William J. Baumol
Sekem: A Remarkable Tale of
Social Entrepreneurship
with Critical Lessons for Policy
Innovations Case Discussion: Sekem
Publication of the remarkable article, “Garden in the Desert,” offers the reader a
fascinating tale illustrating the difficult path that faces a social entrepreneur who
undertakes a major project that points to a path for improvement of the state of
society. It concerns a dedicated and idealistic entrepreneur, Ibrahim Abouleish,
who undertook to transform a strikingly arid location in the Egyptian desert, mit
the determination to make it bloom and yield valuable crops. Darüber hinaus, it was
intended from the beginning that the project would prove to be long lived and self-
sustaining financially. The heroic undertaking and its eventual success is an excit-
ing tale, superior to fiction both because it describes actual achievement and also
because it offers insights of value to other agronomists seeking to bring productiv-
ity to deserts of the world elsewhere.
Aber, implizit, there are also important lessons in the Sekem story for those
crafting economic policy aimed at amelioration of the universal problem of pover-
ty that besets even the most affluent economies of the world and continues to per-
vade the developing societies. My purpose in this short paper is to draw further
attention to, and elaborate upon, the lessons for policy designers embedded in the
Sekem case.
INSTITUTIONAL IMPEDIMENTS AND
CONTRIBUTIONS TO LIVING STANDARDS
Economic historians, notably such outstanding figures as Douglas North and
David Landes, have drawn our attention to the critical role of institutions in deter-
mining the magnitude of entrepreneurial effort in an economy and the size of the
contribution of such effort to innovation, per capita income and economic
Wachstum. The central point here is that the institutions determine the size and
nature of the rewards, in terms of wealth, power and prestige, offered by entrepre-
William J. Baumol is Professor of Economics and Academic Director of the Berkley
Center for Entrepreneurial Studies, New York University and Academic Advisor to the
Ewing Marion Kauffman Foundation of Kansas City.
© 2008 William J. Baumol
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William J. Baumol
neurial activity. If the rewards are generous, more persons are attracted to careers
of innovative entrepreneurship, and the economy will prosper and grow. Das,
quite convincingly, is a critical part of the story underlying the industrial revolu-
tions that began after the eighteenth century and provided for some areas of the
world a degree of prosperity unprecedented in human history.
But institutions can also work the other way. It is not that they will put a stop
to all enterprise, but that they will attract enterprising individuals to unproductive
or even destructive activities—even some, like piracy, drug dealing or the role of
war lord, that undermine prosperity and spread poverty or even famine and death
in their wake. In the wealthier economies the undesirable elements of the incen-
tive structure generated by institutions generally are more moderate, but even in
those societies they serve as effective handicaps to the general welfare. This obser-
vation is important and promising, because if it offers us a hint of the nature of the
impediments to productive entrepreneurship, and indicates how these attributes
can conceivably be changed, it does indeed suggest the routes to effective progress.
Even in developing lands, where the obstacles to progress have proven most
intractable in recent eras, this observation offers hope.
Barriers to Progress in Developing Lands:
Three Example from the Sekem Story
The story of Sekem provides a number of striking examples of barriers to progress
in a developing land such as Egypt—barriers that, fortunately, do not appear to be
immutable. Let me call attention to three of them, each a special case that is
arguably representative of problems of widespread significance.
A. Bank Financing. Funding is one of the most difficult and widespread obstacles
besetting the creation of enterprise, particularly in developing countries. Der
Sekem history illustrates this clearly:
….I was happy to have found an Islamic bank where I could work togeth-
er in a like-minded partnership—or so I hoped….The negotiations were
tough….We agreed on the bank having a 40% share in the
business…[but then] the state investment authority…found that the
estimated value was far higher than the book value. This meant the bank
had to pay more for its involvement in the project. But the bank was
reluctant to accept this finding, and began to doubt everything and try to
get out of the contract. It demanded back the 150,000 pounds it had
already paid out…An arbitrator was employed and it took months for
our two lawyers to agree on a third party to mediate….One day my
lawyer came to me and said, ‘listen, if you give the bank’s lawyer 10,000
pounds he will accept the estimated value.’
When our entrepreneur refused to pay a bribe the problems began in earnest.
Other banks, having heard the story, all refused loan applications from Sekem, Und
the dispute went on for years.
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Sekem: A Remarkable Tale of Social Entrepreneurship
B. Expropriation Vulnerability. In developing lands, as was often ubiquitously true
in the more distant past, there was no guarantee that private property would be
immune from expropriation, particularly if it had proved promising. In the Sekem
Fall, zu, this threatened to become the reality:
…[Ö]ne morning, when I drove to the farm from Cairo as usual, I could
not believe the sight I saw: bulldozers were pulling down thousands of
trees. I was met by soldiers with machine guns and suspicious expres-
sionen. I found out that a general had ordered our grounds to be made
into a military area, even though it was only through our efforts that
there was even a water supply on our land.
C. Superstition as Competitive Weapon. The Sekem enterprise was run on principles
of organic farming, but this made it a financial threat to the pesticide manufactur-
ers, as other growers seemed apt to follow the Sekem example:
The chemical industry could no longer deposit 35,000 tons of pesticides
on the fields each season. The people involved had opposed organic cul-
tivation and had gotten the press involved….We were able to cope with
all the attacks until one day an extensive article appeared in the local
paper with the title “The Sun-Worshipers,” [a label created by a reporter
who had visited the area]….For Muslims, worshiping the sun is like wor-
shiping Satan for Europeans….Based on this article, the prayer leaders in
the mosques around started to stir up animosity toward us, spreading the
word that we did not worship Allah, but the sun [thereby threatening the
entire enterprise].
Impediments to Productive Entrepreneurship in Prosperous Nations: Two
Beispiele
The three examples from the Sekem story surely illustrate the point: that institu-
tional arrangements can constitute a major impediment to productive entrepre-
neurship and that institutional impediments can handicap and even prevent devel-
opments of the sort that promise to contain poverty. But it is important to empha-
size that such counterproductive institutions are not present only in developing
economies. We in the prosperous nations also have much room for institutional
improvement. In der Tat, the most promising institutional arrangements, if they are
inappropriate, even if only in their details, are capable of impeding or even pre-
venting entrepreneurial activities from delivering their potential benefits.
A. Some Missteps in the Early British Patent System and Resulting Impediments to
Invention. The history of the patent system in Great Britain provides one clear
example of institutional impediments in prosperous countries.
As we all know, Great Britain has been accorded by historians the distinction
of having inaugurated the eighteenth century industrial revolution. It is an accom-
plishment so great that its magnitude is difficult to comprehend. In just one cen-
tury the purchasing power of an average inhabitant of Great Britain grew five-fold;
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William J. Baumol
attendant
in den Vereinigten Staaten, seven-fold. This is in contrast with how little was achieved in
the West during the approximately fourteen-century period between the fall of
Rome and the British industrial revolution, during which time the estimated rise
in per capita income for inhabitants of Europe was approximately zero. Noch, strik-
ingly, it turns out that even more could have been accomplished since the indus-
trial revolution but for the obstacles created by the errors of those who designed
the relevant institutions and
rules—
Die
vor allem,
the early British
patent system.
Britain may indeed have
initiated of the institution of
patents and been its earliest user
about four centuries before the
beginning of the industrial
Revolution. But those early
grants of patents by the English
king were not given as a reward
for the invention of new
products or improved
productive techniques.
Britain may indeed have
initiated of the institution of
patents and been its earliest
user about four centuries
before the beginning of the
industrial revolution. Aber
those early grants of patents
by the English king were not
given as a reward for the
invention of new products or
improved productive tech-
the first
Eher,
niques.
known patent was granted to
a French workman who had
migrated to England and had
brought with him the French
secrets about the manufac-
ture of silk. This workman
was given a monopoly on the production of silk in England as a reward for his
theft—or rather his secondary theft; for as we know, Frankreich, zu, had not acquired
its knowledge of silk production by innocent means. It was fully three centuries
später, that the English decreed that the temporary monopoly provided by a patent
could only be granted to the contributor of an original invention
But this amendment to the British patent system hardly marked an end to the
era in which the system was characterized by a set of effective impediments to
invention and associated entrepreneurial efforts. In her superb book The
Democratization of Invention, Professor B. Zorina Khan provides a description of
the early British practices in this field. The government charged a fee for the grant
of a patent that was about four times as large as the average income of an
Englishman: “…[P]atent applications in England alone had to pass through seven
offices, from the Home Secretary to the Lord Chancellor, and twice required the
signature of the sovereign[!]. If the patent were extended to Scotland and Ireland
it was necessary to negotiate another five offices in each country.” (P. 32). The pur-
pose of these arrangements seems clear. Erste, it was believed that only wealthy
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Sekem: A Remarkable Tale of Social Entrepreneurship
aristocrats could be expected to have the knowledge, intelligence, and creativity to
make an inventive contribution of any value to the King and country. To avoid
cluttering the activities of government with the pointless intrusions of “the lower
classes,” such obstacles were adopted for the purpose of their exclusion. Zweite,
the system was designed to contribute to the wealth and comfort of government
officials, and this it seems to have done effectively, so much so that when the rules
were at last changed and improved after the middle of the nineteenth century, Die
affected government employees had to be offered financial compensation for the
losses they would suffer as a result.
Zusätzlich, the view of British law in the earlier period was that the grant of a
patent was a gift from the king, so that when the monarch deemed it to be appro-
priate he could, in effect, re-appropriate a patented invention for his own use,
without compensation to the inventor. This was rarely, if ever, done in nineteenth
Jahrhundert England, so that it does not seem to have been a significant issue there, Aber
it is reminiscent of the dangers of similar arrangements elsewhere, as in China
when the Emperor’s Confucian oriented government is reported to have confiscat-
ed printing from its Buddhist inventors.
The result of these British restrictions upon its patent system was, Natürlich, ein
impediment to its invention process. For nearly three decades until 1855 the num-
ber of patented inventions per million persons in its population was about one
third the level of patents in the United States, where none of the obstacles just
described were present. The relative inventive performance of the Americans was
demonstrated dramatically at the Crystal Palace Exhibit in London in 1853, Und
this frightened the British into reconsidering their patent rules, though the result-
ing changes were far from immediate.
All this does tell us that there is much that is useful to be learned from our own
past mistakes and those of others about effective and ineffective ways to encourage
the productive contribution of the entrepreneur.
Nächste, I will provide one more more recent example that deals with the United
Zustände.
B. Distortions of Incentives Caused by Employee Stock Options. In the U.S. a partic-
ularly important role in the compensation of business executives is played by the
employee stock options (ESOs) that are often a substantial proportion of the
financial compensation of members of management in American business firms.
If the rules under which they are provided are well designed, they can serve as a
powerful incentive for innovative entrepreneurship and growth of the business
firm, as success in these areas will drive up the price of the company’s securities
Und, thereby, the market value of the ESOs. Jedoch, in practice the current rules
have invited abuse in ways that, if anything, inhibit productive entrepreneurial
activity within the firm and hold back its overall performance.
An employee stock option is a grant by a company to the members of its man-
agement or other employees of the right to purchase a specified quantity of the
stock of the company at some future date of the recipient’s choosing, but paying
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William J. Baumol
for those stocks only the market price that prevailed on the date that the options
were granted. This would seem to provide a powerful incentive for management to
work hard for the productivity and profits of its firm as a way to raise the value of
those ESO grants. Recent
Veranstaltungen, Jedoch, have illustrat-
ed all too dramatically the
possibilities for abuse—and
indeed the actual abuse—of
stock options by
manche
entrenched managements.
These opportunities for abuse
include manifestly undesirable
incentives for artificial exag-
geration of
the short-term
earnings of the firm so that
misled investors will increase
their demand for the compa-
ny’s stocks, thereby raising the
value of management’s stock
options. Management does
this instead of undertaking the
harder and riskier task of providing more enduring earnings for the company by
means of entrepreneurial effort and innovation.
[Ö]bstacles imposed by nature
are not all that success in a war
on poverty must overcome.
Hier, as in many other
problems that beset the
economy, the lesson is summed
up by the old comic strip
Überwachung: “We have met the
enemy and he is us!”
Even worse, it has been observed that large rewards of stock options have often
been given to managers of the companies who have accomplished little or nothing
for their firms, but who have benefited greatly when the stock price of the firm has
risen in a period of generally rising stock market prices. Mit anderen Worten, this has
proven to be an incentive for management to do little or nothing for the firm, Die
investors or society, because without undertaking any of the risk or effort this
requires, they would still be richly paid, often in hundreds of millions of dollars.
This problem of divergence between the interests of society and those of man-
agement is inherent in the corporate form of organization of the large business
firm. The large amounts of money needed to create the business can only be
obtained from a large number of investors—the corporation’s many stockholders.
But the resulting dispersion of corporate ownership among many stockholders,
with no stockholder owning enough stocks to enable it to control the company,
makes management by the stockholder-owners unworkable and necessitates giving
the task of management to an essentially separate group, the hired management of
the enterprise. The result is what is described as the separation of ownership from
management that is typical of the modern corporation. But since an effective pro-
gram of innovation in the firm’s products and production methods is likely to
require very hard work and the undertaking of great risks, management is likely to
be reluctant to undertake such a course.
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Sekem: A Remarkable Tale of Social Entrepreneurship
As just indicated, stock options can be a method to achieve the goal of recon-
ciling the interests of managers and shareholders and society. For under the stock
option form of compensation, managements gain most if they can do their utmost
to raise the market value of the company’s securities, and that is presumably what
good profit and sales performance will achieve. Darüber hinaus, a simple change in the
way employee stock options are provided to management promises to remedy the
problems just described.
The problem can at least be alleviated if the quantity of options granted to the
individual executive is based on the performance of the firm’s securities in com-
parison to that of the firm’s industry as a whole. That is to say, more options are
offered in proportion to the extent that growth in the firm’s output or sales exceed
those of related firms.
But the rules for taxation of firms in the U.S. have all but prevented this solu-
tion. Those rules permitted a reduction in the amount of the tax that would oth-
erwise have to be paid for the provision of the stock options, but only if the quan-
tity of options granted to management was not based on its performance! In other
Wörter, the arrangement was completely perverse; it was an incentive for continu-
ation of the temptation of management to pursue its own interests at the expense
of stockholders and the community as a whole.
CONCLUSION
It should be clear from these and an abundance of other experiences that all soci-
eties still have much to learn about how to most effectively promote economic
growth which alone can ultimately terminate the poverty that has plagued human-
ity throughout the ages. Insbesondere, amelioration of the universal problem of
poverty will require reexamination of our institutions; determination of what
institutional arrangements promote general prosperity rather than impeding it;
and action to carry out the modifications that experience, Überwachung, and sys-
tematic research tell us are required.
I return, in conclusion, to Sekem, to the Egyptian tale in which a remarkable
and determined exercise of entrepreneurship succeeded in making the desert
bloom, overcoming obstacles that would have lead weaker individuals to surren-
der. Its ultimate victory has many lessons for all societies. It illustrates dramati-
cally that the obstacles imposed by nature are not all that success in a war on
poverty must overcome. Hier, as in many other problems that beset the economy,
the lesson is summed up by the old comic strip observation: “We have met the
enemy and he is us!” The story of Sekem shows that these problems do occur in
developing lands as well as ours. Wichtiger, it demonstrates that in such
places, zu, institutional impediments can be overcome and, with sufficient deter-
mination and thought, they can even be removed.
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