2012Cambridge Business & Economics ConferenceISBN : 9780974211428
Austrian Economics and Property Rights: An examination of Locus of Control and demographic factors for expatriate entrepreneurs from the Middle East.
Josh McCarthy, Indiana Wesleyan University, (317) 796-2390
Hannah Steinberg, University of Georgia
Shawn M. Carraher, Indiana Wesleyan University
Jacob Millage, Indiana Wesleyan University, (317) 605-8373
AUSTRIAN ECONOMICS AND PROPERTY RIGHTS: AN EXAMINATION OF LOCUS OF CONTROL AND DEMOGRAPHIC FACTORS FOR EXPATRIATE ENTREPRENEURS FROM THE MIDDLE EAST
ABSTRACT
This paper discusses the data we found from interviewing 456 expatriate entrepreneurs from the Middle East. Our primary focus in this research is to determine the level of importance that these entrepreneurs place on having clearly defined individual property rights. The lens through which the authors see this subject of property rights is colored by the Austrian school of thought. Austrian Economics strongly supports individual property rights, along with a strong rule of law to enforce them. In turn, this endorsement of individual property rights is thought to positively influence entrepreneurs, who are more willing to risk their resources in such a context.
To better understand our data we ran a multiple regression, using Rotter’s Locus of Control scale (internal and external locus of control), time as an expatriate, age, sex, and educational level on the importance of Property Rights. We are able to explain 26.7 % of the variance in Property Rights with these variables.Education level proved to be the most powerful independent variable, suggesting that, the more years of postgraduate education, the more an expatriate entrepreneur will value property rights. Curiously, age is negatively related to property rights, meaning that younger entrepreneurs value property rights more than their older counterparts. Entrepreneurs with a strong sense of internal or external locus of control tended to favor property rights.
INTRODUCTION
Regardless of one’s profession or social class, it is understood thateconomicsaffects everyone. Scarcity is a reality of the world we live in. For aneconomy to prosper and reach its full potential, limited resources must be handled in the most efficient and productive way possible.
There are several prominent schools of thought that debate how a country should goaboutmaking this happen. Whether it be a Neoclassical or a Keynesian approach, or a more steady and consistent Monetarist method, world leaders invariably want to implement the strategy that will cause their nation’s economy to flourish, thereby creating wealth.
This paper examines the Austrian school of thought to economics. Three Austrians - Carl Menger, Friedrich von Wieser, and Eugen von Böhm-Bawerk-founded Austrian economics in the 19th Century. Being overshadowed by other philosophies after the death of its founders, Austrian economics is again rising in prominence.
There are several distinct aspects of Austrian economics that separate them from other schools of thought.Austrians see economics as a subjective discipline, because value is subjective and ever changing. As Carl Menger wrote, “The value of goods arises from their relationship to our needs, and is not inherent in the goods themselves.” Those that view economics as an objective and exact science tend to accumulate large masses of large data sets, all trying to somehow determine “general equilibrium.” In contrast, Austrians prefer to emphasize human decisions and preferences, examining the resulting actions and the incentives that encourage them. If others are engrossed in the forecast of aggregates for the “macro” economy, Austrian economists are equally absorbed in their study of the individual, knowing that it is many individuals working together that form the whole, or “macro,” economy.
In his 1981 article Understanding“Austrian” Economics, Henry Hazlitt observed that Austrian economists rarely speak of market equilibrium, but [rather] about the market processes. Regardless of the school of thought that economists come from, most view this “market process” as a beautiful and fantastic phenomenon. Indeed, the market process causes the many thousands of individuals and entrepreneurs in a given economy to work in relative harmony with one another, all through the pricing signals and incentives provided in a freely functioning economy. It is Adam Smith’s “invisible hand” alive and well, with millions of individuals responding to the market and acting in their own self-interest, all the while advancing society and improving the general well-being of others.
Austrian economists believe that the level at which the market process is able to function naturally and unconstrained is directly related to an economy’s ability to function at its greatest potential. This market process provides incentives to market participants, instructing them how to use their scarce resources in the most valuable manner possible. How can the resources of an economy be delegated to the place where they are most valuable and advance the macroeconomy? By individuals responding to incentives provided by a vibrant and dynamic market process.
For Austrians, economics do not so much hinge on governmental data crunching as much as they do on determining the universal realities concerning how to create and/or preserve healthy incentives to the individuals participating in an economy. Because of their high regard for the market process and confidence in its ability to adequately direct economies, Austrians economists generally discourage public sector attempts to improve market process. Historically, they are reliably laissez-faire in their politics.
The implications of Austrian economics on public policy are that public policy should be minimized as much as possible. Governmental intervention in the market process (such as though transfer payments, increased taxes, price controls, etc.) result in distorted incentives in the marketplace, discouraging the individuals in an economy from using their resources in the most efficient and productive way.
Despite the growing Austrian sentiments in much of the academic world, the United States currently employs public policy (as well as monetary policy) that does not logically follow from the Austrian school of thought. Political incentives, as well as opposing economic ideologies, have largely kept the Austrian way in the academic community alone. While the full consequences of current policy remain to be seen, the evidence suggests the results on the economy have not been positive. It appears that change is needed. Perhaps this is an opportunity for the Austrian renaissance to make its way to the governmental level?
Locus of control refers to the perceived control over the events of one’s life. People with an internal locus of control believe that they are able to control what happens in their lives. On the other hand, people with an external locus of control tend to believe that most of the events in their lives result from being lucky, being in the right place at the right time, and the behaviours of powerful individuals. People’s beliefs in personal control over their lives influence their perception of important events, their attitude towards life, and their work behaviours (Rotter, 1966).
Moreover, internal locus of control has been one of the most studied psychological traits in entrepreneurship research. An association between entrepreneurial behaviour and an internal locus of control orientation has strong face validity. Entrepreneurs by most definitions are initiators, taking responsibility for their own welfare and not dependent on others (McClelland 1961). Furthermore, if one does not believe that the outcome of a business venture will be influenced by personal effort, then that individual is unlikely to risk exposure to the high penalties of failure. Since perception of both risk and ability to affect outcomes are crucial to the new venture formation decision, it follows that potential entrepreneurs are more likely to have an internal locus of control origination than an external one (Brockhaus & Horowitz, 1986).
METHOD
Sample
We used a sample of 456 expatriate entrepreneurs from the Middle East (168 females and 288 males). Their average age was 35 and they had spent on average a total of 13 years as an expatriate and had an average of 4.35 years of higher education beyond high school.
Results
In Table 1 are shown the results of a multiple regression of Rotter’s Locus of Control scale (internal and external locus of control), time as an expatriate, age, sex, and educational level on the importance of Property Rights. We are able to explain 26.7% of the variance in Property Rights with these variables.
Table 1
Model SummaryModel / R / R Square / Adjusted R Square / Std. Error of the Estimate
1 / .517a / .267 / .257 / .37970
a. Predictors: (Constant), Gender, Internal Locus of Control, Edu.lev, Age, External Locus of Control, TimeExpat
ANOVAb
Model / Sum of Squares / df / Mean Square / F / Sig.
1 / Regression / 23.569 / 6 / 3.928 / 27.247 / .000a
Residual / 64.733 / 449 / .144
Total / 88.302 / 455
a. Predictors: (Constant), Gender, Internal Locus of Control, Edu.lev, Age, External Locus of Control, TimeExpat
b. Dependent Variable: PropertyRights
Coefficientsa
Model / Unstandardized Coefficients / Standardized Coefficients / t / Sig.
B / Std. Error / Beta
1 / (Constant) / 4.732 / .215 / 22.023 / .000
External Locus of Control / -.057 / .020 / -.130 / -2.822 / .005
Internal Locus of Control / -.058 / .018 / -.132 / -3.154 / .002
TimeExpat / .006 / .004 / .120 / 1.538 / .125
Edu.lev / .087 / .011 / .337 / 8.091 / .000
Age / -.018 / .004 / -.311 / -4.055 / .000
Gender / -.271 / .043 / -.297 / -6.361 / .000
a. Dependent Variable: PropertyRights
Property rights are defined as the authority to determine the allocation of one’s assets (Segal, Ilya and Whinston, Michael D., 2010). Property rights ensure the property owner control over his own resources, including his home, land, and business. When an entrepreneur starts a business, he essentially owns the rights to the business, controlling investments and everyday operations and reaping any ensuing revenue. The right to govern and manage his business is an entrepreneur’s incentive. Property rights are important to economics because they allow people to maximize their utility and take stock in their environment. They entail complete ownership of a resource; any attempt from the government in prohibiting the use or sale of the resource is degrading the property rights of the individual.
The Soviet Union was an extreme example of a socialist nation devoid of property rights. The resources of the country were commonly owned; however, the national government had complete control over the economy, assigning government officials delegation over its assets. Without the institution of property rights, business managers had no stock or investment in their companies, and therefore, no incentive. Before the collapse of the Union, many businesses failed and resources were overexploited. This process is called the tragedy of the commons: the overexploitation of resources due to individuals consulting their self interest and overlooking long term consequences (Hardin, G., 1968). Johnson, McMillan, and Woodruff (2002) found in their paper on property rights and finance that today, “reinvestment rates are lowest in Russia and Ukraine, where bribes for government services and licenses are common, firms make payments for protection, and the courts are least effective.”
The financial state of a nation creates a subsequent effect on entrepreneurs and their willingness to invest. According to Stephen Knack and Philip Keefer (1995), Paolo Mauro (1995), JakobSvensson (1998), and DaronAcemoglu (2001), “country-level studies consistently show that less secure property rights are correlated with lower aggregate investment and slower economic growth” (as cited in Johnson, McMillan, & Woodruff, 2002, p. 1335). Entrepreneurs will only invest if they feel secure in their venture and will reap the benefits, thus, the correlation between property rights and finance.
Regression Analysis
We tested our data at the .05 level. The coefficient of determination reveals that we can explain 26.7% (.267) of the variance in property rights from these variables. That is, 26.7% of the variance observed in our dependent variable, property rights, is explained by our independent variables.
Our understanding of property rights, our dependent variable, needs to be further explained. We are attempting to measure the perception of property rights displayed by expatriates from the Middle East. Specifically, we want to determine what importance they place on having clearly defined property rights. Necessarily, for a country to establish a system that allows personal property rights, that country must endorse a strong rule of law that defends the integrity of these property rights. The Austrian school of thought would support a system that has a strong rule of law and defends property rights.
The ANOVA table displays an F value of 27.247, at the .000000001 significance. For all practical purposes, these numbers mean that there is about a 1 in 1,000,000,000 chance of us coming across this data by chance. What does this mean? This means that these results are definitively not skewed by an abnormal sample. In contrast, these numbers tell us that there is something significant taking place with this data. Thus, we have reason to believe the correlation we find in the data is meaningful and accurate.
While our preference would have been to be able to explain more than 26.7% of the variance in property rights, we are encouraged by the fact that our data is clearly statistically significant. Our independent variables do carry some influence in determining the dependent variable. With this being the case, the question now becomes, what does the correlation within this data mean?
Let us turn our attention to the figure that provides information about our independent variables. Looking down the significance column on the far right (entitled “Sig.”), we see that all variables except for TimeExpat are statistically significant. For this reason, we will not use this TimeExpat in our analysis. Nevertheless, the other values are quite useful, with the significance level being .005 or lower in every variable.
We are left with five statistically significant variables: external and internal locus of control, education level (Edu.lev), age, and gender. The “t” column is a prominent statistic in this table. We see that education level represents the strongest correlation, with a“t” of 8.091. This high number means that we can definitively reason that education level plays a significant role in determining the level of importance that Middle East expatriates place on property rights. In this case, the more years of post high school education, the greater the importance the entrepreneurs tended to placed on property rights.
The second largest “t” value is gender, with a negative correlation, -6.361. Rather than explaining how we coded this data, I will simply inform you that this figure strongly suggests that males place a greater importance on property rights than females. That is, males placed a greater importance on being able to have clearly defined and enforced property rights.
The next strongest “t” value is age, another negative correlation, at -4.055. We found age to be significantly significant, with the younger expatriates viewing property rights as more important.
The fact that younger entrepreneurs place greater emphasis on property rights is a curious finding. Actually, considering the education level variable, we would have expected the exact opposite correlation. We would have expected older people to value property rights more than younger. This follows, because, the more years of education, the greater the importance placed on property rights. Younger people tend to have less years of education under their belt, making these results quite puzzling.
What are the reasons for this? Why the seeming contradiction in the data? Unfortunately, from this study, we are not able to fully understand why the younger entrepreneurs valued property rights more than their elder counterparts. One coauthor perceptively theorizes that this finding could be due to the fact that the younger entrepreneurs have been (presumably) removed from their native context for less time than the older expatriates. Perhaps, the longer these entrepreneurs live in a place that staunchly enforces personal property rights – such as the United States – the less they are reminded of the significance of this type of rule of law. The importance of property rights is no longer “fresh” in their minds. Meanwhile, the importance of property rights is prominent in the minds of (young) expatriates, who have recently removed themselves from a Middle Eastern context that did not protect property rights as strictly. This is an interesting theory that deserves to be examined in greater detail. Such an undertaking is beyond the scope of this data and paper, but we are hopeful that someone will take the time to review this theory in greater detail.
One final observation concerning the independent variable “age.” One may object that age should not be scrutinized so heavily, because its unstandardized coefficient “B” is only -.018. The reason is its “t” value was high is largely because of a minimal level of standard error (.004). The authors agree that age only shows slight negative correlation to the dependent variable, property rights. Nevertheless, we believe that this finding is worth researching further for two primary reasons. First, a negative correlation in age is the complete opposite result that was expected, particularly keeping the education level variable in mind. Second, both of these variables - age and education level - are statistically significant.
Now to our final independent variables: internal and external locus of control. To review, internal locus of control involves having a sense of control over one’s own life. A person with a strong internal locus of control believes that they have the ability to determine their future. Entrepreneurs tend to have a strong internal locus of control, which contributes to their willingness to put time and resources into a business. They expect that their effort will produce fruitful results.