Chapter 13: Economic Perspectives: Influences and Impacts

As of the mid-80s, property investment had proven itself to be an extremely lucrative market. Statsitcs from the last century, revealed that prices in fact doubled every seven years. In light of this potential profit, people found themselves buying multiple properties and renting them out as another stream of income. This case study follows Fergus and Judith Wilson, as they navigated their way through the property ladder, to later become one of Britain’s millionaire couples. See full case study here: Chapter 13 - Case study 

Chapter 13: Questions

1. The chapter explains how ‘neo-Austrian’ economists argued that exploiting ‘special knowledge’ represents a distinctive entrepreneurial function. Entrepreneurial profits are earned when people make use of their knowledge. This argument contrasts with another influential research strand in economics, in which entrepreneurial profits are a reward for bearing uncertainty (Knight 1921). Israel Kirzner has refined earlier neo-Austrian ideas, arguing that profits could be attributed to entrepreneurial ‘alertness’ to previously unidentified opportunities (Kirzner 1979).

What ‘special knowledge’ would you say the Wilsons had brought to their business?

Guidance answer:

They identified the basis for funding a property business which would allow them to invest in a lot of different properties and thereby gain a great deal of leverage (for a given amount of their own capital they could borrow significant multiples).

They identified a type of property for which there would be rental demand, limited supply and downside protection in the event of a market crash.

2. The economist Joseph A. Schumpeter identifies five ways in which innovative entrepreneurial activity creates variety by introducing ‘new combinations’ of productive means:

(1) The introduction of a new good – one with which consumers are not yet familiar – or a new quality of a good; (2) The introduction of a new method of production, that is one not yet tested by experience in the branch of manufacture concerned, which need by no means be founded upon a discovery scientifically new, and can also exist in a new way of handling a commodity commercially. (3) The opening of a new market, that is a market into which the particular branch of manufacture of the country in question has not previously entered, whether or not this market has existed before. (4) The conquest of a new source of supply of raw materials or half-manufactured goods, again irrespective of whether this source already exists or whether it has first to be created. (5) The carrying out of the new organisation of any industry, like the creation of a monopoly position (for example through trustification) or the breaking up of a monopoly position. (Schumpeter [1934] 2000: 51-52).

Which one (or more) of these five categories would you use to describe the Wilsons’ business?

Guidance answer:

The Wilsons were running a buy-to-let business. They were renting a certain type of property to other people, at a scale that had not been undertaken before, in that geographic area. In this respect their enterprise fell into category 1. Their enterprise could also be classified in category 5, because of the novel way in which they had organized their business and effectively created monopoly in certain parts of Kent.

3. Would you classify the Wilsons’ approach to entrepreneurship as being ‘productive’, ‘unproductive’ or ‘destructive’ (Baumol 1990)? Explain the reasons for your answer.

Guidance answer:

According to Section 13.4.1 of the text, ‘Productive entrepreneurship has a beneficial impact (e.g. increasing incomes and employment). By contrast unproductive entrepreneurship (e.g. ‘rent-seeking’ activities, such as tax avoidance) has negative effects while destructive entrepreneurship (e.g. organised crime) can undermine an entire economy.’

The reasons why their activity could be described as being productive is that they have enabled certain types of workers to live in properties in a way that offers convenience for their lifestyle. However in terms of destructiveness, their actions have put various properties out of the purchasing power of young families.