The Elders' Error: Neglecting Intellectual Entrepreneurship

Last week's FREE Insight discussed my decision to accept Montana State University's offer. My mentors considered this a youthful indiscretion and strongly objected. Instead, they suggested I court a better-known school, one attracting an endless stream of high quality faculty and visitors. This would help me create networks with academic leaders.   Good networks lead to grants, invitations to lecture in attractive places, and invited publications. They wanted me to begin an entry to the virtuous upward cycle of academic life.   To them, this implied a first appointment at a top school.

That is the world they knew, liked, and wanted me to have. None of them imagined better alternatives within academe.  It's hard to imagine in today's world but in 1970 entrepreneurship was an alien concept.  Thirty years ago I searched the ten leading economic textbooks to see how the authors treated entrepreneurship.  Aside from brief mentions, they simply ignored it.  

Opportunities and Entrepreneurship

In 1970 MSU was not nearly as attractive as now. My graduate advisors believed I would have far better opportunities elsewhere. These elders didn't recognize the potential of intellectual entrepreneurship and the funding it could bring.

I have been blessed, and sometimes burdened, with an entrepreneurial spirit. Fortunately, I ignored my mentors' advice and came to Bozeman.  I taught and ran an institute at MSU, bought a ranch, and led an eventful life. My modest success is largely due to the creation of new foundations and new interests in economics and the environment. 1970, year of the first Earth Day, was the optimal time to arrive in Montana with an NSF post-doc in environmental policy.  This was especially true for a budding intellectual entrepreneur. 

And I was indeed lucky. A foundation created by Pierre Goodrich, a hugely successful Indianapolis businessman and entrepreneur, funded a summer program for young professors in UCLA's Economics Department. (Within the profession, the department was called, UNIVERSITY OF CHICAGO IN LOS ANGELES.) Clay LaForce chaired that department and directed its summer program. 

Clay was intrigued by my efforts to combine economics with ecology and introduced me to a new foundation in the Northwest, the M. J. Murdock Trust. The Murdock Trust favors grants in Alaska, Idaho, Montana, Oregon, and Washington.  Hence, Clay wasn't increasing UCLA's competition for grant money. I visited officers at the Trust, discussed proposals for work in environmental policy, and received a long series of awards. Their first grant resulted in a home run, a feature editorial column in the Wall Street Journal.

This initial grant supported my conference on natural resource economics for editorial page editors from major national publications. Paul Craig Roberts, an Editorial Page editor of Wall Street Journal, is a Ph. D. economist. Several professors in his graduate program at the University of Virginia were friends of my professors. (Two, James Buchanan and Ronald Coase, later won Nobel prizes.)  My mentors understood the importance of good contacts.  This experience illustrated their wisdom.

Craig liked our conference, then visited our ranch, and wrote an enthusiastic, indeed glowing feature editorial for the Wall Street Journal's editorial page. (Please see our reproduction of the article below.) Although my Montana State University colleagues and I published articles in major economic journals, Craig sprinkled holy waters on our work among readers of the Wall Street Journal.  And of course the heads of foundations interested in economics read the Journal. Thanks to the praise and visibility given by Craig's column, our tiny Montana State University institute gained national recognition. 

The first grant from the M.J. Murdock Trust nearly forty years ago initiated an immense amount of constructive work. A mission guides this work; to foster a blend of liberty, ecology, and prosperity. Later grants also produced hundreds of visits to Bozeman by some of America's most distinguished scholars and opinion leaders. Seminar participants and speakers included several dozen visits by six different Nobel Prize winners*, hundreds more by Article III federal judges, and many by environmental, foundation, and business leaders. 

The result of the seminar and policy salons was the creation of a new field of political economy, the New Resource Economics. This approach guides policy toward the confluence of responsible liberty with sustainable ecology and modest prosperity. How appropriate; think tanks holding this orientation arise in the headwaters of the Missouri River.

None of this could have happened without substantial support from independent foundations. A state university substantially dependent on grants from federal agencies cannot long support, and most can barely tolerate, a classical liberal/libertarian think tank. University administrators know that biting the government hand that feeds is not a survival characteristic. 

When my institute at MSU was censored and threatened by direct pressure from the state's governor, I queried the heads of foundation supporters. My question was simple: "Will you continue support if I leave the university?" All said yes. Several encouraged leaving.

One imparted great wisdom. He told me: “John, here is something you should understand. People in my position don't buy restaurants, we follow chefs. Keep this in mind as you go about your work. We'll be there as long as it's good stuff.”   Most foundations followed this prediction.  As a result several independent organizations have flourished in Bozeman. Each promotes harmony among liberty, ecology, and prosperity.  All stress the importance of entrepreneurship in its various forms; ecological, institutional, economic, social, and cultural.  The results reward foundation supporters.  Thanks to them all.  

* Nobel Prize winners brought to our Bozeman programs through foundation grants are: James Buchanan, Gary Becker, Doug North, Vernon Smith, Thomas Schelling, and Elinor Ostrom. 
All save Becker visited several times.  

The Wall Street Journal

October 4, 1979

Political Economy

By Paul Craig Roberts

The Transfer Society

The Baden ranch, straddling a bubbling brook in Montana’s Gallatin Valley and backdropped by the Spanish Peaks, is a pretty place. It is also a productive one specializing in high quality hay and sheep. Ten years ago it was all gulleys and erosion, naked of fence or building. That was before John Baden saw opportunity in the ruined land and acquired it. Once again a man restored what nature had ruined*, and in the process strengthened on the margin the productive sector of society.

John Baden also manages intellectual resources as director of Montana State University’s Center for Political Economy and Natural Resources. Judging by studies that he and colleagues like Terry Anderson, P.J. Hill and Richard Stroup are producing, the productive sector of society is very much on their minds.

A productive society, they say, cannot be taken for granted. It is a product of particular rights and incentives that are simply not present when resources are managed by government. As one example, Professor Baden cites the vast grazing lands managed by the Bureau of Land Management. BLM admits that only 17% of its lands are in excellent or good condition, a poor showing compared to adjoining private lands.

To improve the situation he argues on economic and environmental grounds for divestiture of BLM lands. He points to BLM’s practice of “chaining” which consists of using huge Cat tractors pulling 600 feet of heavy anchor chain to uproot the land of juniper and pinyon trees. The practice produces more grass for livestock but at a cost that exceeds the value of the grass gained. Moreover, it strips the land of wildlife cover and food sources. 

A society’s productivity goes down when more valuable resources are used to produce less valuable resources. But since chaining is an important component in many BLM district budgets, there is no incentive to discard the uneconomic practice. While critical of chaining,  he sympathizes with the plight of BLM personnel:  “if a person in an agency is well-intentioned and sincerely wants to improve agency performance, it is important that he advance in the organization. But advancement in the bureaucracy is normally not enhanced by advocacy of positions that lead to budget cuts.”

Chaining has a constituency among ranchers who lease BLM lands, because for them it is an income transfer program. They gain more grass and the economies of greater livestock density at the expense of the taxpayer and the uneconomic use of society’s resources.

The uneconomic use of resources is a feature of what Professors Anderson and Hill call the “transfer society”—a stark contrast to the productive society. Productive activity not only benefits the income earner, it also adds to the total wealth of the society. Since resources are used to produce more resources, it is a “positive sum game” for society.

The transfer society’s incentive structure is perverse, because it lets people gain by engaging in activities that reduce GNP. As transfer programs become competitive with production as the source of income for even larger numbers of people, more and more work effort is reallocated from producing income to acquiring transfers. The professors believe that the decline in U.S. productivity growth is partly explained by the rise in transfer activity.

Just reading the newspapers adds credence to the professors’ concerns. The General Accounting Office has recently reported that unemployment insurance benefits are so generous that many recipients have no incentive to go back to work. And Wheeling-Pittsburgh Steel Corp. has obtained $150 million in federal loan guarantees to build a rolling mill. Two other steel producers are trying to block the federal subsidy to their competitor. But people eventually give up on trying to block transfers to others and focus on obtaining transfers for themselves. Thus the transfer society absorbs its critics and grows.

The government’s intention to push synthetic fuel production opens the door to an enormous amount of new transfer activity. Nebraska farmers have already got their state legislature to spend a lot of money pushing gasohol because they believe it will raise the price of grains. Not wanting to be left out, the Montana legislature passed a resolution that Montana State University should do a feasibility study on making fuel alcohol from Montana grains. Professor Richard Stroup ended up with it on his lap.

He found that gasohol could indeed be produced in Montana but the cost per million BTUs was higher than OPEC oil. A gasohol program, he concluded, wasn’t a sensible way to transfer income to grain producers, because a dollar of subsidy produces on a few extra cents of farm income. Professor Stroup concluded that gasohol should not be produced until it is profitable.

There may come a time when studies like Professor Stroup’s will run afoul of the transfer society. Unlike a productive society which has an incentive to support objective research, a transfer society has an interest in justifications for transfers. Objective research in state supported universities has at times come under pressure even in a productive society where it is a cultural norm. As the U.S. becomes a transfer society, university administrators and researchers will find this norm from yesteryear’s culture increasingly difficult to maintain. Once we have everybody trying to live off everybody else and no one allowed to point out the consequences, today’s woes will become the good old times.

*Actually, bad management over decades had ruined the land.