Extending William Baumol’s theory on entrepreneurship and institutions: lessons from post-Second World War Greece

Abstract

This article examines William Baumol’s theory about the interaction between taxation and entrepreneurship and proposes an extension to it. The analysis shows that the traditional form of Baumol’s model, focusing mainly on the level of taxes, cannot be used in order to explain what happened in the Greek case. Utilising historical evidence from the mid 1950s to the late 1980s, this article confirms that problematic tax rules create difficulties for entrepreneurship and can lead to unproductive forms of it, as Baumol suggests. However, the focus here is on aspects of the system of taxation that Baumol’s model, examining solely tax rates and levels of taxation, neglected. It is shown that, as far as Greek entrepreneurship is concerned, the adverse effects of the system of taxation came not from the level of taxes, but mostly from a series of issues that increased its perceived unfairness and illegitimacy. Some of such issues were the complexity and frequent change of legislation, the insufficient organisation of the tax bureaus as well as the lack of adequate training and arbitrariness of the members of tax services. The evidence presented here suggests that Baumol’s model can be enriched by taking into consideration these aspects of taxation too.

Keywords:

• Entrepreneurship
• William Baumol
• Institutions
• Tax System
• Greece

Acknowledgments

I would like to thank Neil Rollings and Jeffrey Fear for their useful comments and suggestions during the preparation of this article. I would also like to thank the participants of the 2017 ABH Conference in the University of Glasgow for their comments on an earlier draft of this article.

Notes

1. Baumol, ‘Entrepreneurship: Productive, Unproductive, and Destructive’, 894.

2. Lindbeck, ‘Consequences of the Advanced Welfare State’, 27.

3. Baumol, ‘Entrepreneurship: Productive, Unproductive, and Destructive’, 915.

4. That is, he refers to rules that concern the level of the various tax rates (Ibid., 917).

5. See Baumol, The Free-Market Innovation Machine, 65,69 and Entrepreneurship, Management and the Structure of Payoffs, 39–40, 252–3.

6. Tatsos, Shadow Economy, 293.

7. See Revenue Statistics, OECD.stat, https://stats.oecd.org/Index.aspx?DataSetCode=REV#.

8. Tatsos, Shadow Economy, 290, 223.

9. Psalidopoulos, History of the Bank of Greece, 274.

10. Kazakos, Between State and Market, 396.

11. Milios, ‘The Greek Economy’, p. 18.

12. Long-term Statistical Series of the Greek Economy, 10.

13. Kazakos, Between State and Market, 389.

14. The study covered 11 European Union Member States, four candidate countries, one applicant country and one country that is neither a candidate nor an applicant.

15. European Commission, Helping Firms Grow, 136–7.

16. Kipping and Üsdiken, ‘History in Organization and Management Theory’, 542–3.

17. Braunerhjelm and Henrekson, ‘Entrepreneurship, institutions, and economic dynamism’, 108.

18. Baumol, ‘Entrepreneurship: Productive, Unproductive, and Destructive’, 917.

19. See North, Institutions, Institutional Change and Economic Performance; Acemoglu and Robinson, Why Nations Fail, 2012.

20. For more recent works on the impact of institutions on entrepreneurship see, for example, Welter and Gartner, A Research Agenda for Entrepreneurship and Context and Randolph, Tasto and Salvino, Public Policy, Productive and Unproductive Entrepreneurship.

21. Baumol, ‘Entrepreneurship: Productive, Unproductive, and Destructive’, 895. Baumol puts forward the same argument in subsequent works too, such as, for example, in The Microtheory of Innovative Entrepreneurship.

22. Schumpeter, in Baumol, ‘Entrepreneurship: Productive, Unproductive, and Destructive’’, 896–7.

23. Ibid., 897.

24. Baumol, ‘Formal Entrepreneurship Theory in Economics’, 203.

25. Ibid., ‘Entrepreneurship: Productive, Unproductive, and Destructive’’, 915.

26. Ibid., Entrepreneurship, Management, and the Structure of Payoffs, 9–10.

27. Baumol, Litan and Schramm, Good Capitalism, Bad Capitalism.

28. Baumol, ‘The Entrepreneur in History’. (in the invention of enterprise, apo sel ix-xiv).

29. Douhan and Henrekson, ‘The Political Economy of Entrepreneurship’, 20.

30. Henrekson, ‘Entrepreneurship and Institutions’, 17.

31. Ibid., 19. There have been of course, works focusing solely on tax rates and the level of taxes, such as, for example, Domar and Musgrave as well as Sinn, which concluded that under the assumption of risk aversion higher taxes encourage risk taking and therefore also entrepreneurship (Douhan and Henrekson, 21). There have also been a number of empirical literature contributions on the effects of taxation on small business creation. For example, the studies of Cullen and Gordon as well as Bruce and Mohsin, which show a ‘weak negative relation’ between tax levels and self-employment (Ibid.). Moreover, there is little distinction in the literature between the level of taxation and the methods of tax collection and enforcement. Estrin, Meyer and Bytchkova mention two early 2000s studies following such a distinction, based on survey data from transitional EU economies. The first one, by Aidis and Mickiewicz, suggests that ‘[t]he measure of taxation is correlated with two omitted variables, ‘‘frequent changes to tax policy’’ and ‘‘ambiguity of taxes’’, suggesting that all aspects of the system of corporate taxation, rather than the level alone, may inhibit entrepreneurial growth’. Also, Meyer et al’s 2005 study indicates that unstable rules and regulation, ‘rather than the actual state of these variables’, are considered by foreign investors as a ‘major obstacle’. Estrin, Meyer and Bytchkova, ‘Entrepreneurship in Transition Economies’, 705.

32. Larroulet and Couyoumdjian, ‘Entrepreneurship and Growth’, 91.

33. Edmark and Gordon, ‘The choice of organizational form’.

34. Sobel, ‘Testing Baumol’, 652. It should be noted here that Sobel’s analysis has been criticized for identifying self employment with productive entrepreneurship (see Larroulet and Couyoumdjian, 93).

35. Coyne and Leeson, ‘The plight of underdeveloped countries’, 244.

36. Ibid.

37. Jones and Wadhwani, ‘Schumpeter's Plea: Rediscovering History’, 22.

38. Ibid., 13.

39. Ibid., 27.

40. Friedman and Jones, ‘Business History’: Time for Debate, 3.

41. For example, in her study about business groups in Argentina, Barbero utilised Baumol’s distinction between innovative, imitative, unproductive and rent-seeking entrepreneurship (Barbero, ‘Business Groups in Argentina’, 72, 88). Similarly, when analysing the determinants of entrepreneurial success in Italy, Toninelli, Vasta and Zavaronne mentioned Baumol’s further distinctions between innovative and replicative entrepreneurs as well as the redistributive and productive ones (Toninelli, Vasta and Zavaronne, ‘Explaining Entrepreneurial Success’, 93–4). In a recent overview about the dimensions of business history research, Amatori stressed Baumol’s point about the entrepreneur being ‘one of the most intriguing characters of the economic scene’ (Amatori, ‘Business History’, 26–7). Similarly, in their study about the relationship between innovation and competition policies in 1950s Britain, Broadberry and Crafts mentioned Baumol’s contributions on the study of cartels and their welfare implications (Broadberry and Crafts, ‘Competition and Innovation’, 5,17). In a much older article concerning the study of entrepreneurship by business historians, Tony Corley analysed how business and corporate historians have utilised Baumol’s theory on contestable markets (Corley, ‘Firms and Markets’, 62–3).

42. Ortiz-Villlajos and Sotoka, ‘An approach to entrepreneurial success’.

43. Ibid., 144, 163.

44. Giouras and Psalidopoulos, Occupation, Nazism and Greek Economy, 19–20; 34; 224–46.

45. Tatsos, Shadow Economy, 287.

46. Kalyvianakis et al., Tax regime, Shadow Economy and Tax Evasion in Greece, 275–9.

47. Dertilis, Ineffectual of Effective? Taxes and Power in the Neo-hellenic State, 40.

48. Ibid., pp. 26; 48–9.

49. Tatsos, Shadow Economy, 295–7.

50. Ibid., 299–300.

51. Bank of Greece Governor’s Annual Report for 1980, 18.

52. Proposals of the Disincentives Committee, 3.

53. Ibid.

54. Ibid., 227–32.

55. Ibid., 163–224.

56. CHROTEX Archive, ‘Tax Courts’, 6.

57. Ibid.

58. OEEC stands for the Organisation for European Economic Co-operation, renamed to Organisation for Economic Co-operation and Developmen (OECD) in 1961.

59. Vovolini Archives, Viomichaniki Epitheorissis, Vol. 26, Proceedings of the 2nd Congress of the Chambers of Commerce and Industry of Greece, 20–23.10.1957, 53–4. The full report was published in the newspaper O EconomicosTahidromos ( 10 October 1957).

60. He was probably referring to legislation that was adopted for the promotion of investment.

61. Bulletin of the Chamber of Commerce and Industry of Athens, 1 January 1965, 16.

62. Bulletin of the FGI, 17, 195, 15 August 1970, 1.

63. Ibid.

64. Bulletin of the Chamber of Commerce and Industry of Athens, August-September 1967, 8–9, p.457.

65. Theodoros Staikos, ‘The Problem of Tax Audits’, The Tax Review, February 1972, 277, pp.81–2.

66. Bulletin of the Chamber of Commerce and Industry of Athens, July-August 1977, 7–8, 49–50.

67. Apart from being involved in business, Argyros has also served as a member of the European Parliament, the vice-President of UNICE, a member of the Executive Committee of the Trilateral Commission, the President of the World Textile Institute and the President of the Board of Directors of the Federation of Greek Industrialists; ‘Stockwatch’, Stelios Argyros; http://www.stockwatch.com.cy/nqcontent.cfm?a_name=bod_view&bodn_id=5747&lang=en and http://mba.aegean.gr/attachments/article/87/ArgyrosSteliosCV.pdf.

68. Argyros, interview excerpt.

69. See Baumol, ‘Entrepreneurship: Productive, Unproductive and Destructive’.

70. Union of Corporations and Limited Liability Companies, Board Meeting Minutes 24 April 1980, 135–6.

71. I Kathimerini, January 21, 1979.

72. Zolotas, Our Economic Problem – A TV discussion, 8.

73. Photopoulos, ‘The Administration of the Greek Tax System’, 896.

74. Kazakos, Between State and Market, 269–70.

75. See, for example, Agapitos, Income Taxation in Greece, 47.

76. Mpakoyiannis, ‘Vassal’ Taxpayers and the ‘Sultan-like’ System of the Tax Services’, 6.

77. Bulletin of the Chamber of Commerce and Industry of Athens, July-August 1977, 7–8, 49–50.

78. Union of Corporations and Limited Liability Companies, Board Meeting Minutes 24.4.1980, 135–6.

79. Bulletin of the Chamber of Commerce and Industry of Athens, February 1977, 2, 10.

80. Demathas, ‘Greek Economy and European Community’, 22.

81. Ibid.

82. ‘In the labyrinth of the VAT return’, I Kathimerini, 3.3.1988, 9.

83. Vovolini Archives, Viomichaniki Epitheorissis, Vol. 26, Proceedings of the 2nd Congress of the Chambers of Commerce and Industry of Greece, 20–23 October 1957, speech of A. Nikolopoulos, president of the Athens Traders Association, 73.

84. The ‘Konstantinos G. Karamanlis’ Foundation, ‘Historical Archive’, Konstantinos Papakonstantinou; http://www.ikk.gr/Default.aspx?tabid=236.

85. No further information about such Advisory Committees has been found, with regards, for example, to their composition.

86. The ‘Konstantinos G. Karamanlis’ Foundation, ‘Konstantinos Papakonstantinou Archive’, File 202A, Findings of the Economics Committee, 1959–1961, Notes on Tax Evasion, Measures against tax theft, 4.

87. Vovolini Archive, Viomichaniki Epitheorissis, Vol. 26, 1959, Proceedings of the 2nd Congress of the Chambers of Commerce and Industry of Greece, 20–23 October 1957, 268–9.

88. Ta Nea, 20 October 1962.

89. Eleftheria, 3 August 1962.

90. Vovolini Archive, Viomichaniki Epitheorissis, Vol. 32, 1965, Proceedings of the 5th Congress of the Chambers of Commerce and Industry of Greece - 8th theme of the agenda, 14–17 June 1964, 171.

91. Bulletin of the Chamber of Commerce and Industry of Athens, May 1981, 5, 3.

92. This was introduced through a relevant circular in 1976 (see I Kathimerini, 29 May 1976, 11).

93. Union of Corporations and Limited Liability Companies, Board Meeting Minutes 8 October 1975, 130.

94. Ibid., 130–1.

95. Bulletin of the Chamber of Commerce and Industry of Athens, October 1988, 10, 3;16.

96. Bulletin of the FGI, October-November 1988, 504, 7.

97. The ‘Konstantinos G. Karamanlis’ Foundation, Konstantinos Papakonstantinou Archive, File 202A’, Findings of the Economics Committee, 1959–1961, Notes on Tax Evasion, Measures against tax theft, 9.

98. Examples of such cases can be found here: I Kathimerini, 17 September 1976, 8; I Kathimerini, 6 October 1979, 4; I Kathimerini, 28 August 1980, 3; Ta Nea, 27 February 1978, 16; Ta Nea, 13 December 1978, 16.

99. Argyros, interview excerpt.

100. In later periods, instead of ‘commando’ the equally unfortunate ‘rambo’ nickname was used to describe such groups (see for example I Kathimerini, 8.November 2006, http://www.kathimerini.gr/267986/article/oikonomia/ellhnikh-oikonomia/elegxoi-se-epixeirhseis-me-laptop-eformoyn-oi-rampo-ths-eforias).

101. Ta Nea, 26 January 1978.

102. Rizospastis, 26 January 1978.

103. I Kathimerini, 18 May 1979.

104. To Vima, 24 August 1978.

105. ibid.

106. ibid.

107. Bulletin of the Chamber of Commerce and Industry of Athens, September 1978, 9, 27.

108. Ibid., May 1981, 4, 3.

109. Retired tax officer requesting anonymity, interview data.

110. For the 1980s, see indicatively: Rizospastis, 7 August 1982, 6; Ta Nea, 7 August 1982, 12; Ta Nea, 29 December 1981, 1; Ta Nea, 23 December 1981, 1; Ta Nea, 24 November 1983, 1; I Kathimerini, 7 September 1983, 3; I Kathimerini, 15 June 1986, 2; I Kathimerini, 21 May 1987, 14; I Kathimerini, 11 September 1987, 8; I Kathimerini, 7 September 1988, 16.

111. Rizospastis, 18 September 1983.