs when the resistance to
adaptation is strong and prolonged and the adjustment to reality, when it
occurs, is abrupt and encompassing. Such adjustments are infrequent. More
178
A.
Etzioni, Entrepreneurship, adaptation and legitimation
commonly, entrepreneurship is evolutionary in that adaptation is achieved by
the accumulation of small adjustments. [For additional discussion of incre-
mental adjustments vs. fundamental ones, see Etzioni (1985a).] As a result,
typically entrepreneurship serves to smooth the inevitable transitions. The
more it is supplied, the more frequent but less disruptive the adaptation. The
less it is served, the more stochastic the changes.
2.3.
Entrepreneurship as a statistical adaptation
While entrepreneurship is an activity that promotes adaptive patterns,
most entrepreneurs misjudge the situation and either challenge existing
patterns that are still relatively adaptive, or, much more often, advance new
patterns that are non-adaptive, i.e., inappropriate for the new situation.
Much of the literature on entrepreneurship focuses on the successful entre-
preneur; but most entrepreneurs are not. This is reflected, for instance, in the
number of patents issued but not implemented (although, of course, there are
other reasons for such non-implementation); in R&D projects that yield
nothing that is ever used or adds to knowledge; and in the high number of
new ventures that fail (although factors other than poor entrepreneurship
also affect the failure rate). In short, entrepreneurship is not a rational,
orderly search process but a statistical assault of thousands of endeavors, a
small sub-set of which is successfully advanced. The accumulative effect is
adaptation, but not that of every single or even most entrepreneural acts.
At the same time the assault is not random, as Kirzner suggests.
Legitimation (we shall see) and partial knowledge of where obsolescence is
high or new promising patterns are available but have not yet been adopted,
guide entrepreneurs to the areas in which to focus their efforts. For instance,
in 1984-1985, in the USA, corporate takeovers were a promising area. If one
assumes that the existing distribution of assets is obsolescent, as reflective in
that numerous firms could be found whose stock values were low compared
to book and real asset values, as well as compared to expected stream of
earnings, entrepreneurs usher in a more adaptive pattern. Another factor is
that in the USA unfriendly takeovers are considered legitimate. In West
Germany they are not acceptable behavior, and are practically unknown
[Thurow (1985)]. Similarly, endeavors to change patterns of labor relations
in order to gain the support of workers to enhance productivity was a ripe
area as labor unions weakened and their legitimacy declined and Japanese
quality of work circles were held up as role models in recent years. It was
less acceptable in the 1960s. Also, there were many more opportunities in
areas in which the declining legitimation of government intervention led to
deregulation (e.g., airlines, banking) than in those in which consumer
pressures maintained regulation (e.g., electrical utilities). [On the relationship
between regulation and entrepreneurship, see Gilad (1982, pp. 157-158).]
179
A. Etzioni, Entrepreneurship, adaptation and legitimation
2.4. Initiation, not implementation
Entrepreneurship is an endeavor that introduces, or initiates new patterns.
Entrepreneurs do more than destroy old patterns (indeed these are often
weakened before entrepreneurship arises), they focus on finding new ways of
doing business from making a better mouse trap to creating new financial
instruments. At the same time entrepreneurs only serve to start the process,
not to fully implement, solidify, let alone routinize and multiply their
creations. Entrepreneurs are the shock troops of innovation; innovation
managers are the infantry that follows.
To summarize the argument up to this point: Entrepreneurship has been
defined as adaptive reality-testing, as an activity whose societal function is to
replace societal patterns that have grown excessively obsolescent with
patterns more compatible with the constantly changing environment. The
process is expected to typically involve the accumulation of numerous small
changes and only rarely, large, revolutionary, adjustments. The process is far
from rational; numerous failures proceed, accompany and follow each
success. Success is viewed as introducing a new pattern that is relatively more
adaptive than the one it replaces. The full integration of new patterns into
society is not the role of entrepreneurs.
3.
Are the patterns rational?
Over the last decade a major effort has been undertaken to shore up the
rationality axiom of neo-classical analysis, in economics as well as in other
social sciences, by arguing that while individual actors may not command
the intellectual capabilities rational choice required, they may nevertheless
act rationally by drawing on various decision-making devices provided to
them. The reason these devices are of cardinal interest for the issue at hand
is because they provide an excellent analogue for societal patterns, their
rationality, and their need for adaptation.
Different authors have focused on different devices including heuristics
[which are said to simplify the world and hence enhance individual decision-
making, Nisbett and Ross (1980)] and rules-of-thumb that tell individuals
how to render decisions rationally in a given situation without any or
without much gathering of information, conducting analyses, drawing in-
ferences and so on. 'It is easy to jump to conclusions that the widespread use
of rules of thumb is good evidence of sloppy workmanship on the part of
business management. ...on the contrary, rules of thumb are among the
more efficient pieces of equipment of optimal decision making' (Baumol and
Quandt, 1964, p. 23). Still others have depicted rules of thumb and patterns
(such as the structure of firms) in essentially the same way [Williamson
(1975); North (1981)].
180 A. Etzioni, Entrepreneurship, adaptation and legitimation
Moreover, these devices and patterns themselves are said to be subject to
rationalist adaptations. They are said to be modified over time to reflect
empirical experience which renders them more efficient. For instance, Cyert
and March (1963) reported that when prices were set initially, say too high,
with inadequate reference to demand, 'feedback from the market' caused the
stores they studied to mark prices down. This, Nicholson (1978, p. 276)
argued, shows that despite the suggestions that these rules appear to consider
only the costs of the goods, they ultimately do take into account demand as
well, and hence qualify as rational utility maximizers. Similarly, Machlup
(1952, p. 69), an ardent defender of the rationalist position, re-examined
thirty-eight interviews conducted by Hall and Hitch (1939). Machlup argued
that some of those who said they charged 'full costs' in effect 'admitted that
they might charge more in periods of exceptionally high demand' and others
reported 'that they might charge less in periods of exceptionally depressed
demand'. This 'attention to demand elasticities' Machlup (1952, pp. 70-71)
concludes, 'is equivalent to marginal revenue considerations'. In short, rules
are said to be maximally rational. [Strong evidence to the contrary by
Kahneman et al. (1982), has not yet influenced the true believers in this
axiom.] Evolutionary arguments are sometimes used to argue that firms (or
other organizational units, e.g., city governments, that compete with one
another over industries) that do not act rationally, will be wiped out. Hence,
it is argued that when one encounters organizational units whose rules or
patterns are not rational these are to be viewed as short-lived aberrations
that will correct themselves.
For brevity's sake this approach will be referred to here as the patterns-
are-rational thesis. It constitutes nothing but a latter day version of the
equilibrium theory and it faces the same challenge in the study of entrepre-
neurship that the equilibrium theory does: if the world as-it-is (i.e., static) is
rational, there is no need for entrepreneurship. (If one acknowledges that the
existing patterns are obsolete, that they require adaptation, even when the
gains of adaptation exceed the costs, then they were not rational to begin
with.)
In contrast the societal approach followed here suggests that patterns are
ossified in most societies, in most periods, including modern societies, albeit
in varying degrees. That is, typically patterns are not adapted as reality
changes but lag behind (without assuming that they were ever fully or highly
adaptive at any point in time). True, some exceptional patterns are ahead of
their time. (For example, in the 1940s military bases in the U.S.A. were
ordered desegregated long before the society was or such action was called
for by those who served in the said bases). But we expect studies will show
most time patterns are anachronistic. The reasons pattern lags are to be
expected are numerous. One reason is that the costs of adapting a pattern
are high. These include much more than the often-cited information costs,
181 A. Etzioni, Entrepreneurship, adaptation and legitimation
those of searching for data, interpretation, inference and analysis. The finding
and introduction of new patterns, the task of the entrepreneur, requires
modifying the consensus of one or more collectivities which support the
prevailing patterns [a point spelled out in Janis' (1972) study of 'groupthink']
and undoing the existing power structure formed around the obsolescent
patterns. That is the total costs of adaptation are much higher than those
incurred from the information involved.
This does not mean that adherence to the prevailing patterns is rational.
People act as if the costs of forming the old patterns are not sunk costs, to
be disregarded, and are far from anxious to change prevailing patterns even
when according to neutral observers the benefits of adaptation exceed the
costs. One main reason for the opposition to adaptation is that the gains are
not distributed evenly. Those who benefit most from the obsolescent patterns
are often those in power and more able, even if they are a minority, to
sustain the patterns against the less powerful majority or new but still weak
minority power wielders. Each pattern generates a flow of rent that is
distributed unevenly among the members of the relevant collectivity. For
instance, tolls on bridges flow to the owners or to a public authority, for
years if not decades even when the bridges are poorly maintained. Industrial
development bonds favor some industries over others and so on. Note that
at issue here is not imperfect markets or even economic monopolies but the
use of political power of economic actors to maintain their advantages
position and the patterns that it draws upon. For example, those who benefit
from existing patterns tend to be more powerful in the political realm than
those who are weaker for reasons explored elsewhere. They use their political
power to attempt to block change and maintain their rent whether or not
these patterns are efficient [Etzioni (1985b)].
Entrepreneurs, in effect, join the political challenge, by providing new,
knowledge-based, reasons to discard the old patterns, and above all, point to
what new patterns to switch. This is not to suggest that there is a conscious
alliance between entrepreneurs and political agents of change. And often the
political change agents favor changes that have no reality-base but are only a
struggle over allocations. However, when pattern changes enhance reality, poli-
tical change agents and entrepreneurs complement one another. For example,
during the rise of capitalism, opposed by the landed aristocracy, bourgeois
politicians and industrial entrepreneurs complemented one another. And
now, founders of new, Hi-Tech, industries seek political allies in supporting
young 'yuppie' candidates, to overcome the resistance of politically en-
trenched old industries (such as steel:tnd auto) to modify tax laws to allow
for more R&D and to keep making international trade freer.
Another reason obsolescent patterns persist even when the benefits of
change exceed the costs of adaptation, and why entrepreneurship is required
as a special effort to generate adaptation rather than it occurring automati-
182 A. Etzioni, Entrepreneurship, adaptation and legitimation
cally under these circumstances due to market forces, is that the actors have
no way of knowing or rationally estimating the costs and the benefits of
whether or not new patterns are likely to be more adaptive than prevailing
ones. Entrepreneurs semi-gamble that sizable gains of few successful en-
deavors will make up for numerous, but hopefully smaller, losses caused by
those that fail. (Semi-gamble, because, as was suggested earlier, they focus on
promising sectors of innovation even when they cannot foretell which specific
innovation will payoff.)
In short, entrepreneurship is necessary as a special force to propel
adaptation. But what promotes entrepreneurship? In part, it is favored by
environmental factors; the more rapidly the environment changes, the larger
the potential gain from adaptation, and hence the potential reward for
entrepreneurs. Some factors are internal to society; e.g., falling out among the
power wielders as reflected in the literature on oligopolies that fight one
another rather than collude. We focus here on one force that significantly
enhances the ability to serve the need for adaptation, that of legitimation.
4. Legitimation
4.1. The level of legitimation
The roots of the tenD 'legitimation' lie in considering an act to be in
accordance with the law [Sternberger (1968); Schaar (1981)]. However, the
usages of the tenD in political science, sociology, and even in the popular
press have expanded its meaning to refer to a wide set of values and mores
that provide moral approval of specific activities or institutions whether or
not legal sanction is involved [Lipset (1963); Deutsch (1974, pp. 15ff)]. Thus,
it might be said that in the 1970s in the U.S.A. cohabitation was considered
to be more legitimate than in the 1950s, even if it has not grown more in
accordance with the governing laws. The tenD refers to the fact that living
together has become more acceptable according to public morality. The same
holds for views of the entrepreneur.
'Nowadays it is quite fashionable to be an entrepreneur. Suburban front
rooms are stacked high with pocket calculators to be sold through mail-
order advertisements in the local paper. Commuters' wives run "nearly
new" boutiques in their local village. It was not always so. Quite
recently a French sociologist, challenged to give a definition of the
entrepreneur, is reputed to have said "The entrepreneur is a pig"'.
[Casson (1982, p. 1).]
Legitimation is a continuous, not a dichotomous variable. Indeed, it runs
the full gamut from highly supportive to highly oppositional. -Entrepreneur-
183 A. Etzioni, Entrepreneurship, adaptation and legitimation
ship may be regarded as the prime activity of society (e.g., in settling of new
countries, e.g., the American West); as an activity acceptable but of second-
ary importance (commerce, finance, manufacturing, technology in late aristo-
cratic, early industrial Britain; in the last generation of the 18th Century); an
activity suitable only for a minority (Jews, Armenians, Turks, etc.), or a
highly tabooed activity.
The level of legitimation is expected to affect all aspects of entrepreneur-
ship. All other things being equal, the higher it is the more the educational
system (including the family, on-the-job programs in corporations, not just
schools and colleges) will dedicate itself to educate and train entrepreneurs;
the more the polity will reward entrepreneurs; and the more entrepreneurial
behavior will be the source of psychic rewards, generated by the respect the
activity generates.
Throughout the sociological literature there is much evidence that certain
religions were less favorable to entrepreneurship than others [Catholics vs.
Protestants, Weber (1930)]; dogmatic 'secular religions' or ideologies, less
favorable than pragmatic ones [Communism as compared to capitalist
welfare state, Berliner (1983); Gilad (1982, p. 154)], family-oriented societies
less favorable than national-oriented ones [e.g., ancient China vs. ancient
Japan, Pelzel (1965); Levy (1953); Latin vs. North America, Cochran (1965);
Lauterbach (1966)]. Starr (1985) argues that in recent decades the public
opinion climate in New York City changes from favorable to risk-taking to
one that views developers as public enemies. Our purpose here is not to
review the immense literature on the subject, but to remind readers of the
relevance of the findings on the role of values in the rise of capitalism to the
issue at hand.
4.2.
The sources of legitimation
The immediate sources of legitimation are the values of the society and the
relevant sub-societies, applied to endorse an activity or institution at issue.
Reference is made to the society and sub-societies because often there are
significant variations on sub-societal levels. For instance, on average, Asian-
American orientations toward entrepreneurship seem to differ from that of
Black Americans, or that of New Englanders from that of many in the Deep
South.
The deeper question is: what shapes the values that mold legitimation?
Social sciences have not been able to come up with a parsimonious answer
to this question. Given a particular society, it is possible to trace the sources
of value changes to cross-societal diffusion (e.g., anti-entrepreneurial Moslem
fundamentalism is spreading from Iran to other Moslem countries; Western
settlers introduced values favorable to entrepreneurship into African tribal
184 A. Etzioni, Entrepreneurship, adaptation and legitimation
societies). Also, changes in leadership (e.g., from Carter to Reagan) and in
intellectual elites (e.g., from old liberal to neo-conservative) playa role, as
well as social movements (e.g., the rise of the women's movement in the
U.S.A. significantly increased women entrepreneurship) and the educational
system (e.g., changes in focus from liberal arts to vocational and pre-
professional; rise of business schools). However, such lists, easy to draw after
the fact, case by case, provide no satisfactory theory of what derives
legitimation, above all, changes its content and potency.
About the only general theorem that seems to hold is the Weberian notion
that legitimacy tends to wear out. That is, given a high level of commitment
to any particular endorsed line of activity (e.g., pioneering in the early days
of Israel; support for the war effort in U.K. in 1939), legitimacy will decline
as years follow. It is hence comparable to a stock of capital that depreciates.
Weber thought that once decay sets in, legitimation cannot be re-stocked; it
wears out to the point it breaks down and is replaced by a new mode. I
argued elsewhere that internal rejuvenation is possible, as that of the
American political system experienced during the Jacksonian and Progressive
Eras. In Third World countries, a recent return to interest in Western style
entrepreneurship is at least the second time around. In either case, we know
either too much (ad hoc) or too little (systematically) about the sources of
legitimation.
One subsidiary issue, which received a very large amount of attention,
ought to be singled out in the present context and that is the role of
economic factors in shaping legitimacy. Obviously if economic factors
determine the level of legitimation, say if there is more demand for (or profit
in) entrepreneurship -it grows more legitimate, then legitimation would be
but an intermediary variable and not a factor (or, at least not a major one)
in its own right. The debate over whether or not ideas, values, and
legitimation, are a primary causal factor, or -merely a largely reflective one,
is at the core of the debate between Western intellectuals and Marxists.
Nowhere is it more central than in the work of Max Weber. Indeed, his
masterful comparative study of economic development in India, China, and
Europe is built around the question: did religious differences cause economic
differences or merely reflect them? His conclusion is that the spirit of
capitalism played a major independent role in launching a new societal-
economic system, that of capitalism. [See Weber (1930,1951,1958) and
Schluchter (1981). For a recent study that found legitimacy plays an
independent role, in this case, in the production of social science research, see
Useem (1980).] On the other hand, to suggest that legitimacy plays a key
independent role is not to deny that costs have an effect on legitimacy. Both
Thurow (1980) and Wilensky (1983) show that rising costs (in the context of
slow growth, high inflation and high unemployment) undermined the legiti-
macy of social initiatives of the kind associated with the Great Society.
A. Etzioni, Entrepreneurship, adaptation and legitimation 185
4.3.
The effects of legitimation
The ways that changes in the level and content of legitimation affect
entrepreneurship are relatively clear. In the terms used by economists,
legitimation is a key factor which affects the preferences, the 'constraints', and
the resource allocation simultaneously. These effects are first spelled out and
then the significance of these observations are indicated. Obviously the
approach is sociological, or -one of socioeconomics, and not that of
traditional economics because it deals with factors economists frequently
consider either as 'given' or as the territory of other disciplines, especially
when it concerns the factors that shape preferences [Samuelson (1983, p.
90)]. Some public-choice political scientists and several neo-classical econo-
mists have systematically denied that legitimation plays a role and have tried
to account for such effects in terms of inadequate knowledge or information
costs [Clark & Dear (1984, p. 156)]. According to the approach followed
here, which is dynamic rather than one of 'comparative statics', changes over
time in economic behavior, such as changes in the level of consumption,
saving, or entrepreneurship, may be determined by changes in prices or by
changes in preferences. [On the role of legitimation of mass consumption,
which in effect reduces the capital available for investment and adaptation, at
least under conditions of full employment, see Douglas and Isherwood
(1979).] A change in societal legitimation is a major reason individual
preferences change. For example, a major drive by business lobbies which
touts the merits of venture capital for the American economy, and depicts
those who favor a high level of environmental and worker protections and
seeks a 'risk free world', as 'sissies' and 'un-American', to the extent that it is
successful (i.e., the dominant societal endorsed view is affected), it will serve
to enhance entrepreneurship: people will become less risk averse.
Concretely such a change in orientation may take numerous forms such as
more youngsters choosing business careers over public service, universities
expanding the facilities of business schools while dedicating less public
resources to liberal arts, and more youngsters joining Junior Achievement
programs and fewer the Salvation Army and the Red Cross. True, not all or
even most, who will be affected in these ways will become entrepreneurs; but
statistically the more individuals who are 'recruited' into these anterooms of
entrepreneurship, the more entrepreneurs will end up in the main arena.
Second, these same changes in the level of legitimation will also affect the
'constraints'. For example, the same campaign by business lobbies, if
successful, will also make it easier for elected representatives to change the
tax laws, to make them more favorable to entrepreneurs (e.g., by reducing
the tax on capital gains; shorten the period a stock must be held to qualify
for capital tax treatment; reduce the prohibition on private placement of
stocks). All these steps, in turn, will decrease the costs of entrepreneurship.
186
A. Etzioni, Entrepreneurship, adaptation and legitimation
A neo-classical economist may say at this point that there is nothing in
this approach that is incompatible with traditional economic analysis. Given
more demand or more supply of entrepreneurs, or lower costs, more
'production' of entrepreneurs is to be expected. Indeed, the sociological
analysis explored here is compatible with economic analysis; it 'precedes' it in
the sense that it seeks to account for the changes in factors which
economists, in turn, can then take for granted. It adds though to the
explanation, to the extent that one grants that preferences can be changed,
and are due to external factors which can be systematically accounted for. It
is also parsimonious in that it accounts, by exploring changes in one factor,
that of legitimation, for changes in both preferences and constraints.
4.4 Psychic side-effects
The question might be asked, what difference does it make whether
individuals change their economic behavior, say the level of their entrepre-
neurial efforts, due to changes in constraints or in preferences? In either case,
the behavior will be the same, say, there will be more of it. However, a very
extensive review of the findings of more than a thousand studies of a large
variety of individual behavior, shows that behaviour will differ significantly
[Etzioni (1975), see also Mueller (1973, pp. 129ff)]. The main effect is that if
behavior is changed due to changes in constraints, it will be accompanied by
a measure of resentment, while if it is due to a change in preferences, this will
not be the case. The reason is, briefly, that when a person has a preference,
say, to use a simplistic example, to go to a movie, but because of changes in
constraints will instead work overtime, he is considered not to have changed
his preference but as being constrained from acting it out, which generates a
measure of resentment. On the other hand, if the person is convinced -say,
that overtime is important for the future of his company -he will change his
preferences (he will no longer want to go to the movie) and hence no
resentment will accrue. The difference can be empirically validated. For
example, people will work more conscientiously if convinced of the need to
work overtime rather than being 'made' to stay. This general observation,
well supported by data, applies to entrepreneurship. Acceptance of the risk
taking involved will be much higher if entrepreneurship is legitimated than
when it is perceived as a matter of necessity; say, when other job lines are
not open (for example, to minorities, in anti-entrepreneurial societies).
5.
Institutionalized entrepreneurship and meta-entrepreneurship
Aside from the question of whether or not certain sectors of entrepre-
neurial activities are legitimated, and to what extent as compared to others,
A. Etzioni, Entrepreneurship, adaptation and legitimation
the most important consideration is whether or not entrepreneurship is ad
hoc or institutionalized.
It is commonplace to observe that entrepreneurship is (a) often not an
individual undertaking but a team rask (although much of the literature
focuses on entrepreneurs as individuals), and (b) that much entrepreneurship
work is not an ad hoc improvised activity (as implied in many of the personal
accounts by and of entrepreneurs) but a routinized activity in societies that
legitimate entrepreneurship, expecially those that rank it as a highly approved
activity. That is, much entrepreneurship takes place in institutions especially
set up to advance entrepreneurship, such as venture capital firms, R&D
programs within established firms, and think tanks.
A still higher order of legitimation may be needed if sufficient entrepre-
neurship is to be provided in the face of rapid change. In a rapidly changing
environment, if it is due to a rapid growth of knowledge, rapid change in
technology, or in the behavior of major competitors (e.g., the Japanese), or
the occurrence of 'shocks' -institutionalized entrepreneurship may not
suffice. Indeed, the fact that it is routinized, which is an advantage in a
slowly changing environment, may pose a problem. What is needed is for
those firms and other social units (such as think tanks) whose primary
societal function is entrepreneurship, to contain sub-units that turn the
entrepreneurship perspective on these entrepreneurial units and lead them to
restructure as their patterns of entrepreneurship become obsolete. This may
be referred to as meta-adaptation. [On this concept see Day (1975, p. 9).]
Take, for instance, the Brookings Institution, a major Washingtom think
tank, and in the 1960s a source of numerous new public policy ideas.
Brookings is basically set up to do 'big books'. A typical Brookings
project/book costs more than $250,000, and takes at least five years from the
day a proposal is first drafted to the day the book reaches its intended
audience. True, the books often are less obsolescent than one might expect
because ad hoc changes are made long after the project is launched and,
many issues require treatment even after five years (e.g., black youth
unemployment). However, many other issues change too fast for such a slow
treatment. For instances, most plans for energy studies laid in 1972 were
overtaken by events by the end of 1973. Studies of the effects of a flat tax
suggested early in 1985 had only a limited policy value by late 1985, as
Congress was fashioning various new loopholes to replace some of the old
ones although the total bill maintained some of its reform features (broader
revenue base) deductions. Clearly, if Brookings had an internal meta-review
and restructuring capacity, it would significantly reduce its reliance on big
books as a tool of policy studies and rely more on much shorter, less costly,
quicker turn-around policy briefs widely used by its competitors, such as the
American Enterprise Institute and the Heritage Foundation.
Similar needs to adapt the structure of the entrepreneurial units can be
88 A. Etzioni, Entrepreneurship, adaptation and legitimation
seen in the need to de-centralize and enhance the staff participation in the
management of R&D units, to build collaboration between universities and
R&D corporations, and to change the flow of work as new computer techno-
logies become available. In short, a high level of entrepreneurship requires
more than legitimation of ad hoc entrepreneurship, or even routinized
entrepreneurship, it requires approval of meta-entrepreneurship, i.e., of
activities in which the entrepreneurial units themselves are routinely subject
to entrepreneurship.
References
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71.
Baumol, William J. and Richard E. Quandt, 1964, Rules of thumb and optimally imperfect
decisions, American Economic Review, March, 23-46.
Berliner, Joseph S., 1983, Entrepreneurship in the Soviet period: An overview, in: G. Guroff and
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University Press, Princeton, NJ).
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Theodore Grover, eds., Adaptive economic models (Academic Press, New York).
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Glencoe, IL).
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5, no. 2, 133-150.
Gilad, Benjamin, 1982, On encouraging entrepreneurship: An interdisciplinary analysis, Journal
of Behavioral Economics XI, no. 1, 132-163, Summer.
Hall, R.L. and C.J. Hitch, 1939, Price theory and business behavior, Oxford Economic Papers 2,
May, 12-45.
Halperin, M.H., 1974, Bureaucratic politics and foreign policy (Brookings Institution, Washing-
ton, DC).
Janis, Irving L., 1972, Victims of groupthink: A psychological study of foreign-policy decisions
and fiascoes (Houghton Mifflin, Boston, MA).
Kahneman, Daniel, Paul Slovic and Amos Tversky, 1982, Judgement under uncertainty
(Cambridge University Press, New York).
Kirzner, Israel M., 1973, Competition and entrepreneurship (University of Chicago Press,
Chicago, IL).
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Chicago, IL).
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economy (Cornell University Press, Ithaca, NY).
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Leibenstein, H., 1978, General x-efficiency theory and economic development (Oxford University
Press, New York).
Levy, Marion J., 1953, Contrasting factors in the modernization of China and Japan, Economic
Development and Cultural Change 2, no. 3, May, 161-197.
Lipset, Seymour, 1963, Political man (Anchor Books, Garden City, NY).
Machlup, Fritz, 1952, The economics of sellers' competition (The Johns Hopkins Press,
Baltimore, MD).
Mueller, Claus, 1973, The politics of communication (Oxford University Press, New York).
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Nisbett, Richard and Lee Ross, 1980, Human inference: Strategies and shortcomings of social
judgement (Prentice-Hall, Englewood Cliffs, NJ).
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(Harvard University Press, Cambridge, MA).
Perrow, C., 1981, Normal accident at Three Mile Island, Society 18, 17-26.
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Cambridge, MA).
Schaar, John, 1981; Legitimacy in the modem state (Transaction Books, New Brunswick, NJ).
Schluchter, W., 1981, The rise of western rationalism, Max Weber's developmental history
(University of California, Berkeley, CA).
Schumpeter, Joseph, 1934, The theory of economic development: An inquiry into profits, capital,
credit, interest, and the business cycle, Harvard Economic Studies 46 (Harvard University
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Starr, Roger, 1985, The rise and fall of New York City (Basic Books, New York).
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York).
Sternberger, Dolf, 1968, Legitimacy, International Encyclopedia of the Social Sciences 9, 244-
248.
Thurow, Lester, 1980, The zero-sum society (Basic Books, New York).
Thurow, Roger, 1985, Hostile corporate takeovers in West Germany go down with as much
gusto as low-cal beer, Wall Street Journal, July 18, 28.
Useem, Michael, 1980, Legitimacy and government control of the production of academic social
knowledge, in: G. Kourvetaris and B. Dobratz, eds., Political sociology (Transaction Books,
New Brunswick, NJ) 413-428.
Weber, Max, 1930, The protestant ethic and the spirit of capitalism (Allen and Unwin, London).
Weber, Max, 1951, The religion of China -Confucianism and Taoism (Free Press, Glencoe, IL).
Weber, Max, 1958, The religion of India: The sociology of Hinduism and Buddhism (Free Press,
Glencoe, IL).
Wilensky, Harold, 1983, Political legitimacy and consensus: Missing variables in the assessment
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Williamson, Oliver E., 1975, Markets and hierarchies: Analysis and antitrust implications (Free
Press, New York).
doc_347309457.pdf
Within this brief elucidation in regard to entrepreneurship, adaptation and legitimation a macro behavioral perspective.
Journal of Economic Behavior and Organization 8 (1987) 175-189. North-Holland
ENTREPRENEURSHIP, ADAPTATION AND LEGITIMATION
A Macro-behavioral Perspective*
Amitai ETZIONI
George Washington University, Washington, DC 20052, USA
Final version received April 1986
Societal patterns often lag behind the constantly changing environment. Entrepreneurs, by
seeking new ways of doing business, enhance societal adaptation towards the changing
environment. This process of destroying old patterns and replacing them with new ones is
usually not revolutionary, but instead involves the accumulation of numerous small adjustments.
Entrepreneurship is thus studied as a societal function, not individual attributes. The degree of
change entrepreneurs bring about in any particular society reflects the extent which entrepre-
neurship is legitimated in that society.
1. Introduction
Entrepreneurship is studied here as the force that promotes societal reality
testing. Societal patterns (institutions, organizations, rules, etc.) tend to ossify,
lagging ever more behind constantly changing environments. Entrepreneurs,
by promoting new patterns, help bring society and its component units in
touch with reality. Unlike many discussions that focus on entrepreneurs as
individuals, exploring their traits or personalities or decision-making styles,
the focus here is on the contribution of entrepreneurship to the society at
large and the economy embedded within it.
Legitimation is a major factor in determining the level of entrepreneurship
that is found within one society as compared to others, and in different
periods within the same society. The extent to which entrepreneurship is
legitimate, the demand for it is higher; the supply of entrepreneurship is
higher; and more resources are allocated to the entrepreneurial function.
Many phenomena, treated in the literature on entrepreneurship as distinct
subjects, in effect directly reflect the pivotal role of legitimation. For example,
both the extent to which individuals entering the labor force are educated
and trained to seek to become entrepreneurs, and -the tax incentives the
*This article won the first annual competition of the Society for Advancement of Behavioral
Economics in 1986 and is a product of the Socio-Economic Project, supported by The George
Washington University and the Center for Policy Research. I am grateful to Benny Gilad for
comments on a previous draft and to Kenneth Cobb and Janet Shope for research assistance.
0167-2681/87/$3.50 @ 1987, Elsevier Science Publishers B.V. (North-Holland)
176 A. Etzioni, Entrepreneurship, adaptation and legitimation
government provides to encourage entrepreneurship, directly reflect the
extent to which entrepreneurship is legitimated.
It is thus a single factor that affects significantly many facets of economics.
It does not shape them single-handedly; but it affects them all deeply as we
shall see.
2. A societal view of entrepreneurship: Promoting adaptation
2.1. Overcoming lags
The societal function of entrepreneurship is to provide adaptive reality-
testing; that is, to change existing obsolescent societal patterns (of relations,
organization, modes of production) to render them more compatible with the
changed environment. For example, introducing the production of small cars,
when the consumers tastes have changed to favor such cars, but oligopolistic
manufacturers keep mass producing large cars.
Entrepreneurs are persons who serve this function. While their function
can be clearly defined, their characteristics cannot. They will differ according
to the specific historical context in which the function is served. For instance,
ability to circumvent the bureaucracy may be more important in the USSR,
and having access to risk capital more important in the USA. Far from
being 'adapted' to the constantly changing environment at all times, societal
patterns most times lag, i.e., are slow to adapt and resist adaptation.
Evidence that societal units faced with new environmental challenges fall
back on existing 'routines' rather than develop new ones is provided by
several researchers [Allison (1971), Halperin (1974), Perrow (1981) and
reviewed by Stern (1984a)].
A major reason for the prevalence of lags is that societal changes are
highly taxing; it takes large efforts to develop a consensus and establish a
pattern. Hence once achieved it tends to become entrenched; i.e., to resist
change even when the pattern is no longer highly adaptive. An economist
may state that adaptation will occur when the gains to be achieved by
adaptation exceed the costs involved. However, societal patterns are upheld
well beyond that point by individuals and groups that benefit from the
entrenched patterns (the so-called vested interests), groups that will be
replaced when the patterns are adapted (e.g., steel makers, by chip makers).
Hence there is a built-in need for a special societal group, the entrepreneurs,
to support the forces of adaptation.
The position advanced here is in sharp contrast to equilibrium theory in
which there is no systematic place for entrepreneurship. The received theory
of the firm is based on profit maximization and comparative statics of
equilibrium states, and '... as a result of this very fact the theory is deprived
of the ability to provide an analysis of entrepreneurship' [Baumol (1968, p.
68)]. Business people are simply 'profit maximizers'. Such a theory lacks the
A. Etzioni, Entrepreneurship, adaptation and legitimation 177
ability to explain dynamic changes [Casson (1982, pp. 9ft); Ronen (1984)].
Above all, the concept of meta-adaptability, i.e., ability of a system to change
itself while it is adapting to a changing environment, is alien to such theories.
Finally, the position suggested here directly conflicts with the view that all
organized business activity is entrepreneurship.
'To the extent that behavior in a business firm is organized (formally or
informally), to that extent we have entrepreneurship; to the extent that it
is disorganized, random, or self-defeating, to that extent entrepreneur-
ship is lacking' [Aitken (1963, p. 6)].
This approach sacrifices a useful term by equating management with
entrepreneurship.
The position followed here may seem at first blush to be quite akin to that
of Schumpeter (1934) who saw the entrepreneur as a master innovator, as the
force behind economic development. Note, though, that Schumpeter thought
that innovation is most fertile when the economy approaches equilibrium
(because then the future is easiest to foresee and the risks of the innovators
smallest). As we see it, equilibrium is a never-neverland and the need and
reward of innovation are highest when the prevailing patterns are highly
obsolescent, i.e., when equilibrium (with the environment) is particularly
remote. Most important, Schumpeter was preoccupied with the psychological
origins of entrepreneurs (their dreams, impulse to fight and joy of creating,
1934, pp. 93-94) while we focus on their societal function. Individuals with
very different psychological profiles may fulfill this function, depending on
the details of the societal context.
The position followed here has some similarities to that advanced by
Kirzner (1973,1979). Kirzner basically sees the economic world as in a state
of disequilibrium if not anarchy and views the function of entrepreneurship
as unscrambling the chaos. The difference is that according to the view
evolved here, order -albeit often obsolescent if not ossified -logically
precedes entrepreneurship; entrenched patterns often persist for long periods
of time before attempts are made to adapt them to a reality long changed.
[The notion of obsolescent patterns is akin to Leibenstein's (1978) notion of
X-efficiency. He refers to 'obstructions' in the economic pathways which
entrepreneurs may overcome.] To put it differently, the more ossified the
prevailing patterns, the more a changing reality has rendered them obsol-
escent, the greater the societal need for entrepreneurship.
2.2.
Most adaptation is evolutionary
Entrepreneurship may be revolutionary; this occurs when the resistance to
adaptation is strong and prolonged and the adjustment to reality, when it
occurs, is abrupt and encompassing. Such adjustments are infrequent. More
178
A.
Etzioni, Entrepreneurship, adaptation and legitimation
commonly, entrepreneurship is evolutionary in that adaptation is achieved by
the accumulation of small adjustments. [For additional discussion of incre-
mental adjustments vs. fundamental ones, see Etzioni (1985a).] As a result,
typically entrepreneurship serves to smooth the inevitable transitions. The
more it is supplied, the more frequent but less disruptive the adaptation. The
less it is served, the more stochastic the changes.
2.3.
Entrepreneurship as a statistical adaptation
While entrepreneurship is an activity that promotes adaptive patterns,
most entrepreneurs misjudge the situation and either challenge existing
patterns that are still relatively adaptive, or, much more often, advance new
patterns that are non-adaptive, i.e., inappropriate for the new situation.
Much of the literature on entrepreneurship focuses on the successful entre-
preneur; but most entrepreneurs are not. This is reflected, for instance, in the
number of patents issued but not implemented (although, of course, there are
other reasons for such non-implementation); in R&D projects that yield
nothing that is ever used or adds to knowledge; and in the high number of
new ventures that fail (although factors other than poor entrepreneurship
also affect the failure rate). In short, entrepreneurship is not a rational,
orderly search process but a statistical assault of thousands of endeavors, a
small sub-set of which is successfully advanced. The accumulative effect is
adaptation, but not that of every single or even most entrepreneural acts.
At the same time the assault is not random, as Kirzner suggests.
Legitimation (we shall see) and partial knowledge of where obsolescence is
high or new promising patterns are available but have not yet been adopted,
guide entrepreneurs to the areas in which to focus their efforts. For instance,
in 1984-1985, in the USA, corporate takeovers were a promising area. If one
assumes that the existing distribution of assets is obsolescent, as reflective in
that numerous firms could be found whose stock values were low compared
to book and real asset values, as well as compared to expected stream of
earnings, entrepreneurs usher in a more adaptive pattern. Another factor is
that in the USA unfriendly takeovers are considered legitimate. In West
Germany they are not acceptable behavior, and are practically unknown
[Thurow (1985)]. Similarly, endeavors to change patterns of labor relations
in order to gain the support of workers to enhance productivity was a ripe
area as labor unions weakened and their legitimacy declined and Japanese
quality of work circles were held up as role models in recent years. It was
less acceptable in the 1960s. Also, there were many more opportunities in
areas in which the declining legitimation of government intervention led to
deregulation (e.g., airlines, banking) than in those in which consumer
pressures maintained regulation (e.g., electrical utilities). [On the relationship
between regulation and entrepreneurship, see Gilad (1982, pp. 157-158).]
179
A. Etzioni, Entrepreneurship, adaptation and legitimation
2.4. Initiation, not implementation
Entrepreneurship is an endeavor that introduces, or initiates new patterns.
Entrepreneurs do more than destroy old patterns (indeed these are often
weakened before entrepreneurship arises), they focus on finding new ways of
doing business from making a better mouse trap to creating new financial
instruments. At the same time entrepreneurs only serve to start the process,
not to fully implement, solidify, let alone routinize and multiply their
creations. Entrepreneurs are the shock troops of innovation; innovation
managers are the infantry that follows.
To summarize the argument up to this point: Entrepreneurship has been
defined as adaptive reality-testing, as an activity whose societal function is to
replace societal patterns that have grown excessively obsolescent with
patterns more compatible with the constantly changing environment. The
process is expected to typically involve the accumulation of numerous small
changes and only rarely, large, revolutionary, adjustments. The process is far
from rational; numerous failures proceed, accompany and follow each
success. Success is viewed as introducing a new pattern that is relatively more
adaptive than the one it replaces. The full integration of new patterns into
society is not the role of entrepreneurs.
3.
Are the patterns rational?
Over the last decade a major effort has been undertaken to shore up the
rationality axiom of neo-classical analysis, in economics as well as in other
social sciences, by arguing that while individual actors may not command
the intellectual capabilities rational choice required, they may nevertheless
act rationally by drawing on various decision-making devices provided to
them. The reason these devices are of cardinal interest for the issue at hand
is because they provide an excellent analogue for societal patterns, their
rationality, and their need for adaptation.
Different authors have focused on different devices including heuristics
[which are said to simplify the world and hence enhance individual decision-
making, Nisbett and Ross (1980)] and rules-of-thumb that tell individuals
how to render decisions rationally in a given situation without any or
without much gathering of information, conducting analyses, drawing in-
ferences and so on. 'It is easy to jump to conclusions that the widespread use
of rules of thumb is good evidence of sloppy workmanship on the part of
business management. ...on the contrary, rules of thumb are among the
more efficient pieces of equipment of optimal decision making' (Baumol and
Quandt, 1964, p. 23). Still others have depicted rules of thumb and patterns
(such as the structure of firms) in essentially the same way [Williamson
(1975); North (1981)].
180 A. Etzioni, Entrepreneurship, adaptation and legitimation
Moreover, these devices and patterns themselves are said to be subject to
rationalist adaptations. They are said to be modified over time to reflect
empirical experience which renders them more efficient. For instance, Cyert
and March (1963) reported that when prices were set initially, say too high,
with inadequate reference to demand, 'feedback from the market' caused the
stores they studied to mark prices down. This, Nicholson (1978, p. 276)
argued, shows that despite the suggestions that these rules appear to consider
only the costs of the goods, they ultimately do take into account demand as
well, and hence qualify as rational utility maximizers. Similarly, Machlup
(1952, p. 69), an ardent defender of the rationalist position, re-examined
thirty-eight interviews conducted by Hall and Hitch (1939). Machlup argued
that some of those who said they charged 'full costs' in effect 'admitted that
they might charge more in periods of exceptionally high demand' and others
reported 'that they might charge less in periods of exceptionally depressed
demand'. This 'attention to demand elasticities' Machlup (1952, pp. 70-71)
concludes, 'is equivalent to marginal revenue considerations'. In short, rules
are said to be maximally rational. [Strong evidence to the contrary by
Kahneman et al. (1982), has not yet influenced the true believers in this
axiom.] Evolutionary arguments are sometimes used to argue that firms (or
other organizational units, e.g., city governments, that compete with one
another over industries) that do not act rationally, will be wiped out. Hence,
it is argued that when one encounters organizational units whose rules or
patterns are not rational these are to be viewed as short-lived aberrations
that will correct themselves.
For brevity's sake this approach will be referred to here as the patterns-
are-rational thesis. It constitutes nothing but a latter day version of the
equilibrium theory and it faces the same challenge in the study of entrepre-
neurship that the equilibrium theory does: if the world as-it-is (i.e., static) is
rational, there is no need for entrepreneurship. (If one acknowledges that the
existing patterns are obsolete, that they require adaptation, even when the
gains of adaptation exceed the costs, then they were not rational to begin
with.)
In contrast the societal approach followed here suggests that patterns are
ossified in most societies, in most periods, including modern societies, albeit
in varying degrees. That is, typically patterns are not adapted as reality
changes but lag behind (without assuming that they were ever fully or highly
adaptive at any point in time). True, some exceptional patterns are ahead of
their time. (For example, in the 1940s military bases in the U.S.A. were
ordered desegregated long before the society was or such action was called
for by those who served in the said bases). But we expect studies will show
most time patterns are anachronistic. The reasons pattern lags are to be
expected are numerous. One reason is that the costs of adapting a pattern
are high. These include much more than the often-cited information costs,
181 A. Etzioni, Entrepreneurship, adaptation and legitimation
those of searching for data, interpretation, inference and analysis. The finding
and introduction of new patterns, the task of the entrepreneur, requires
modifying the consensus of one or more collectivities which support the
prevailing patterns [a point spelled out in Janis' (1972) study of 'groupthink']
and undoing the existing power structure formed around the obsolescent
patterns. That is the total costs of adaptation are much higher than those
incurred from the information involved.
This does not mean that adherence to the prevailing patterns is rational.
People act as if the costs of forming the old patterns are not sunk costs, to
be disregarded, and are far from anxious to change prevailing patterns even
when according to neutral observers the benefits of adaptation exceed the
costs. One main reason for the opposition to adaptation is that the gains are
not distributed evenly. Those who benefit most from the obsolescent patterns
are often those in power and more able, even if they are a minority, to
sustain the patterns against the less powerful majority or new but still weak
minority power wielders. Each pattern generates a flow of rent that is
distributed unevenly among the members of the relevant collectivity. For
instance, tolls on bridges flow to the owners or to a public authority, for
years if not decades even when the bridges are poorly maintained. Industrial
development bonds favor some industries over others and so on. Note that
at issue here is not imperfect markets or even economic monopolies but the
use of political power of economic actors to maintain their advantages
position and the patterns that it draws upon. For example, those who benefit
from existing patterns tend to be more powerful in the political realm than
those who are weaker for reasons explored elsewhere. They use their political
power to attempt to block change and maintain their rent whether or not
these patterns are efficient [Etzioni (1985b)].
Entrepreneurs, in effect, join the political challenge, by providing new,
knowledge-based, reasons to discard the old patterns, and above all, point to
what new patterns to switch. This is not to suggest that there is a conscious
alliance between entrepreneurs and political agents of change. And often the
political change agents favor changes that have no reality-base but are only a
struggle over allocations. However, when pattern changes enhance reality, poli-
tical change agents and entrepreneurs complement one another. For example,
during the rise of capitalism, opposed by the landed aristocracy, bourgeois
politicians and industrial entrepreneurs complemented one another. And
now, founders of new, Hi-Tech, industries seek political allies in supporting
young 'yuppie' candidates, to overcome the resistance of politically en-
trenched old industries (such as steel:tnd auto) to modify tax laws to allow
for more R&D and to keep making international trade freer.
Another reason obsolescent patterns persist even when the benefits of
change exceed the costs of adaptation, and why entrepreneurship is required
as a special effort to generate adaptation rather than it occurring automati-
182 A. Etzioni, Entrepreneurship, adaptation and legitimation
cally under these circumstances due to market forces, is that the actors have
no way of knowing or rationally estimating the costs and the benefits of
whether or not new patterns are likely to be more adaptive than prevailing
ones. Entrepreneurs semi-gamble that sizable gains of few successful en-
deavors will make up for numerous, but hopefully smaller, losses caused by
those that fail. (Semi-gamble, because, as was suggested earlier, they focus on
promising sectors of innovation even when they cannot foretell which specific
innovation will payoff.)
In short, entrepreneurship is necessary as a special force to propel
adaptation. But what promotes entrepreneurship? In part, it is favored by
environmental factors; the more rapidly the environment changes, the larger
the potential gain from adaptation, and hence the potential reward for
entrepreneurs. Some factors are internal to society; e.g., falling out among the
power wielders as reflected in the literature on oligopolies that fight one
another rather than collude. We focus here on one force that significantly
enhances the ability to serve the need for adaptation, that of legitimation.
4. Legitimation
4.1. The level of legitimation
The roots of the tenD 'legitimation' lie in considering an act to be in
accordance with the law [Sternberger (1968); Schaar (1981)]. However, the
usages of the tenD in political science, sociology, and even in the popular
press have expanded its meaning to refer to a wide set of values and mores
that provide moral approval of specific activities or institutions whether or
not legal sanction is involved [Lipset (1963); Deutsch (1974, pp. 15ff)]. Thus,
it might be said that in the 1970s in the U.S.A. cohabitation was considered
to be more legitimate than in the 1950s, even if it has not grown more in
accordance with the governing laws. The tenD refers to the fact that living
together has become more acceptable according to public morality. The same
holds for views of the entrepreneur.
'Nowadays it is quite fashionable to be an entrepreneur. Suburban front
rooms are stacked high with pocket calculators to be sold through mail-
order advertisements in the local paper. Commuters' wives run "nearly
new" boutiques in their local village. It was not always so. Quite
recently a French sociologist, challenged to give a definition of the
entrepreneur, is reputed to have said "The entrepreneur is a pig"'.
[Casson (1982, p. 1).]
Legitimation is a continuous, not a dichotomous variable. Indeed, it runs
the full gamut from highly supportive to highly oppositional. -Entrepreneur-
183 A. Etzioni, Entrepreneurship, adaptation and legitimation
ship may be regarded as the prime activity of society (e.g., in settling of new
countries, e.g., the American West); as an activity acceptable but of second-
ary importance (commerce, finance, manufacturing, technology in late aristo-
cratic, early industrial Britain; in the last generation of the 18th Century); an
activity suitable only for a minority (Jews, Armenians, Turks, etc.), or a
highly tabooed activity.
The level of legitimation is expected to affect all aspects of entrepreneur-
ship. All other things being equal, the higher it is the more the educational
system (including the family, on-the-job programs in corporations, not just
schools and colleges) will dedicate itself to educate and train entrepreneurs;
the more the polity will reward entrepreneurs; and the more entrepreneurial
behavior will be the source of psychic rewards, generated by the respect the
activity generates.
Throughout the sociological literature there is much evidence that certain
religions were less favorable to entrepreneurship than others [Catholics vs.
Protestants, Weber (1930)]; dogmatic 'secular religions' or ideologies, less
favorable than pragmatic ones [Communism as compared to capitalist
welfare state, Berliner (1983); Gilad (1982, p. 154)], family-oriented societies
less favorable than national-oriented ones [e.g., ancient China vs. ancient
Japan, Pelzel (1965); Levy (1953); Latin vs. North America, Cochran (1965);
Lauterbach (1966)]. Starr (1985) argues that in recent decades the public
opinion climate in New York City changes from favorable to risk-taking to
one that views developers as public enemies. Our purpose here is not to
review the immense literature on the subject, but to remind readers of the
relevance of the findings on the role of values in the rise of capitalism to the
issue at hand.
4.2.
The sources of legitimation
The immediate sources of legitimation are the values of the society and the
relevant sub-societies, applied to endorse an activity or institution at issue.
Reference is made to the society and sub-societies because often there are
significant variations on sub-societal levels. For instance, on average, Asian-
American orientations toward entrepreneurship seem to differ from that of
Black Americans, or that of New Englanders from that of many in the Deep
South.
The deeper question is: what shapes the values that mold legitimation?
Social sciences have not been able to come up with a parsimonious answer
to this question. Given a particular society, it is possible to trace the sources
of value changes to cross-societal diffusion (e.g., anti-entrepreneurial Moslem
fundamentalism is spreading from Iran to other Moslem countries; Western
settlers introduced values favorable to entrepreneurship into African tribal
184 A. Etzioni, Entrepreneurship, adaptation and legitimation
societies). Also, changes in leadership (e.g., from Carter to Reagan) and in
intellectual elites (e.g., from old liberal to neo-conservative) playa role, as
well as social movements (e.g., the rise of the women's movement in the
U.S.A. significantly increased women entrepreneurship) and the educational
system (e.g., changes in focus from liberal arts to vocational and pre-
professional; rise of business schools). However, such lists, easy to draw after
the fact, case by case, provide no satisfactory theory of what derives
legitimation, above all, changes its content and potency.
About the only general theorem that seems to hold is the Weberian notion
that legitimacy tends to wear out. That is, given a high level of commitment
to any particular endorsed line of activity (e.g., pioneering in the early days
of Israel; support for the war effort in U.K. in 1939), legitimacy will decline
as years follow. It is hence comparable to a stock of capital that depreciates.
Weber thought that once decay sets in, legitimation cannot be re-stocked; it
wears out to the point it breaks down and is replaced by a new mode. I
argued elsewhere that internal rejuvenation is possible, as that of the
American political system experienced during the Jacksonian and Progressive
Eras. In Third World countries, a recent return to interest in Western style
entrepreneurship is at least the second time around. In either case, we know
either too much (ad hoc) or too little (systematically) about the sources of
legitimation.
One subsidiary issue, which received a very large amount of attention,
ought to be singled out in the present context and that is the role of
economic factors in shaping legitimacy. Obviously if economic factors
determine the level of legitimation, say if there is more demand for (or profit
in) entrepreneurship -it grows more legitimate, then legitimation would be
but an intermediary variable and not a factor (or, at least not a major one)
in its own right. The debate over whether or not ideas, values, and
legitimation, are a primary causal factor, or -merely a largely reflective one,
is at the core of the debate between Western intellectuals and Marxists.
Nowhere is it more central than in the work of Max Weber. Indeed, his
masterful comparative study of economic development in India, China, and
Europe is built around the question: did religious differences cause economic
differences or merely reflect them? His conclusion is that the spirit of
capitalism played a major independent role in launching a new societal-
economic system, that of capitalism. [See Weber (1930,1951,1958) and
Schluchter (1981). For a recent study that found legitimacy plays an
independent role, in this case, in the production of social science research, see
Useem (1980).] On the other hand, to suggest that legitimacy plays a key
independent role is not to deny that costs have an effect on legitimacy. Both
Thurow (1980) and Wilensky (1983) show that rising costs (in the context of
slow growth, high inflation and high unemployment) undermined the legiti-
macy of social initiatives of the kind associated with the Great Society.
A. Etzioni, Entrepreneurship, adaptation and legitimation 185
4.3.
The effects of legitimation
The ways that changes in the level and content of legitimation affect
entrepreneurship are relatively clear. In the terms used by economists,
legitimation is a key factor which affects the preferences, the 'constraints', and
the resource allocation simultaneously. These effects are first spelled out and
then the significance of these observations are indicated. Obviously the
approach is sociological, or -one of socioeconomics, and not that of
traditional economics because it deals with factors economists frequently
consider either as 'given' or as the territory of other disciplines, especially
when it concerns the factors that shape preferences [Samuelson (1983, p.
90)]. Some public-choice political scientists and several neo-classical econo-
mists have systematically denied that legitimation plays a role and have tried
to account for such effects in terms of inadequate knowledge or information
costs [Clark & Dear (1984, p. 156)]. According to the approach followed
here, which is dynamic rather than one of 'comparative statics', changes over
time in economic behavior, such as changes in the level of consumption,
saving, or entrepreneurship, may be determined by changes in prices or by
changes in preferences. [On the role of legitimation of mass consumption,
which in effect reduces the capital available for investment and adaptation, at
least under conditions of full employment, see Douglas and Isherwood
(1979).] A change in societal legitimation is a major reason individual
preferences change. For example, a major drive by business lobbies which
touts the merits of venture capital for the American economy, and depicts
those who favor a high level of environmental and worker protections and
seeks a 'risk free world', as 'sissies' and 'un-American', to the extent that it is
successful (i.e., the dominant societal endorsed view is affected), it will serve
to enhance entrepreneurship: people will become less risk averse.
Concretely such a change in orientation may take numerous forms such as
more youngsters choosing business careers over public service, universities
expanding the facilities of business schools while dedicating less public
resources to liberal arts, and more youngsters joining Junior Achievement
programs and fewer the Salvation Army and the Red Cross. True, not all or
even most, who will be affected in these ways will become entrepreneurs; but
statistically the more individuals who are 'recruited' into these anterooms of
entrepreneurship, the more entrepreneurs will end up in the main arena.
Second, these same changes in the level of legitimation will also affect the
'constraints'. For example, the same campaign by business lobbies, if
successful, will also make it easier for elected representatives to change the
tax laws, to make them more favorable to entrepreneurs (e.g., by reducing
the tax on capital gains; shorten the period a stock must be held to qualify
for capital tax treatment; reduce the prohibition on private placement of
stocks). All these steps, in turn, will decrease the costs of entrepreneurship.
186
A. Etzioni, Entrepreneurship, adaptation and legitimation
A neo-classical economist may say at this point that there is nothing in
this approach that is incompatible with traditional economic analysis. Given
more demand or more supply of entrepreneurs, or lower costs, more
'production' of entrepreneurs is to be expected. Indeed, the sociological
analysis explored here is compatible with economic analysis; it 'precedes' it in
the sense that it seeks to account for the changes in factors which
economists, in turn, can then take for granted. It adds though to the
explanation, to the extent that one grants that preferences can be changed,
and are due to external factors which can be systematically accounted for. It
is also parsimonious in that it accounts, by exploring changes in one factor,
that of legitimation, for changes in both preferences and constraints.
4.4 Psychic side-effects
The question might be asked, what difference does it make whether
individuals change their economic behavior, say the level of their entrepre-
neurial efforts, due to changes in constraints or in preferences? In either case,
the behavior will be the same, say, there will be more of it. However, a very
extensive review of the findings of more than a thousand studies of a large
variety of individual behavior, shows that behaviour will differ significantly
[Etzioni (1975), see also Mueller (1973, pp. 129ff)]. The main effect is that if
behavior is changed due to changes in constraints, it will be accompanied by
a measure of resentment, while if it is due to a change in preferences, this will
not be the case. The reason is, briefly, that when a person has a preference,
say, to use a simplistic example, to go to a movie, but because of changes in
constraints will instead work overtime, he is considered not to have changed
his preference but as being constrained from acting it out, which generates a
measure of resentment. On the other hand, if the person is convinced -say,
that overtime is important for the future of his company -he will change his
preferences (he will no longer want to go to the movie) and hence no
resentment will accrue. The difference can be empirically validated. For
example, people will work more conscientiously if convinced of the need to
work overtime rather than being 'made' to stay. This general observation,
well supported by data, applies to entrepreneurship. Acceptance of the risk
taking involved will be much higher if entrepreneurship is legitimated than
when it is perceived as a matter of necessity; say, when other job lines are
not open (for example, to minorities, in anti-entrepreneurial societies).
5.
Institutionalized entrepreneurship and meta-entrepreneurship
Aside from the question of whether or not certain sectors of entrepre-
neurial activities are legitimated, and to what extent as compared to others,
A. Etzioni, Entrepreneurship, adaptation and legitimation
the most important consideration is whether or not entrepreneurship is ad
hoc or institutionalized.
It is commonplace to observe that entrepreneurship is (a) often not an
individual undertaking but a team rask (although much of the literature
focuses on entrepreneurs as individuals), and (b) that much entrepreneurship
work is not an ad hoc improvised activity (as implied in many of the personal
accounts by and of entrepreneurs) but a routinized activity in societies that
legitimate entrepreneurship, expecially those that rank it as a highly approved
activity. That is, much entrepreneurship takes place in institutions especially
set up to advance entrepreneurship, such as venture capital firms, R&D
programs within established firms, and think tanks.
A still higher order of legitimation may be needed if sufficient entrepre-
neurship is to be provided in the face of rapid change. In a rapidly changing
environment, if it is due to a rapid growth of knowledge, rapid change in
technology, or in the behavior of major competitors (e.g., the Japanese), or
the occurrence of 'shocks' -institutionalized entrepreneurship may not
suffice. Indeed, the fact that it is routinized, which is an advantage in a
slowly changing environment, may pose a problem. What is needed is for
those firms and other social units (such as think tanks) whose primary
societal function is entrepreneurship, to contain sub-units that turn the
entrepreneurship perspective on these entrepreneurial units and lead them to
restructure as their patterns of entrepreneurship become obsolete. This may
be referred to as meta-adaptation. [On this concept see Day (1975, p. 9).]
Take, for instance, the Brookings Institution, a major Washingtom think
tank, and in the 1960s a source of numerous new public policy ideas.
Brookings is basically set up to do 'big books'. A typical Brookings
project/book costs more than $250,000, and takes at least five years from the
day a proposal is first drafted to the day the book reaches its intended
audience. True, the books often are less obsolescent than one might expect
because ad hoc changes are made long after the project is launched and,
many issues require treatment even after five years (e.g., black youth
unemployment). However, many other issues change too fast for such a slow
treatment. For instances, most plans for energy studies laid in 1972 were
overtaken by events by the end of 1973. Studies of the effects of a flat tax
suggested early in 1985 had only a limited policy value by late 1985, as
Congress was fashioning various new loopholes to replace some of the old
ones although the total bill maintained some of its reform features (broader
revenue base) deductions. Clearly, if Brookings had an internal meta-review
and restructuring capacity, it would significantly reduce its reliance on big
books as a tool of policy studies and rely more on much shorter, less costly,
quicker turn-around policy briefs widely used by its competitors, such as the
American Enterprise Institute and the Heritage Foundation.
Similar needs to adapt the structure of the entrepreneurial units can be
88 A. Etzioni, Entrepreneurship, adaptation and legitimation
seen in the need to de-centralize and enhance the staff participation in the
management of R&D units, to build collaboration between universities and
R&D corporations, and to change the flow of work as new computer techno-
logies become available. In short, a high level of entrepreneurship requires
more than legitimation of ad hoc entrepreneurship, or even routinized
entrepreneurship, it requires approval of meta-entrepreneurship, i.e., of
activities in which the entrepreneurial units themselves are routinely subject
to entrepreneurship.
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