Entrepreneurship is essential in a modern economy, yet economists devote surprisingly little time to understanding entrepreneurs. Ed Lazear, who sadly passed away this week, was one of the exceptions. He’s best known for serving as Chairman of the Council of Economic Advisers during the financial crisis and creating the subdiscipline of personnel economics. But he also wrote a widely-cited paper on what sets entrepreneurs apart from the rest of us.
It is tempting to argue that skills such as creativity or attitudes to risk best predict who becomes an entrepreneur, but Lazear’s key insight was that entrepreneurs are jacks-of-all-trades. Entrepreneurs don’t have one special skill, but are instead quite good at many different things.
To be an entrepreneur, you need to not only be good at management but also be able to understand a field well enough to identify talent and opportunities for investment. Looking at graduates, we should expect the students that studied a wide range of subjects to be more likely to become entrepreneurs. A good example might be Steve Jobs, who as well as learning to design computers famously took calligraphy lessons. Entrepreneurs will also tend to have more varied job histories.
Lazear’s theory helps shed light on questions such as why some professions see high degrees of entrepreneurship (e.g. insurance) while others don’t (art). The ability to understand complicated insurance policies is likely to be correlated with other key business skills such as accounting or management. By contrast, artistic ability is less likely to correlate with business skills so artists are more likely to specialise.
Another key feature of Lazear’s model is that at the very highest income levels, entrepreneurs will be over-represented while at lower income there’ll be an even mix of entrepreneurs and employees.
To test his idea that what makes entrepreneurs special are their balanced skillsets, he used data from Stanford Graduate School of Business’ survey of alumni. As his theory predicted, the graduates who went on to start businesses tended to take a wider variety of courses, tended to do equally well across courses, and when they entered the world of work they were more likely to have taken on different roles. Likewise, at the top income levels a greater share of alumni were entrepreneurs.
Other economists have tested Lazear’s jack-of-all-trades hypothesis against different data and found it bears out. Joachim Wagner applied it to a large representative sample of the German population and found that individuals who have worked in different fields and have multiple areas of study were more likely to start businesses. While Orazem, Yu, and Jolly looked at Iowa State alumni from 1982 to 2006 and found that alumni who selected a broad college curriculum and had a varied work career were more likely to become entrepreneurs.
It is tempting to search for a single skill that sets entrepreneurs apart. But Lazear's theory and the data that backs it up show that entrepreneurship isn’t just about creativity or an attitude to risk, rather it’s about having the ability to do multiple things well.