When current regulations are obsolete, one solution may be to evade rather than to reform or abide by potentially stifling rules. Evasive entrepreneurship refers to circumventing institutional obstacles as part of novel activity. It is not illegal: it’s done by using new technologies, finding room in existing regulations or working in the gray zone. If successful, it can make the institution being sidestepped irrelevant, or even provoke reform by highlighting its inefficiency. Evasive entrepreneurship is potentially a tool that can aid institutional reform in Europe, in particular in areas where institutions are obsolete or ineffective but where political reform is slow in response.
I use this framework to discuss how initiatives which stem from communities can bring about change. An example used to illustrate this is the Helliniko Metropolitan Community Clinic in Greece, a large volunteer effort which provides health care to low-income patients. The self-organized clinic referred to as the people’s “Alternative Health System” has served thousands of patients parallel to the existing (but ill functioning) health care system.
All this is nothing new. Economic and social development often results from entrepreneurs responding to problems or opportunities and enacting change. While high-tech business firms are everyone’s favourite example, this entrepreneurship need not be profit-driven nor abide by existing rules.
Institutional entrepreneurship refers to how entrepreneurs are influenced by and influence institutions. It is a field that greatly interest me. Entrepreneurship typically refers to business activity. More fundamentally however it includes all innovative activities aimed at change, not only firms. Other categories include “social entrepreneurs” who create non-profit organizations, “political entrepreneurs” who recombine resources in the policy arena to bring about reform and “community entrepreneurs” who organize to provide local public goods.
According to Schumpeter, the defining characteristic of entrepreneurship is not earning profits but disrupting the current equilibrium – the “order of things” inherited from the past. Business entrepreneurs who change the market equilibrium with new technologies, products or organizations are one important group, but the term can be applied to other actions which bring about dynamic change.
This post discusses these concepts theoretically as well as giving examples of how specific projects can be viewed within this framework.
A case illustrating political entrepreneurship is the People’s Assembly in Estonia, an online platform for crowdsourcing ideas for reforming electoral and political laws. The public was free to suggest proposals, which were reviewed by experts and discussed by a randomly chosen assembly of a few hundred voters. The People’s Assembly was initiated and organized by civil society voluntaries dissatisfied with democratic institutions in Estonia. It uses modern IT-tools to mimic classical democratic associations in smaller polities which allowed for face-to-face discussions and open proposals.
One interesting example of “community entrepreneurship” is Prinzessinnengarten, a large urban garden in the middle of Berlin founded and managed by local volunteers. The garden was built in a poorer part of Berlin to experiment with green urban gardening but also as a social initiate. Both the Prinzessinnengarten and the People’s Assembly are entrepreneurial in that they are novel responses to opportunity, but clearly not business firms.
Social entrepreneurship was also the driving force behind several much larger institutions. The Swiss businessman Henry Dunant is not famous for his private investments but for founding of the Red Cross, for which he received the first Nobel Peace Prize in 1901. More recent example of non-profit entrepreneurs includes Jimmy Wales and Larry Sanger who in 2001 created Wikipedia. The Red Cross and Wikipedia were innovative initiatives which changed the world as much as any entrepreneurial firm and which also required novel ideas, alertness to opportunities, risk taking and organizational effort.
The People’s Assembly, Prinzessinnengarten, The Red Cross and Wikipedia are examples of novel and to various extents disruptive entrepreneurship, but not of evasive entrepreneurship. These are examples of innovations in practices, technology or organization carried out within the existing institutional framework.
Entrepreneurs act within the rules of society we call institutions, sometimes defined as “the humanly devised constraints that shape human interaction”. Formal written institutions include laws, property rights and regulations whereas informal unwritten institutions include as traditions, cultural practices and norms. In the last few years there have some interesting work on how institutions affect entrepreneurs and how entrepreneurs may in turn influence institutions. I have previously written about the interaction of entrepreneurship and institutions.
Institutions such as property rights, rules, market structure, the political system and social norms largely regulate society and influence the extent to which entrepreneurial talent is directed toward productive or unproductive activity. Entrepreneurs can in turn work to abide, evade or alter institutions.
The common response is to institutions and work whiting the current framework. Altering institutions can take the form of social activism aimed directly at influencing policy makers to reform laws and regulations, such as the environment movement. A perhaps more intriguing way in which entrepreneurs interact with institutions is through evasive entrepreneurship aimed at circumventing formal institutions. Unlike activism, evasive entrepreneurship is not aimed directly at changing institutions by influencing policy makers but at devising ways to work around them.
One example includes rides-for-hire application companies such as Uber and Lyft which enable their users to circumvent regulations in the local taxi market. Another example aimed at circumventing intellectual property right and monopoly power includes file-sharing platforms such as The Pirate Bay. An important recent study by Elert and Henrekson discusses evasive entrepreneurship in depth:
“A well-established idea in the entrepreneurship literature is that entrepreneurs generally abide by institutions, which are therefore seen as the main determinants of entrepreneurship and economic growth. We challenge this idea by providing the first formal definition of evasive entrepreneurship, and argue that it is an important yet underappreciated source of innovation and change in the economy, especially because evasive entrepreneurs through their actions in the market may spur institutional change with potentially important welfare effects…This type of entrepreneurship is a means to test and provoke the existing institutional frameworks, and it also indirectly results in adaptations within those frameworks”.
Social activism takes place in the policy arena and deals with unwanted institutions by creating opinion and influencing politicians to directly reforming the institution in question. Evasive entrepreneurship by contrast accepts the institution but devices method to de facto work around it in the real economy. Elert and Henrekson discuss the distinction:
“Unlike institution-altering entrepreneurs, evasive entrepreneurs do not use political means to change institutions, but instead affect them through their activities in the market […] they do not directly try to change institutions through political means at the higher levels of the institutional hierarchy”
An entrepreneur who devises clever ways to evade taxes by using tax-havens may cause harmful economic effects. An early definition of evasive entrepreneurship is efforts in “evading the legal system or in avoiding the unproductive activities of other agents”. Adam Smith had this figured out already in 1776. He wrote that individuals could circumvent institutional constraints unfavorable to commerce, and added that the effort of individuals to better their condition is “not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operation’’.
Elert and Henrekson agree. Evasion can be both a bad and a good thing, depending on the specifics.
“If evasive entrepreneurship circumvents institutions that are welfare enhancing, it is likely to decrease welfare, but if there are other motives behind these institutions or if they have become obsolete (act as impediments) due to technical and/or organizational change, evasive entrepreneurship is likely to raise welfare”.
It is more likely that evasive entrepreneurship act as a vehicle of regulatory change by provoking it when the institutions being evaded is obsolete or inefficient. In these cases, evasive entrepreneurship has the additional benefit of pointing to inconsistencies in regulation.
Policy-makers may indeed welcome evasive entrepreneurship in many situations. The interest of politicians and society do not always perfectly coincide, for example in settings characterized by rent seeking, corruption, lobbying or group conflict. This can lead to institutional designed to further private interests of politicians or special interests despite being ineffective for society at large. Not all institutional inefficiency is however intentional. In other cases, inefficiency reflects complexity and the fact that optimal policies constantly shift due to technological and social change. In this situation,evasive entrepreneurship palys a Hayekian role by utilizing local information that is known in communities affected by policies but which policy makers in centralized decision making do not have full access to.
Another major problem in devising institutions is uncertainty, not the least when dealing with new technologies. When there are large uncertainties, evasive entrepreneurs can serve as an educational source for policy makers by demonstrating by experimenting and testing boundaries, demonstrating on a smaller scale what works and what does not. This is particularly true when there are active communities which self-organize to actively bring knowledge to the surface. In recent years, policymakers have become more aware about the benefits of using self-organized communities as a source of smalls scale experimentation and innovation as a complement for large scale for bureaucracy. Many initiatives fail, but the cost of failure is small, unlike state activity, and easily outweighed by the gains from even a few successful experiments.
An example of such innovative initiatives who I recently came into contact with is the tech community Edgeryders, which experiments with open access enterprises to deal with institutional failure in Europe. One fascinating case in evasive entrepreneurship which interested me is in the Greece health care sector.
Health care provision is one of the major problems facing the economy. Studies in the field of health economics has documented the difficult problem of health inflation, where expenditure on health care consistently increases faster than the rest of the economy, which puts pressure on public and private finances in both the U.S and Europe. There are however few satisfactory answers to what can be done about this.
The Greek health care system in addition collapsed following the economic crisis. Edgeryders works with a very interesting case study on evasive entrepreneurship in the Greek health care sector. Health care provision in Greece faces major difficulty following the financial crisis, with brought the public to the brink of bankruptcy and in addition led to many Greeks losing their jobs in a country where the national health service is tied to employment. This led to many unemployed Greeks losing their insurance virtually lacking access to public health care and no money to pay for private clinics.
One response to institutional failure was Metropolitan Community Clinic, a self-organized initiative evading existing institutions to provide health care to those lacking health care. Edgeryders write:
“This is a very strange animal as health care providers go. It has no legal existence. Its literature proudly proclaims: “MCCH is a volunteer organization without Legal or Taxable status and it is not a ‘Non-Profit-Making-Organisation’.” Maria: “We are technically illegal”. It does not accept donations in money. It does accept donations in kind: medicines, equipment, blood sample analyses. It operates from a building that belongs to the Municipality of Helliniko-Argyropoulis. Though none of its employees works in the building, the Municipality still pays the electricity and phone bills that the MCCH generates”
Traditional economic theory might in the past have concluded that this arrangement is impossible, but work in New Institutional Economics by Elinor Ostrom and others have shown that self-organized governance systems can use norms, internal trust and reciprocity even when formal structures and property rights are lacking. The MCCH may serve as an illustration of Ostrom’s Law: “A resource arrangement that works in practice can work in theory”
There are apparently several similar health-care clinics in Greece circumventing the institutional framework as a response to policy failure. I find this an interesting example of evasive entrepreneurship, and plan to evaluate the MCCH as a case of evasive entrepreneurship as a response to institutional failure together with my college Erik Lakomaa. Elert and Henrekson in their study focus on for-profit evasive entrepreneurship, but conceptually nothing precludes non-profit evasive entrepreneurship.
In discussed above, the benefits of evasive entrepreneurship are particularly important in situations when existing institutions do not function well, which makes Greece a suitable case study. This and other cases are interesting to evaluating if evasive entrepreneurship may be utilized to identify, resolve or reform obsolete institutions in Europe.
Photo credit: Charles Knowles on flickr.com
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