The best job market paper I have seen so far this year

From Hyejun Kim at MIT”s Sloan School:

Knitting Community: Human and Social Capital in the Early Transition into Entrepreneurship

The process by which individuals become entrepreneurs is often described as a decisive moment of transition, yet it necessarily involves a series of smaller steps. This study examines how human capital and social capital are accumulated and deployed in the earliest stages of the entrepreneurial transition in the setting of “user entrepreneurship.” Using the unique dataset from Ravelry—the Facebook of knitters—I study why and how some knitters become entrepreneurs. I show that knitters who make the entrepreneurial transition are distinctive in that they have experience in fewer techniques and more product categories. I also show that this transition is facilitated by participation in offline social networks where knitters garner feedback and encouragement. Importantly, social and human capital appear to complement each other with social capital producing the greatest effect on the most skilled users. Broader theoretical implications on user innovation, the role of social capital, and entrepreneurship research are discussed.

Here is part of the concluding summary:

…the critical factor explaining why some creative knitters transition to designers is the feedback and encouragement they receive from fellow knitters and friends. With a carefully matched sample, difference-in-difference analysis verifies that the participation in an offline local networking group increases the likelihood of transition by 25%. Furthermore, the results suggest that social capital effect is largest among those with entrepreneurial human capital, as social capital complements human capital in knitters’ transition to
designers.

I have read through the entire paper and the whole thing is a gem.

Comments

But can one knit while sitting in a sushi restaurant with a tacky carpet and discuss an Emergent Ventures proposal?

If you're wearing Scottish Kilts you can (NOT). What kind of tacky comment is that?

If one is not "commando" under the Scottish Kilt, I don't see why that would disqualify? even if "commando" underneath the kilt, if there is a tablecloth you can get away with it, but not in cold climes...you do what you want to do, clockwork_prior :)

On the one hand, many of the early micro-computer start-ups were by hobbyists who attended homebrew meetings, consistent with the story here. I'm not sure how far these social capital stories get us though; I'd have to think that entrepreneurs have distinctive personality traits that are more important than membership in hobbyist clubs, although maybe they're counting those traits as part of their human capital. Also I'm not sure how representative knitters are of other entrepreneurs; I'm guessing that they're more likely to be female, and social capital might have either a larger influence with female entrepreneurs, or might influence them differently from how it influences male entrepreneurs.

'not sure how far these social capital stories get us though'

Well, social capital just might help when becoming a successful owner of a software company that provides an OS which can be used with a micro-computer.

Of course, everyone has a mother. It is just that very few people have mothers with the proper social capital. 'Beyond the Seattle area, Gates was appointed to the board of directors of the national United Way in 1980, becoming the first woman to lead it in 1983. Her tenure on the national board's executive committee is believed to have helped Microsoft, based in Seattle, at a crucial time. In 1980, she discussed her son's company with John Opel, a fellow committee member and the chairman of International Business Machines Corporation (IBM). Opel, by some accounts, mentioned Mrs. Gates to other IBM executives. A few weeks later, IBM took a chance by hiring Microsoft, then a small software firm, to develop an operating system for its first personal computer.' https://en.wikipedia.org/wiki/Mary_Maxwell_Gates

Also, Bill Gates' dad was a heavyweight anti-anti-trust lawyer. Few kids grow up with table talk about the importance and virtue of grabbing monopoly power.

When Gates was 25 in 1980, he talked IBM into a contract that led to his gaining much of the monopoly power over the PC industry. Nowadays, lots of ambitious young people think about how to follow the example of Gates, Zuckerberg, et al, and get themselves some monopoly power. But not in 1980. I was an MBA student in 1980 and it wouldn't have occurred to me. A couple of years later, I read Michael Porter's 1980 book "Competitive Strategy" about the need to get some monopoly power and it all made sense to me. But for Gates to outsmart IBM over this in 1980 is testament to the specific advantages he received from his accomplished parents.

I ran across the Louis Pasteur quote "Chance favors the prepared mind" in high school, and it changed my view of the world. That, plus the 80/20 rule, explains a lot in life.

Wow, this entire comment thread right here is great. Good job all!

@clockwork_prior

If Gary Kildall with his pioneering CP/M had been more responsive to IBM or with Gates, he might have made $ billions but there are a lot of myths but Bill Gates took advantage of the market opportunity and won big.

But to some extent, "monopoly power" is just another way of saying "pricing power," and that idea has been around forever...

True monopolies are rare. Microsoft is not a monopolist. A better term, as Ricardo suggests, is "pricing power" or, in Buffett's lexicon "a moat". Businesspeople have always understood the importance of a moat even if economists haven't. The concept of "monopolistic competition" actually rules most industries- becoming a commodity is death to a business.

Right, when I questioned the role of social capital I should've been more specific: social capital in general is clearly highly important. What I question is the role of those social networking groups in developing the social capital.
(As opposed to, e.g. parents, as in the Bill Gates example, or other sources of social capital. Bill Gates' biggest push into computers seems to have been thanks to gaining access to the Univ of Washington's mainframe after hours; he needed some social connection to even think that he had the right to wheedle his way into the facility, but it's not as if there was some homebrew computer club that he was meeting with there.)

If it were about fly fishers or golfers, would you poo-poo it for being irrelevant to female entrepreneurs? The author used this population because of the amazing data.

Yep. When medical researchers look at heart disease, and include only men as subjects, critics rightly point out that by leaving women out of the research they're limiting its usefulness.

Having not read the paper, I find the inference that the mechanism of encouragement and feedback in offline groups unconvincing. I think a much more plausible mechanism is subjective comparison of talent. Absent an offline group you're comparing your work to etsy and Instagram examples from some of the best artisans in the world, you think 'my work is crap'. But in an offline group you can see 'Alex' doilies sold at the PTA fundraiser for $45, and my work is way better than Alex's... Maybe I can monetize this after all'..... I guess that could be defined as "feedback and encouragement"?

The paper is not about selling physical goods - it's about selling the designs themselves. Seeing a friend sell their physical product is less informative about your ability to sell your design than feedback and encouragement from peers, who would be the first customers for your design.

"offline social networks"

In other words, face to face contact. It's a remarkable aspect of the last 1/4th of a century that the vast bulk of the rewards from the Information Superhighway have accrued to individuals less from their participation in the Internet than from the participation in old fashioned it's-not-what-you-know-it's-who-you-know groups. We were promised in 1993 that in the future you could live anywhere and make it big, but it turned out to be the opposite. Even, we now see, in knitting.

This absolutely. Encouragement from small-but-close peer circles is 10x as valuable as encouragement from large-but-far peer circles (aka the internet).

Encouragement from small-but-close circles provides other incentives other than just the encouragement. It provides a fall-back, willingness to commit resources other than just kudos, and access to the resources of the peer circle's extended network.

Jordan Peterson actually alluded to this in an interview when he talked about how terrifying modern society's "lack of encouragement is". It is all too often a person not only does not receive encouragement from their circle large or small, but realizes only too late that their supposed friends were actually secret competitors.

More good points here. Also, the phrase "offline social networks" is kind of funny. It's like calling mailing a letter "physical email".

They're retronyms, the first famous one being "natural grass" after Astroturf became common

*retronym* -- i love it! and "natural grass" is SO perfect.

It's instructive that the study is about knitter entrepreneurs and the comments are about Bill Gates and Mark Zuckerberg. My father was an entrepreneur. No, he didn't dominate the PC market, he was a chef, a self-employed chef, who invested his earnings not only in restaurants but other assets as well. A successful entrepreneur. I'm not sure my father would fit today's markets, with large companies dominating every market, from restaurants to retail. What's an aspiring entrepreneur to do? Create another personal assistant app? Knit? Cowen admires the man in Ethiopia who aspires to open his own travel business. I'm old enough to remember when people in America aspired to open their own travel business. Or retail store. Peter Thiel advises his followers that monopoly is the key to business success. Is it possible for every aspiring entrepreneur to be a monopolist?

i highly recommend reading "The Snowball Effect" (Katherine MacLean, 1952), a highly entertaining Speculative Fiction short story about, well, theoretical sociology gone wild. https://freeclassicshortstories.blogspot.com/2016/01/the-snowball-effect-by-katherine-maclean.html

I would like to see someone examine Takahashi Korekiyo, Japanese finance minister during the Great Depression, and why Japan sidestepped most of the Great Depression. That might be useful.

Back to my knitting....

And so Tyler uses his peer circle to encourage more female economists to write interesting papers about the economics of knitting clubs.

Actually it's not a bad point because lots of traditional "women's work" makes a great basis for microeconomic studies. Also somewhat strange that "home economics" was split off of economics as not-a-thing, considering how important to pretty much every family in America management of household finances is.

There's probably a gold mine of topics for research involving stuff that is considered "feminine" out there.

Given the paper highlights the economic value of emotional support and feedback, which one is way more likely to get from the women in one's life, you could expand your observation considerably (from the knitting) and still have a rock solid point. If you count on a woman for X, that woman is working for you. Some of them a really bad at what they do, but that doesn't mean the role is not work. It shows it is.

Consider how 'good sounding board' (listening, supporting, gently pointing out bullshit) has been transactionalized into the career of life coach. And the men and women who do that job very well are nicely compensated. If you've ever gotten it for free, be grateful.

Home economics wasn't really economics where I went to school. The cooking part is largely hygiene. The sewing part should include things like knot tying that are left to the scouts to teach.

Home economics is more like the way Thoreau used the word, closer to "economizing".

Isn't "economizing" something that is worth economic study? Seems to me that's what everyone is doing when they engage in price discrimination isn't it?

I'm just thinking there's a reasonable path where you could link these concepts together into a natural progression. i.e you get girls in high school to think about economics by starting with cooking and then shopping and budgeting food, and then introduce ideas like supply and demand and market pricing in super markets.

Well, that economizing is just problem solving under constraint. Tetris with money. And actual sewing is a great way to teach it! Here is a pattern for a dress. We have this leftover fabric which is nearly exactly enough and no buttons, but we have a zipper. Go!

it takes a village to make an entrepreneur?

"I show that knitters who make the entrepreneurial transition are distinctive in that they have experience in fewer techniques..."

So... stick to your knitting?

Entrepreneurship in the US died during the late '90s and early 00's due to (IMO) non-enforcement of anti-trust and over-enforcement of patent law. The classic entrepreneurial path was work with your prospective customers to find out what they want and what they can pay and then find a way to give them that. That's what rayward's father did (read between the lines). I counseled young tech entrepreneurs for almost 30 years (after a successful tech venture of my own). During the '80s and into the '90s, it was fun - lots of successful young companies - not into making millions, just into doing their own thing. Then in the late '90s, the questions changed from how to find customers or how to solve some business problem to how to find venture capital, (again IMO) a complete loser for real entrepreneurs. By early 2000, that was all I heard from the US - fortunately there was enough foreign interest (increasingly from China) to hold my interest until the mid 2010's when I gave it up as no longer useful.

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Awesome writeup. Keep up the good work

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