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Monthly Archives: September 2023

Building an Economy: Entrepreneurship

26 Tuesday Sep 2023

Posted by Oren Litwin in Economics, Politics, Politics for Worldbuilders, Writing

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economics, politics, worldbuilding, writing

In the economics literature, there is a heated debate over whether entrepreneurship should properly be considered a factor of production, or whether it is better thought of as a special mode of using the three main factors of production. For the present purposes I don’t really care; the main thing is that entrepreneurship is sufficiently different from land, labor, and capital that it merits discussion by itself.

What is entrepreneurship? Depending on who you read, it can consist of either or both of willingness to bear risk, or skill at coordinating and directing the other three factors of production. In either case, unlike land and capital (both passive resources) and labor (the physical work of masses of people), entrepreneurship is a mental and social activity of individuals (though groups of skilled entrepreneurs can be quite effective, for example the “PayPal Mafia”)

Willingness to bear risk (or uncertainty, not the same thing) means to accept the possibility of failure when trying something that could work better (or be more profitable) than the status quo. The entrepreneur has a certain amount of resources, and is willing to devote them to some business pursuit even though they could be lost if things go bad. This is distinct from “normal” work or investing, where a given amount of labor or capital yields a more or less predictable output (wages or interest payments). (You might argue that many workers face risks as well; according to this framework, they would therefore be acting in part as entrepreneurs.) This was the standard 18th- and 19th-century formulation, pioneered by Cantillon.

The newer understanding of entrepreneurship is skill at coordinating the three factors of production in new and more productive ways. This aspect is somewhat broad; it could encompass inventiveness, creativity, strategic vision, skill at managing employees and vendors and getting them to play nice with each other, skill at negotiating deals, or a deep desire for technical or organizational optimization. Note also that this aspect of “entrepreneurship” doesn’t require that the entrepreneur be using her own capital; the entrepreneur could be an employee of the firm specifically for her entrepreneurial talents, rather than being the boss and risking her own money. This vision of entrepreneurship was pioneered by Joseph Schumpeter and Israel Kirzner.

A word on organizational skill. Anyone who has ever run a business, or been a supervisor or manager, knows just how hard it is to get a group of people pointed in the same direction and keep them from dissolving into acrimony or full-throated mutual combat. The ability to manage people, and to cultivate a strong organizational culture, is what often separates successful companies (and countries) from backward ones. And the prevailing culture of a society can make building strong organizations easier or harder. Willingness to work hard and work as a team, balanced by the confidence to take individual initiative, can lead to tremendous results. Conversely, a society that fosters narrow selfishness, does not encourage individual drive, and punishes nonconformity or excellence, will tend to produce organizations that are lackluster at best.

Additionally, while entrepreneurs are risk-tolerant, they still want to find good opportunities that are worth the risk. So they thrive in a society that is relatively stable (but not stagnant!), has predictable laws, and low levels of violence. Societies with high corruption and banditry, on the other hand, make entrepreneurialism a difficult sell—because businessmen are much less likely to enjoy the fruits of their labors.

As a result, you can fairly characterize whole societies as being more or less hospitable to entrepreneurialism. America is famously entrepreneurial (or more properly, certain parts of America); Israel has been called the “Startup Nation,” punching well above its weight in terms of new businesses. By contrast, countries with high levels of social stratification and economic corporatism, such as France or Germany, will tend to discourage entrepreneurs because it is hard for them to challenge the status quo with something new. And countries that have high corruption or social unrest (or even civil wars) will have little entrepreneurialism beyond the informal “hustles” of people trying to keep themselves alive by any possible means.

*****

(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned second book in this series, working title Wealth [Commerce?] for Worldbuilders. No idea when it will be finished, but it should be fun!)

Building an Economy: Social Capital

25 Monday Sep 2023

Posted by Oren Litwin in Economics, Politics for Worldbuilders, Writing

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economics, politics, social capital, worldbuilding, writing

We previously discussed how the main factors of production are land, labor, capital, and entrepreneurship. I might have to amend that list, however, to include social capital—that is, the set of beliefs and attitudes about the world that influence how people living together cooperate to form a society, or not. (I might also end up squeezing it into an existing category such as the “culture” component of human capital; but the categorization is artificial anyway.)

The study of social capital was largely kicked off by Robert Putnam, famous most recently (I think) for Bowling Alone, his argument that the American social fabric was fraying. But the basic theory was based on over a decade of research prior to that, focused on Italy. By comparing the northern cities of Italy (which had a heritage of having become free cities some 500 years ago) with cities in the Italian south (which did not), Putnam showed not only that people in the northern cities were much more prone to social and civic involvement, were less tolerant of corruption, and had more generalized trust—he showed that these characteristics had measurable impacts on economic growth. The more social capital a society had, the more economic growth.

Luigi Zingales (in A Capitalism for the People) discusses why this is so, specifically with regard to generalized trust—that is, the predisposition to trust other people even before you know them. Generalized trust is the reason that we hand packages off to the postal worker, that we deposit money in the bank, and that we buy things from the supermarket while they are still in the package. A general belief that most people are trustworthy, absent concrete evidence otherwise, makes possible a tremendous amount of trade and exchange.

Contrast the above picture with the situation in backward villages of Sicily. Zingales describes a social milieu where no one trusts anyone else outside of his family (and even within the family, not much!), and people are chiefly concerned with not being a sucker. Moreover, that expectation is justified by experience, as government officials are corrupt, businessmen are shady, and people from other families will cheerfully exploit any momentary advantage offered by some poor sap. As one result, farmers do not cooperate with each other and end up with perennially bad yields, remaining mired in poverty.

Zingales also notes that it takes a very long time for people to develop generalized trust. Immigrant communities in the United States from low-trust countries take several generations for their level of generalized trust to rise to the level prevailing in American society. By contrast, it is very easy to lose such trust. If a government victimizes the people, or businesses do the same (for example, by the growth of crony capitalism or by violating laws with impunity), generalized trust suffers immediately and the legacy of such abused trust can echo for hundreds of years.

Depressing, certainly (especially given how cavalier our political class is acting right now in squandering the trust of the public; but I digress). But extremely useful for worldbuilders. If you characterize an invented society as having high or low levels of social capital, that has a whole host of implications for its history, its future development, the basic attitudes of the people, and its level of economic dynamism.

*****

(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned second book in this series, working title Wealth [Commerce?] for Worldbuilders. No idea when it will be finished, but it should be fun!)

A Few More Comments on Cities

20 Wednesday Sep 2023

Posted by Oren Litwin in Economics, Politics, Politics for Worldbuilders, Writing

≈ 1 Comment

Tags

economics, government, politics, worldbuilding, writing

Rereading Fernand Braudel recently, I came across two critical points he makes during his discussion of cities. We’ve previously discussed how cities show up where they are most convenient for commerce, production, or government control (and sometimes all three at once). But Braudel adds some lovely texture to that discussion.

First, he notes that in Europe, cities were often placed by rivers in order to take advantage of watermill power for production. Every inch of suitable riverbank was harnessed by mills, where possible (and where the riverbank was not already devoted to docks for the vast array of shipping needed to supply the city). If the site was not conducive to the growth of a city, the mill complex would become a standalone production site, such as ironworks or mines. But cities had several advantages as centers of production even before the Industrial Revolution, namely that they had lots of workers nearby and potentially had lots of customers, and easy access to the transportation networks for raw materials and the export of finished goods.

In a more abstract sense, you could say that cities grow where they can access enough power (plus food, another frequent topic of Braudel’s). If new ways to produce (and transport!) power emerge, expect to see new cities grow up that can make use of the new power availability to exploit opportunities that previously were out of reach.

Second, we noted that “administrative” cities often have little production of their own, and rely on constant government funding. Braudel (starting around pg. 530 of Structures of Everyday Life) gives us hard numbers of major European capitals, which were particularly prone to such tendencies, and they are quite astonishing.

Lavoisier, writing in the mid-1700s, estimated that the city of Paris spent some 260 million livres per year to support its populace—of which only 20 million came from commercial profits, while 140 million came from government salaries and bonds, and 100 million came from ground rents or from business activities conducted outside of the city.

Some 141,000 people lived in Berlin in 1783, of which some 33,000 were soldiers and their families, 13,000 bureaucrats-and-families, and 10,000 servants—in other words, over a third of the city was economically unproductive, spending salaries that came from tax revenue. Many of the remainder made their living solely by catering to the needs and tastes of the salaried class.

St. Petersburg, capital of imperial Russia, was even more lopsided. In 1789, it had about 220,000 inhabitants, more than two-thirds of whom were male. Soldiers, (military) sailors, and cadets (and their families) comprised some 55,000 people, over a quarter of the city. Large numbers of others were servants. And let us not forget the bureaucracy. The city itself was placed in a bad location for practical purposes, constantly dealing with bitter cold and floods that killed many every year, far away from its sources of food and even building material; but that was where Peter the Great wanted his court, due to the spectacular vistas it afforded. Consequently, vast sums of money were spent to build the city and keep it working.

None of this is bad, per se. If a country has the money and wants to spend it in a major city, good for it. But it does illustrate that the fortunes of such cities are inextricably tied to those of the government. Braudel notes that when the Mughals of India moved their capital city, practically the entire population of the old capital would move with them; they had no way to support themselves otherwise.

Braudel also points out, in an argument later echoed by Jane Jacobs, that when a capital city grows too large and lacks an independent commercial base, its elites end up bending government policy to favor the capital city at the expense of the rest of the country. Jacobs noted in particular that London favored policies that benefited its international banking business and impoverished the rest of Britain. Paris likewise became a massive megalopolis that drained wealth from the countryside.

(I note in passing that until recently, Washington DC and its environs were not a major urban powerhouse—that role was played by New York, Los Angeles, and other major cities able to counterbalance the centralizing tendencies of the capital. By 2011, however, that had changed. The region has become overrun by well-paid lobbyists, and to a lesser degree by financial and healthcare firms that benefit from easy access to regulators. This was probably a symptom, not a cause, of the growth of centralized policy; but once such people are ensconced, they continue to drum up business at the expense of the common citizen. See Luigi Zingales, A Capitalism for the People [2012]. Matters have only become more exacerbated since he wrote.)

*****

(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned second book in this series, working title Wealth [Commerce?] for Worldbuilders. No idea when it will be finished, but it should be fun!)

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