Carl Schramm doesn’t just study entrepreneurs. Or write about them. He is an entrepreneur, as well as a corporate executive, scholar, author, and foundation CEO.
As president and chief executive officer of the Ewing Marion Kauffman Foundation in Kansas City, Missouri, he heads America’s largest foundation dedicated to advancing entrepreneurial success.
The foundation’s namesake entrepreneur started a pharmaceutical company, Marion Laboratories, out of his home, giving it his middle name so customers wouldn’t realize it was a one-man show. By the time he sold the firm in 1989, it had annual global sales nearing $1 billion, and Kauffman was known as the man who brought Major League Baseball back to Kansas City.
Schramm became president and CEO of the foundation in 2002 and has brought his extensive experience to bear on the two areas the founder intended to support—entrepreneurship and education.
Trained as an economist and attorney, Mr. Schramm began his career on the faculty of Johns Hopkins University. While there, he founded the Johns Hopkins Center for Health Care Finance and Management, the first such research center in the nation. He went on to head the Health Insurance Association of America and later became executive vice president of Fortis (now Assurant) and president of its health insurance operations.
Mr. Schramm has founded or co-founded several companies, including Greenspring Advisors, Inc., a Baltimore merchant-banking firm supporting business development in health care and insurance; and HCIA, Inc., once the nation’s largest provider of data to the healthcare industry.
He is the author of The Entrepreneurial Imperative (HarperCollins, October 2006). His next book, Good Capitalism, Bad Capitalism (Yale), with Will Baumol and Robert Litan, will be released in early 2007.
PHILANTHROPY: Your forthcoming book is titled The Entrepreneurial Imperative. Would you explain what this imperative is?
MR. SCHRAMM: The promotion of entrepreneurship is essential for our economic growth. It is critical to the advance of democracy, and should even be central to our foreign policy.
Entrepreneurship is the process in which one or more people take economic risk to create a new organization that will exploit a new technology or innovative process that generates value to others.
It is imperative that we see entrepreneurship as central to our economic life, because it is the only way to maintain the leverage we need to remain an economic superpower—and to continue to enjoy our standard of living.
Nothing else will do. Technology, because of its now-universal availability, will not provide us that edge. Instead, we must find entrepreneurial ways of employing technology. Education will not keep us out front—many parts of the world already surpass the United States in teaching skills needed for the future. We must find entrepreneurial ways to employ what we learn.
The same applies to basic manufacturing—where we have given up any effort to compete on price—and finance, where capital markets are
becoming increasingly global. In short, entrepreneurship in our personal lives, businesses, universities, and foundations—and in our approach toward government policy and foreign affairs—is the only way we can continue to thrive.
Unfortunately, most of the current literature on economic growth is rather poorly conceived. We have very little in the way of a record, going back to World War II, of policies we try that have any demonstrable, predictable effect in terms of growth.
That just happens to be a hard reality, which recently people such as Doug North, William Easterly, and Richard Stanton have been writing about. I’m struggling here along with my colleagues Bob Litan and Will Baumol to begin to explain economic growth in a different way, with entrepreneurship as the driving engine.
One of the great risks of neo-classical economics is that its elegance stems from a human tendency to view the world as static. Thus, it often misses the dynamism of capitalism’s continuing evolution.
PHILANTHROPY: Where do you see the U.S. economy going in terms of its capacity to create new wealth, make new markets, and innovate in terms of the products it produces?
MR. SCHRAMM: The economy changes continuously, and no one has a real view of how it all works. It is a tremendously complex arrangement, and doesn’t have the predictability of studying the solar system, for example. It is essentially 300 million Americans taking action several times an hour that make the economy tick, and no one can really model the individual behavior and decision-making of 300 million people, not to mention the billions of people who do the same thing around the world.
With that qualification, I think that the more we embrace a vision of individuals taking initiative—economic initiative—and preparing themselves to be economically responsible for the creation of new entities and to exploit the development of new technologies, we’ll have a faster-growing, sounder economy.
There are days at the Kauffman Foundation when we think that, if we’ve done our job well, we will have created programs and perspectives that may eventually increase the real rate of GDP growth.
To many people in philanthropy, this may seem an odd objective, because there are so few economists and there is little economic vision in philanthropy. Our view is that with expansion of economic growth comes expansion of human welfare. This is not just our opinion—it is a demonstrable empirical fact.
When you talk about the expansion of human welfare, one contributing factor is the innovation brought to our lives by high-technology, high-growth businesses.
Another is the creation of large numbers of high-paying jobs with great promise—jobs in which people are in growth modes.
Finally, and importantly, it is the expansion of human welfare that permits more charitable activity in the foundation world and in many social policy groups.
Simply, there can be no expansion of human welfare in a non-growth economy. Growth in the civilizing influences—self-determination and democracy—is a central objective of humankind, and is intimately related to economic growth. At Kauffman, we are committed to helping individuals follow this path and to understanding how you make economic growth occur.
In a sense, this takes us back to the first question you asked, about imperative. It’s imperative that we export this view to the world because it’s the only way forward in terms of the expansion of social welfare.
PHILANTHROPY: You might define the type of growth economy you have described as entrepreneurial capitalism. Would you describe the economic evolution that brought us to where we are today?
MR. SCHRAMM: Capitalism is a form of economic interchange, and the way to order a society and an economy continues to change. We always knew this. Adam Smith knew this. All the great economists understood this, including Keynes. Every economist with ambition attempts, in fact, to influence the trajectory of change by his or her writing.
But, in simple terms, if you look broadly at the American economy, you can think of our colonial period as consolidating a vision of markets different from that of Europe. We had people like Benjamin Franklin and Alexander Hamilton, who articulated their view that the fundamentals of the economy should be different from the mercantilist system we inherited from Great Britain.
We then passed to a period of emerging and expanding industrial capitalism throughout the 1800s. The Industrial Revolution came to the United States and the American economy reformed and made it work in dimensions that no one had ever foreseen.
This happened over time, and by the end of the 1950s we seemed to be evolving into a bureaucratic form of capitalism, which was entirely predictable. We had fought our way through the Depression, we had won World War II and essentially saved Western civilization.
The Soviet threat was compelling, and predictability in the economy became the critical objective. That essentially led us to a bureaucratic perspective—that is, we wanted a more predictable way to organize the economy. We were happy to see the consolidation of economic activity and energy in very large companies. Galbraith wrote about this when he spoke approvingly of the “techno-structure” and countervailing power of big unions. And, of course, big government was seen in a post-Keynesian world as necessary to managing the economic clockworks.
All of this worked well until it didn’t work at all. And that was clearly the period of stagflation in the 1970s. As I’ve written in the book, through a rather miraculous confluence of events, none of which was planned or made to work one with the other, we actually reset a number of fundamental rules of the economy, and went a great distance to put the individual’s energy and initiative at the center of it. That certainly was the case through the 1990s, and will continue to be through the current decade and beyond.
In sum, I see the 20th century as one of industrial capitalism evolving into bureaucratic capitalism of corporations, government, and labor unions, while the 21st century will probably be the century of entrepreneurial capitalism, not just in the United States but everywhere.
PHILANTHROPY: You’ve talked about entrepreneurship as America’s gift to the world. Is there anything that makes entrepreneurship uniquely American?
MR. SCHRAMM: The good news is that we could make a claim that it’s sort of uniquely American, but of course it’s not. The Industrial Revolution began in Europe, and there’s no way to look at the Industrial Revolution without thinking of entrepreneurship.
But America embraced it and made it into a bigger system. There’s much in our gene code or our cultural proclivity that tends toward individual, rather than state, action.
The great part of what I’m watching is that the American Dream is becoming a world dream. People want 4 percent growth in their economies. They want low rates of unemployment and inflation, and they want political stability and security.
Our country offers those things, and the rest of the world wants them as well. People from all over the planet come to the United States trying to figure out what entrepreneurial capitalism is. Large numbers of foreigners visit the Kauffman Foundation every year because they associate us with entrepreneurship. When you add the cumulative number of foreign visitors at the Kauffman Foundation, it’s a wonder we get any work done, because everybody is here trying to ask us: How does the American economy work? What’s the venture capital business? How do your universities work? How do we do this? How do we structure our entrepreneurial economy?
Americans should approach this very humbly. If you look at the accumulation of economic literature, and if you look at 50 or 60 years of growth country-by-country, there’s no evidence anywhere that we have an exportable formula.
I believe, however, that the entrepreneurial element of the American economy is critical to expansion in other countries. Imagine the republics that came out of the Soviet Union. Entrepreneurship, in those countries and in Russia itself, was forgotten. It was totally foreign to the Marxist, collectivist system. Individual initiative was punished rather than rewarded as it is under an entrepreneurial system.
The transformation to market economies can be seen around the world. In that regard I’m very hopeful, and I think that, in the end, the imperative is that America ought to understand what it is we have to offer and become efficient and humble about how we inject it into the world. It’s in our own interest economically, and it’s in our own interest politically.
It is very important that we get this right. At this point, I’m not sure how we do that, but I do know that some of the best money we spend at Kauffman is with some of the greatest minds in the country working on new formulations and tests of how economies develop.
PHILANTHROPY: Could you describe how technology has influenced economies over the last 20-25 years?
MR. SCHRAMM: It’s certainly not my insight, but the insight that I would adopt and urge your readers to consider is that we have all been taught that human discovery is discontinuous. Thus, there was the zenith of Greco-Roman culture, and then the Dark Ages descended. This is then broken by the Renaissance and Enlightenment, followed by another lull.
Then, suddenly, there’s the 20th century, and we have electricity, telephones, and the automobile. Vast steel and oil companies are built on technological revolutions, but we also remember that following this period of innovation, the Depression descended—our own mini-Dark Age. Some economic theorists certainly subscribe to this view of discontinuity.
My own view is that we have now created such massive investment in, for example, university laboratories and high-tech companies, that technological innovation is virtually continuous. This is part of the reason we find it so hard to keep up.
I ask your readers to think about how long ago it was that no one had a cell phone or no one had an iPod. No one was podcasting. No one had a GPS built into the dashboard of his or her car. People cannot help but be amazed if they look back only 15 years, even 10 years! It is difficult to imagine that the PC was introduced in 1981, the Internet 1991, but that the real population of the Internet didn’t happen until probably 1996.
Now, we are about to leap past telephonic communications. I have a teenage daughter, and my wife and I marvel at our expectation that she would be on the phone all the time as a teenager. She’s never on the phone—with instant messaging, there’s no need to be on the phone. It’s a new means of human communications profoundly different as a result of technology.
PHILANTHROPY: Where, in today’s environment, does the major corporation come in? What is the corporation’s role, and what is the way forward?
MR. SCHRAMM: I think large, established corporations are all figuring out how they have to be restructured to take advantage of the fluid and unstopped rate of technology, the expectations of their customer markets, and the changing nature of the capital markets.
You see a number of companies—IBM is certainly one—creating an environment in which their scientists can break away with brand new companies that are still somehow in the gravitational force of IBM. Of course, it’s of great interest to shareholders to figure out what the ownership is, but it’s also in the interests of the shareholder to make sure there is innovation. If that means a spin-off produces a one-time huge return on investment, that’s terrific. Or if it means that, through a different form of holding structure, the shareholders in fact benefit by owning hundreds of companies that are entrepreneurial, that may be the way it comes out, too.
My own view is that, as the price of information gets cheaper and individuals become more sophisticated at managing risk, we won’t look to huge consolidated companies as the managers of risk that they effectively once were. Essentially, the consolidated conglomerate gave you risk protection through the technical management of the company. That’s not as important these days, and I think a lot of corporate executives understand that.
PHILANTHROPY: In managing a corporation toward entrepreneurship, you have pointed out that one of the key factors is decentralization—forcing entrepreneurship out into the greater body of employees of corporations. Is that always possible? And is that always necessary?
MR. SCHRAMM: First of all, it’s critical, because the growth of human capital—that is, the talent you have—is more and more central to a company. To maximize that talent you have to encourage freedom. You can’t do that in a command-and-control, hierarchical structure.
If you run a software company, you’re not at all sure of your market position 24 months from now, and this is true for many technology companies and even consumer product companies. Automakers are a case in point today—they now face hundreds of discrete markets, but are at a serious disadvantage because of the persistence of hierarchical structures geared toward long-term planning and stability.
PHILANTHROPY: Even if a corporation takes an enlightened view of the need for entrepreneurship, do we have a system of higher education that can provide the necessary skills?
MR. SCHRAMM: Basically, no—our educational system is not geared toward the new economy. This is very important because many people think higher education has figured out the formula. In reality, however, we’re watching a drift in higher education toward courses of study that don’t prepare people for entrepreneurial roles at all.
It helps to conceive of a distinction between wealth-making majors and wealth-consuming majors. I have mentioned a course of study being offered called marine animal rescue. That is not, by definition, wealth-generating—it is wealth-consuming. One of the great dangers in our society is that we are so wealthy we are able to delude ourselves that we can use the scarce resources of our university system to ends that will not, in fact, enrich successive generations. It is very difficult to put your arms around, but is invariably true.
What is happening as a result of this, I believe, is the development of new approaches everywhere.
First of all, we see the emergence of for-profit universities. The University of Phoenix, for example, has annual tuition revenue of over a billion dollars. No public or private universities have anywhere near Phoenix’s tuition revenues. And Phoenix is driving toward a pragmatic product: you cannot attend it and take many majors that are not wealth-generating. It has a very pragmatic perspective on what education is about for its customers.
The other thing we are seeing is any number of companies developing what can only be described as universities within companies. This is critical, not so much for the generation of skills—although there is some necessary skills training—but for the cultural training about how the company thinks, how it makes money, how employees relate to the company, and how employees will bear the burden of creativity inside the company. That’s a major issue.
PHILANTHROPY: You have written about business schools and that the MBA is perhaps not a terribly effective tool for creating entrepreneurs. What has gone wrong?
MR. SCHRAMM: I think this case is easy to make, and I am certainly not alone in my criticism. The curriculum in most MBA schools is all about skill sets—there’s very little that’s taught about the larger economic context. The degree has become exactly what it is named, training in the administration or management of business as opposed to the generation of business.
The three great deficits of the business school are the focus on particular skills in marketing, human resources, accounting, and finance, as opposed to understanding a more creative process about how wealth is made. What is missing is the larger economic context and the preparation of students for individual risk-taking.
PHILANTHROPY: The Kauffman Foundation has as one of its two great goals the advancement of entrepreneurship. Can you describe the foundation’s major initiatives in this area?
MR. SCHRAMM: I would mention two types of programs. First, we have programs geared at stimulating entrepreneurship on campus and are preparing to make a number of substantial awards to a new cohort of universities. What we hope to do is open the whole university to thinking about entrepreneurship.
The entire university should be congenial to the notion that half of its graduates will eventually start businesses. Tragically, many universities convey value-sets that implicitly denigrate the contributions of business. We are trying to ensure that there is a new innovative force in American universities that understands this dimension of not only our economy but also our culture and how they relate. This includes, for example, an effort to help universities leverage the discoveries of their laboratories into products and services that expand human welfare.
Second, we have a wonderful program in minority entrepreneurship. Our view is that minorities, particularly African-Americans, are not represented anywhere near where they should be as a proportion of owners and initiators of high-growth businesses, despite research showing that this group has the highest aspirations for starting a business. So, we have a very ambitious program in place to identify and help black entrepreneurs achieve high-growth, large-scale business. This involves providing support services such as coaching and facilitating access to capital. Additionally, we are partnering with the National Urban League, Business Roundtable, and federal government on urban entrepreneurship to develop economic centers to serve urban and minority business owners.
PHILANTHROPY: The Kauffman Foundation is located in Kansas City. Do you have plans to make the city into a larger center for entrepreneurship?
MR. SCHRAMM: We not only have those plans, I think we are actually beginning to have some success. Entrepreneur magazine recently named Kansas City the 11th most congenial city for entrepreneurs in the nation.
I’d like to believe that our city has benefited enormously in this regard from the Kauffman Foundation. From our entrepreneurship training programs and other initiatives we incubate in Kansas City, to our efforts to help our community become a model for exemplary math and science education, to the thousands of experts we convene in our building each year, we help to shine a spotlight on our hometown. And we do think in an ambitious way that we serve as an epicenter of sorts in terms of thinking and programming in the world of entrepreneurship.
We also contribute to the development of a body of literature about entrepreneurship. I’m not the only person writing at the Kauffman Foundation. And, more importantly, the professors, policymakers, intellectuals, and thinkers we support—largely economists, but increasingly those in the engineering community—are developing a huge literature, a very sophisticated literature that, as it accumulates, will unavoidably have a huge impact on policy creation.