The engine of capitalist process: entrepreneurs in economic theory

Economic & Financial Review, Oct, 2001 by Robert L. Formaini

Let us call a halt to this imaginary dialogue [between Karl Marx and Joseph Schumpeter] and return to the main subject at hand: the neglect of entrepreneurship in modern, mainstream economics. Surely, this neglect must give us pause? It is a scandal that nowadays students of economics can spend years in the study of the subject before hearing the term "entrepreneur," that courses in economic development provide exhaustive lists of all the factors impeding or accelerating economic growth without mentioning the conditions under which entrepreneurship languishes or flourishes, and the learned comparisons between "socialism" and "capitalism" are virtually silent about the role of entrepreneurship under regimes of collective rather than private ownership.

--Marc Blaug (1986, 229)

Some of the simplest questions often asked about economic performance have the most complex answers. Three examples: How can profit exist? What causes economic growth? How does a market economy coordinate resource use? Over the long history of the development of economic doctrine, many great minds have wrestled with these questions and many have turned to the concept of the entrepreneur. This term has long been used by economists, albeit with varying emphases at different times, and recently enjoyed a renaissance in economic and business school pedagogy because of the Internet's evolution and the small-business explosion it generated. The concept remains relevant as America's economy enters the new millennium, for how we treat our entrepreneurs has immediate and profound effects on our overall national economic performance and the direction of economic activity.

According to modern economic theory, an entrepreneur is an individual who takes on certain tasks based solely on a perception of market opportunities and how to exploit them. This person is, to varying degrees, a risk taker, resource manager, innovator, arbitrager, and both creator and destroyer. Entrepreneurship is not planning by groups or management decisions by corporate bodies, but the exploitation of perceived opportunity by individuals based solely on personal judgments and visions that others either don't see or can't bear the risks of acting on. It was entrepreneurs who created the New Economy. The story of who they were and how they did it is more enlightening than anything pure theory can offer on this topic. (1)

But theory remains integral to understanding, and so theorists are appealing more often to the idea of entrepreneurship and the role of entrepreneurs as explanatory variables for economic reality. It is useful to look at the historical development of this concept. Only by studying the past can we expect to understand the present.

THE HISTORY OF A CONCEPT

Beginnings--The Physiocrats

Most historians of economic thought date the genesis of modern economic theory to the early eighteenth century in France, where a group of thinkers called the Physiocrats emerged. The most famous among them was Richard Cantillon (1680-1734), whose 1755 work Essai sur la nature du commerce en general (written between 1730 and 1734) first introduced the concept of the entrepreneur into economic analysis (Spengler 1960). The concept itself had been used before Cantillon's time, however, to mean various things. One writer has summarized its history as follows:

      The most general and probably the earliest meaning of the word
   entrepreneur is celui qui entreprend, which means an active person with
   initiative. The word originates in the verb entreprendre, which has a
   meaning similar to "getting things done." Up unto the sixteenth century
   entrepreneur meant: (1) grasp, take hold of (saisir) (2) surprise, discover
   (surprendre). (2)

The term seems to have evolved in the fifteenth century and was applied to people who ran risks, especially during wars. By the sixteenth century, the term was being applied to "a large scale businessman who contracted to supply, having taken upon himself the responsibility to combine the factors of production at his own expense and risk." (3) As Rothbard (1995a, 351) writes about Cantillon's analysis:

      Thus Cantillon divides producers in the market economy into two classes:
   "hired people" who receive fixed wages, or fixed land rents, and
   entrepreneurs with non-fixed, uncertain returns. The farmer-entrepreneur
   bears the risk of fixed costs of production and of uncertain selling
   prices, while the merchant or manufacturer pays similar fixed costs and
   relies on an uncertain return. Except for those who only sell "their own
   labour," business entrepreneurs must lay out monies which, after they have
   done so, are "fixed" or given from their point of view. Since sales and
   selling prices are uncertain and not fixed, their business income becomes
   an uncertain residual.

Rothbard also notes that, for Cantillon, entrepreneurs are equilibrating agents in the market system. This is in contrast to the analyses of some economists, especially Joseph Schumpeter, who later came to view entrepreneurs as disequilibrating factors.