Theories of Entrepreneurship: Historical Development and Critical Assessment
Abstract and Keywords
The historical evolution of ideas about the entrepreneur is a wide-ranging subject and one that can be organized in different ways — theorist by theorist, period by period, issue by issue and so forth. What follows is a compromise between these possibilities. This article starts with some very broad reflections about economic change over thousands of years and the connections between these changes and the economic thinking of the time. A recognizably ‘modern’ idea of the entrepreneur begins to emerge in the eighteenth century and part of this article is devoted to the role of entrepreneurship in classical and neoclassical economic theory. In the next five sections, the article looks at particular areas that have been associated with debates about the entrepreneurial role — uncertainty, innovation, economic efficiency, the theory of the firm, and economic development. A final section presents a brief summary and comments on the place of the entrepreneur in evolutionary models.
The historical evolution of ideas about the entrepreneur is a wide-ranging subject and one that can be organized in different ways—theorist by theorist, period by period, issue by issue and so forth. What follows is a compromise between these possibilities. The paper starts with some very broad reflections about economic change over several thousand years and the connections between these changes and the economic thinking of the time. A recognizably ‘modern’ idea of the entrepreneur begins to emerge in the eighteenth century and the following two sections are devoted to the role of entrepreneurship in classical and neoclassical economic theory. In the next five sections, the paper looks at particular areas that have been associated with debates about the entrepreneurial role—uncertainty, innovation, economic efficiency, the theory of the firm, and economic development. A final section presents a brief summary and comments on the place of the entrepreneur in evolutionary models.
A reader who is already familiar with important distinctions between capitalist, innovator, uncertainty bearer, judgemental decision-maker, market-maker and so forth should be aware that these will be discussed in greater detail as the paper advances. The following section does not examine entrepreneurship through the ages using a constant and clearly defined concept throughout. Rather, it provides some historical context and links this to contemporary attitudes towards trade, economic change and the perceived agents of change. It shows that advances in pure analytical thought were required before helpful definitions of entrepreneurship could be derived, and that without these advances an important ingredient of any theory of economic change was missing.
2.2 The entrepreneur in economic history
Entrepreneurship is not a concept that has a tightly agreed definition. In modern common usage an ‘entrepreneur’ is ‘a person who undertakes an enterprise, especially a commercial one, often at personal financial risk’.1 It is the product of a ‘modern’ post-enlightenment world in which continual change has become the norm, where ‘progress’ (technical, social and economic) has become expected and where notions of liberal individualism predominate. The ancient and mediaeval worlds seem not to have developed a concept of entrepreneurship that could plausibly be seen as similar to the modern notion. Philosophers gave only limited attention to economic matters and, in so far as agriculture, industry and trade were discussed, much thinking would have been a sub-branch of politics or ethics. In the Aristotelian tradition, economic thought was highly normative. Trade was a suspect activity liable to undermine the good order of society and sterile in itself. Even if the reality was more complicated, early social thought concerned static societies built upon caste or social position where justice was the outcome of each group faithfully performing its allotted function. In the hierarchy of social esteem, the noble warrior took pride of place, agriculture was respected and compatible with the inculcation of certain virtues, industry in support of military power was too useful to neglect, but commerce was the province of less respected if not completely despised social groups.
It is not difficult to understand this early suspicion of commerce and the trader. The landed aristocrat had large, illiquid and specific (to a geographical region) investments to protect. As with a player in a modern game theoretic model of oligopoly, such a person could plausibly commit to fight interlopers. For the widely travelled merchant with access to ships and with assets in liquid and non-specific form, the temptation simply to move elsewhere when the fighting started and to deal with the winners would have been compelling. The aristocrat's position depended upon a willingness to deter others and to fight for what was his. The merchant's position derived from an ability to go where he was treated tolerably and to flee from unrewarding environments. Where violent conflict was endemic or its likelihood significant, nobles and merchants were thus hardly natural allies.
Another reason for the early disapproval of trade, and in particular, the use of money was its association with situations of ‘distress’. Where agricultural production dominates and this is mainly accomplished on large estates using slaves or serfs, the economy has many of the features of an extended ‘household’. Indeed the modern English word ‘economics’ derives from the Greek oikonomiā or ‘law of the household’. Production and consumption in these conditions are largely undertaken locally within the relatively self-sufficient household, and trade with outsiders is limited to luxury goods for high status members, or imports of food and other staple goods at high prices in the event of crop failure. The result would tend to be an association of the merchant with frippery on the one hand and ruthless exploitation on the other.
In the mediaeval era, the authority of St Augustine held that it was unjust to buy below or sell above the ‘just price’, while ‘usury’—interest on the use of money—was condemned in the religious teaching of the era. Each of these doctrines should be seen in the context of the conditions of the time and scholars have argued about their precise interpretation and force, but even allowing for scholarly refinements, the doctrine of the just price would appear to be highly subversive of entrepreneurial activity. When the whole of society is viewed in terms of duty and obligation in the performance of divinely assigned and sanctioned roles; and when preparation for the next life rather than the improvement of material conditions in this one has the higher priority, entrepreneurship could hardly be expected to feature prominently in the prevailing economic thinking.2
Absence of a well-developed conception of the entrepreneur in the philosophy of the time in no way implies that economic conditions were completely static, trade suppressed or technology totally unprogressive. Roman law, for example, developed (p. 36) highly individualistic concepts of private property and contract which permitted the development of an extensive and sophisticated European trading network. Venetian dominance of Mediterranean trade in the early middle ages could not have developed without an environment sufficiently conducive to entrepreneurial activity. Even the mediaeval economy outside the city-states, which in its social stratification and apparent stability is popularly seen as stagnant, is now regarded by historians as having experienced considerable technological advance.3 Nevertheless, the distinct notion of an entrepreneurial role awaited an era in which success in commerce and the political power of the state were more closely associated.
With the rise of the modern nation states of France, Spain and England from the late fifteenth century onwards, rulers began to take on at least one characteristic of the merchant. No longer able to rely on feudal obligation from the nobility to protect their interests, the accumulation of treasure, and hence the ability to pay armies, became associated with the maintenance and projection of political power. The mercantilist doctrine that emerged from this era was criticized by later classical economists for confounding money with real national wealth although it is doubtful whether mercantilist writers succumbed fully to such a fallacy. For present purposes, however, it is relevant to note that the building of the power and revenue of the state was the central concern. Such a project is unlikely to be conducive to the growth of decentralized and competitive markets and thus might be seen as inimical to the social development of the entrepreneur. Bureaucratic intervention, the selling of monopolies, licensing and taxation are not the most obvious routes to the entrepreneurial society. However, compared with the world that had preceded them, the sixteenth and seventeenth centuries were the more conducive to entrepreneurship.
The state as an economic organization, an idea which underlay mercantilist thinking, and the accumulation of treasure that was seen as a means of building state power, required the input of entrepreneurial and not merely bureaucratic talent, at least in the context of the competitive states of Europe.4 The whole enterprise may have been statist at heart but it relied on people to develop overseas markets, to build great trading companies, to strengthen domestic industry and to (p. 37) generate a large tax base. People of energy and talent could migrate between jurisdictions, and the willingness of other places to receive them placed limits on the exploitation that they would tolerate in any given location. English words now often used to describe entrepreneurs such as ‘buccaneer’ and ‘privateer’ derive from this period as the state tolerated or even encouraged the piratical disruption of the trade routes of other nations. As the profits of trade increased, the old aristocracy in England began to accept trade as a respectable activity. Money talked. Defoe commented that ‘Trade is here so far from being inconsistent with a gentleman, that, in short, trade in England makes gentlemen’ while Voltaire observed that ‘It is only because the English have taken to trade … that England can have two hundred men of war and subsidize allied kings’.5
It was, however, the agricultural and industrial revolutions of the eighteenth and nineteenth centuries that finally produced the modern multi-faceted image of the entrepreneur. As rulers gradually submitted to constitutional constraints on their power, and property rights became more secure within the nation states, entrepreneurial energy was released at a historically unprecedented rate. In England in particular, major advances in agricultural productivity and innovations in transport, mining, textiles, steel, shipbuilding, engineering and banking became associated with particular names. The Duke of Bridgewater in the construction of canals, Richard Arkwright in the transformation of the cotton industry and the evolution of the factory system, Mathew Boulton, John Roebuck and James Watt in the development of steam power, George Hudson in the promotion of railways—these and others introduced the revolutionary changes that still colour our image of the entrepreneur.
The ‘men of business’ of the nineteenth century represented a new social phenomenon. Checkland (1964: 103) writes ‘It is probably not far from the truth to say that the period from 1815 to 1885 in Britain represents the range of human experience in which individual economic initiative had its greatest opportunity to operate upon men and things, and in so doing to remake an ancient society’. From this period derives the idea of the heroic entrepreneur, a transformer or founder of industries, an undertaker of massive feats of engineering, an opener of continents. Such activities required the raising of enormous quantities of capital, the development of new organizational methods and the coordination of vast numbers of people. The failures could be as spectacular as the successes. Entrepreneurship of this order required as much strategic insight, tactical awareness, personal energy, power of leadership, organizational flair, (p. 38) ruthlessness and determination as military conquest. And like the military commander, the entrepreneur began to be studied and respected.
In the twentieth century, the cult of the entrepreneur initially receded. The large-scale organizations established in the nineteenth century and the corporations developing in the newer electrical, chemical, communications and motor industries began to look more managerial and professional than heroically entrepreneurial. The entrepreneurs having blazed their pioneering trail, it began to be seriously considered that professional scientists, technicians and managers would be able to maintain momentum. By the 1940s Schumpeter (1942) was advancing this view, and others such as Jewkes (1948) were specifically asking the question ‘Is the Businessman Obsolete’?6 Later developments in the century were to redress the balance somewhat. In the UK, for example, the shipbuilding, coal, steel and cotton industries all but disappeared and this substantial and continuing restructuring undermined the notion that change of this degree could be brought about by managerialism alone. The growth of the service sector of the economy, and the development of computer technology, and communications may also have contributed to a rise in self-employment and small-scale entrepreneurship.
From this brief historical review it is apparent that popular conceptions of the entrepreneur have evolved over time. The somewhat varied notions that still prevail reflect this history. The small-scale trader and peddler, the self-employed craftsman, the ‘buccaneering’ chancer, the innovator and improver as well as the founder of entirely new technologies and industries are all seen as entrepreneurs. It is evident, however, that a coherent theoretical treatment of entrepreneurship is not automatically suggested by the history of economic and social change. The birth of classical political economy coincided with the upheavals of the agricultural and industrial revolutions of the eighteenth century and an interest in ‘The Nature and Causes of the Wealth of Nations’. Yet, both in its classical and later neoclassical formulations, economics as a discipline has not found it easy to find a formal place for the entrepreneur.
2.3 The entrepreneur in classical political economy
Classical economics did not incorporate a systematic treatment of entrepreneurship. The system of economic thought that prevailed during the ‘hey day’ of the ‘men of business’ paid no particular attention to them except as a form of skilled (p. 39) labour or as providers of capital. The classical system rested upon foundations that subtly drew attention away from the role of the entrepreneur. This is most clearly seen in the work of Ricardo.7 The three factors of land, labour and capital received rewards in the form of rent, wages and profits. Over time, ‘the condition of the labourer will generally decline, and that of the landlord will always be improved’ (p. 79) as population growth presses on limited resources of land and rents rise, while ‘the natural tendency of profits then is to fall’ (p. 98) with capital accumulation. The dynamics of the system were derived from Malthus and a supposed ‘natural’ tendency of populations to outstrip the means of subsistence. Subsistence might itself afford more than the means to mere survival, if advancing notions about tolerable standards of living could be harnessed to ‘moral restraint’, but the classical economists never seemed very confident about this. In so far as an entrepreneur can be found in this system he or she is a supplier of the capital required for a one-way journey to the stationary state.
Ricardo recognizes that ‘this gravitation as it were of profits, is happily checked at repeated intervals by the improvements in machinery … as well as by discoveries in the science of agriculture’ (pp. 98–9). But his use of the word ‘gravitation’ indicates an ultimately decisive natural force, one from which no object on earth had escaped at the time Ricardo was writing. It also suggests the Newtonian basis of classical thinking in economics. Objects might move in this system, but they did so ‘automatically’ in response to natural and impersonal forces. This mind-set was not conducive to a well-developed role for the entrepreneur within classical theory.
Thus, although the work of Ricardo provides a good example of the exclusion of the entrepreneur or the conflation of entrepreneur with capitalist, the same observation has been made of Smith, Senior, Marx and Mill. For Smith, the labour theory of value was an outcome of his ‘natural law’ preconceptions, and Schumpeter (1949) speculates that these ‘led Adam Smith to emphasize the role of labor to the exclusion of the productive function of designing the plan according to which this labor is being applied’ (p. 255).8 It should be recognized, however, that the writings of the classical economists are open to widely differing interpretations and that Adam Smith, perhaps because he offered a much less formal ‘model’ of the economy than did David Ricardo, can be seen as the originator of an approach to economic growth which implicitly ascribes a central role to the entrepreneur.
Holcombe (2001), for example, contrasts Smithian and Ricardian models of growth and argues that the Smithian approach is completely different from Ricardo's pessimism. Smith's central concern was with the causes of growth and the opening chapter of The Wealth of Nations, indeed its opening sentence, ascribes (p. 40) growing wealth to the division of labour. This division of labour was ‘limited by the extent of the market’ (ch. III of bk 1) but Smith did not see ‘the extent of the market’ as a final and limiting constraint leading to a stationary state. Instead, Smith can be interpreted as describing a dynamic process of a continuously increasing division of labour accompanying continuously increasing market size. The motivating force of this expansion is described as follows: ‘Every individual who employs his capital in the support of domestic industry, necessarily endeavours so to direct that industry, that its produce may be of the greatest possible value’.9 This passage is famous for the ‘invisible hand’ metaphor by which the individual is led ‘to promote an end which was no part of his intention’10—the enrichment of society as a whole. ‘To promote an end’ is to encourage movement in a certain direction rather than to achieve a resting point, however, and Smith might therefore be interpreted as offering a theory of growth that has entrepreneurial decision-making at its core. The efforts of people to ‘better their condition’ will lead to increasing productivity, a more extensive division of labour and an expanding market.
The tension between a Smithian approach to economics based upon the above reading, which is compatible with a process of continuing economic advance, and a more formal Ricardian approach, which emphasizes the nature and inevitability of a final end state, is of continuing relevance and will be discussed further on p. 43 Marx, in his economic analysis, was entirely Ricardian in spite of references to the ‘wonders’ brought about by the bourgeoisie that reveal a complete awareness of the massive industrial and commercial achievements of his age.11 This disjunction between a common sense reaction to actual events, which could hardly see the investment of such massive amounts of capital in entirely new industries as ‘automatic’, and classical Ricardian economic theory, was also apparent in the work of J. S. Mill.
Mill is credited as introducing the word ‘entrepreneur’ into English economics, although Schumpeter (1949) opines that he did not go much further than including ‘superintendence’ as a necessary input into production. Gross profits had to be sufficient to provide ‘a sufficient equivalent for abstinence, indemnity for risk, and remuneration for the labour and skill required for superintendence’ (pp. 245–6). Abstinence reflects the usual classical association of entrepreneur with capitalist. Superintendence makes a portion of the entrepreneur's reward effectively a wage. Even innovation and invention could be seen as a type of labour. ‘The labour of invention is often estimated and paid on the very same plan as that of execution’12 (p. 41) (p. 26). It was, however, Mill's inclusion of ‘indemnity for risk’ as part of profit that perhaps lay behind his preference for the word ‘undertaker’ rather than ‘manager’ and supports the case that he saw the entrepreneurial function as something qualitatively different from capitalist or worker. Interest is the reward for abstinence ‘while the difference between the interest and the gross profit remunerates the exertions and risks of the undertaker’ (p. 246).13
The association of entrepreneurship with risk bearing is an important strand of thought that survives to this day, and is reflected in the dictionary definition quoted earlier, but it has given rise to substantial controversy. Schumpeter (1954: 556) was sufficiently convinced that this ‘served to push the car still further on the wrong track’ to devote an extended footnote to explaining the supposed fallacy involved in Mill's position. Because losses can only be experienced by resource owners, and because capital is the only resource under discussion, it is evident that losses are borne by capitalists. If a capitalist lends to an entrepreneur, he or she takes the risk that the debt will not be repaid. If the entrepreneur has sufficient wealth to cover the debt, then ‘he too is a capitalist and, in case of failure, the loss again falls upon him as a capitalist and not as an entrepreneur’. For Schumpeter, the supply of capital and the supply of entrepreneurial services were quite distinct, and risk attached to the former not the latter.
Although this argument at first sight seems to have the inescapable force of a syllogism—all losses accrue to resource owners, only capitalists are resource owners, ergo only capitalists experience losses—it is still possible to question the interpretation of the conclusion as well as the validity of the premises. Both Mill and Schumpeter paid tribute to the French tradition in this field and in particular to the work of Cantillon (1755) and Say (1803). Cantillon, who first introduced the term ‘entrepreneur’, envisaged an agent who contracts with suppliers at known prices in order to produce goods that could be sold later at uncertain prices. Here we have a clear statement that the entrepreneur's profit is a residual. It is what remains after all contractual commitments have been honoured. Schumpeter (1949) remarks approvingly that this conception is ‘not infelicitous’ as it ‘emphasizes the elements of direction and speculation that certainly do enter somewhere into entrepreneurial activity’ (p. 254).
This French tradition fits uneasily, however, with Schumpeter's rejection of the entrepreneur as a bearer of risks. The receipt of residual income as conceived by Cantillon, unlike the more modern theory of Israel Kirzner which is discussed below (p. 48), would seem to require the acceptance of risk. If the future residual income is not certain but takes the form, as it were, of a lottery ticket, the holder must be a risk bearer. Schumpeter seems to assume that speculation using other people's money is necessarily riskless. An entrepreneur who starts with nothing (p. 42) ‘cannot lose’. But it is still a ‘state contingent claim’ that the entrepreneur is holding even if the returns are highly geared and negative financial outcomes do not feature. Thus the conclusion ‘only capitalists experience losses’ is not quite the same as ‘only capitalists bear risks’.
An objection might also be raised to the premise that all resource owners are capitalists. We can, of course, always define things this way. But the interpretation of human capital raises problems. An entrepreneur who has persuaded a financier to advance money by means of a fixed interest loan may have used the intangible resources of character, experience, track record and reputation. Failure and bankruptcy would be expected to affect the ability of the entrepreneur to raise similar finance in the future and thus would result in a ‘write down’ of this entrepreneur's human capital. Viewed in this light it seems reasonable to take the ‘common sense’ position that the entrepreneur can experience losses. The alternative is to insist that the entrepreneur still loses as a ‘capitalist’, and that, in spite of the person-specificity of entrepreneurial human capital, it is a distinct entity quite separate from the speculative and organizational skills that he or she supplies. This, however, would seem to open up the possibility of disputes to rival in sophistry those of mediaeval scholasticism.
2.4 The entrepreneur in neoclassical theory
It is sometimes argued that the development of neoclassical analysis beginning with Menger and Jevons in the 1870s, heralded a change of emphasis from the ‘magnificent dynamics’ of classical theory to ‘precise statics’.14 Robbins (1935: 16) later described this central concern as ‘the relationship between ends and scarce means which have alternative uses’. At the heart of this new economics were a clearly stated subjectivism and the systematic application of marginal analysis. Jevons (1871) immediately establishes these foundations with his ‘novel opinion’ that ‘value depends entirely upon utility’, by which he meant marginal utility.15
An economics based upon subjective value theory and marginal analysis, rather than an objective (labour) theory of value, resulted in some subtle changes in thinking about entrepreneurship. On the one hand, the new discipline was capable of being developed in highly formal and mathematical ways. Rational allocation of (p. 43) any given amount of a scarce resource requires that its marginal benefit should be equal in every potential use. This ‘first order condition for maximization’ applies to any rational person whether consumer or producer. Working out whether all these individual maximizing decisions could be made mutually compatible was obviously a major interest and it was one of the greatest intellectual achievements of neoclassical economics to show the coordinating role of prices. Walras and other ‘general equilibrium’ theorists investigated the conditions under which a set of prices existed, in a world of ‘price takers’, that was compatible with universal market clearing. In this equilibrium, economic rents might accrue to resources such as land or even differential skill, but business profit would be zero. Schumpeter (1953: 893), who greatly admired Walras's work, remarks that his contribution to the analysis of the entrepreneur was ‘important though negative’. Walras ‘indicated a belief to the effect that entrepreneurs' profits can arise only in conditions that fail to fulfill the requirements of static equilibrium’.
Unfortunately, it was the apparent failure of prices to ensure universal market clearing that was more obvious to observers in the inter-war years than their benign potential as a coordinating mechanism. It was not unnatural, in the face of mass unemployment, to wonder whether alternative resource-allocating mechanisms might produce better results. Such thoughts were not particularly subversive of the calculating, rationalist or marginalist basis of neoclassical economics. Ensuring that resources are allocated rationally to achieve specified ends is the sort of ‘scientific’ problem that looks suitable for experts, technicians and managers. Refinements of neoclassical theory were thus capable of diverting attention from entrepreneurship entirely—either by a highly static Walrasian formalization of competitive equilibrium, or by conceiving the entire economy as one giant maximization problem. It was the latter view that lay behind the so-called ‘calculation debate’ about the feasibility of socialist planning during the 1930s and 1940s. The rational, calculating, maximizing, equi-marginal principles of economics could be used by officials to achieve a social optimum—or so it seemed.
Neoclassical thinking was capable of leading in quite a different direction, however. If attention is directed at its subjectivist foundations rather than its calculating rationalism, the problem of reconciling multifarious individual subjective ‘ends’ with multifarious individually perceived ‘means’ looks distinctly less of an engineering problem and more of a problem of social institutions and organization. Competitive market processes could be seen as a mechanism by which these ends were revealed, resources discovered and developed, and the various possibilities latent in the resources explored. Participants in this type of market are active bargainers and pricesetters rather than passive Walrasian ‘price takers’. Thinking along these lines does not lead so much to ‘precise statics’ as to ‘imprecise dynamics’. Instead of the ‘magnificent dynamics’ of classical theory leading with Newtonian predictability to the stationary state, we have a dynamics, magnificent or otherwise, of a more evolutionary, unpredictable and Darwinian (p. 44) conception. The modern ‘Austrian’ school, which includes writers such as Hayek (1945, 1978), Shackle (1972, 1982) and Kirzner (1973, 1979), represents this strand of thought. Clearly, entrepreneurship fits more naturally into this tradition than into static analysis.
The sharp dividing line that has become established since the 1940s between ‘Austrian’ and ‘neoclassical’ thinking, however, was much less apparent to writers of the period between 1870 and 1940. The increasing formality of the analysis might be static but the ‘vision’ was of economic evolution, or ‘progress’ little different from that of J. S. Mill.16 This is most clearly seen in the work of Marshall (1912: 165) who emphasized evolutionary change instituted by ‘business management’ rather than ‘entrepreneurship’. Under the heading of ‘management’, however, Marshall argues that ‘the superintendence of labour is but one side and often not the most important side of business work’. In addition, he identifies the accumulation of knowledge about products and processes, the forecasting of market movements, the seeing of opportunities for new commodities and processes, the exercise of judgement, the undertaking of risks and the leadership of people. While therefore clearly stating that there were two ‘sides’ to business activity, we might now say an administrative side and an entrepreneurial side, Marshall does not feel impelled to distinguish them clearly and to assign separate rewards for each.
2.5 Entrepreneurship and uncertainty
It was Knight (1921) who effectively proposed to deconstruct the Marshallian business manager and highlight the entrepreneurial element.17 Starting from the proposition that no profit existed in a Walrasian perfectly competitive equilibrium, it followed that pure profits were related to the existence of disequilibrium.
Disequilibrium must imply unexpected change. Fully anticipated change is quite compatible with sophisticated versions of the Walrasian system in which economic agents trade in futures contracts. Similarly, in a world of complete markets and where probabilities could be assigned to potential outcomes, even risk-bearing could be ‘optimized’ by trading-in state contingent claims. In such a world it was not clear that ‘risk bearing’ and profit were related. ‘Market’ prices would ensure that bearers of risk would be compensated and that risk was distributed optimally (p. 45) across the population. For Knight, profit was related not to risk bearing but to uncertainty bearing. An uncertain situation was one in which probabilities could not be assigned to outcomes so that decision-making was impossible to model in terms of neoclassical optimization. ‘It will appear that a measurable uncertainty, or “risk” proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all’.18
A world of true uncertainty gave rise to the possibility of pure profits and losses (residual income as distinct from contractual income)19 and a distinct role for the entrepreneur. ‘With uncertainty present doing things, the actual execution of activity becomes in a real sense a secondary part of life; the primary problem or function is deciding what to do and how to do it’.20 This view of entrepreneurship is thus a comprehensive twentieth-century elaboration and refinement of the French tradition. What is required from the entrepreneur is judgement in the face of uncertainty. The entrepreneur, having made a judgemental decision, must be able to implement the decision, which will usually involve hiring other inputs. In this way, Knight's analysis of pure profit leads to a view of the firm with the entrepreneur as the central contractual agent and the residual claimant. In so far as the entrepreneur needs to manage resources in order to implement a plan of action, and in so far as these management activities are ‘routine’, part of his or her income will be a wage. The rest will be pure profit—a return to good judgement and pure luck.
Schumpeter's objection to the idea that the entrepreneur undertakes ‘risk bearing’ has already been discussed and would presumably apply to Knight's uncertainty-based theory. Knight specifically discusses these problems when he remarks that ‘it is impossible for entrepreneurship to be completely specialized or exist in a pure form’ except by imagining a ‘rare and improbable case’21 in which the entrepreneur provides no capital and undertakes no managerial responsibility. Nevertheless, Knight argues that ‘judgement of men’ is much more pertinent to successful entrepreneurship than ‘judgement of things’. Once we admit the possibility that one person might ‘have knowledge, or opinions on which they are willing to act, of other men's capacities for the entrepreneur function’ then we can envisage a financier being willing to commit resources to a Knightian ‘entrepreneur’. Presumably this is what the modern venture capitalist is effectively doing when financing start-ups or management buy-outs, an activity that represents a clearer apparent separation of entrepreneur from capitalist than was common in (p. 46) the classical era.22 Similarly, the distinction between manager and entrepreneur can be equally problematic in practice even though the theoretical distinction is clear. An entrepreneur has to exercise ‘control’ in order to put a judgement about resource allocation into effect. This will tend to result in some ‘management’ activity unless we can imagine a ‘pure’ case in which the entrepreneur contracts with managers who can be trusted to follow through on his or her judgemental decisions.
2.6 Entrepreneurship and innovation
Schumpeter's most celebrated contribution to the theory of the entrepreneur did not concern his criticism of J. S. Mill, already discussed, concerning risk bearing. This was ultimately a sub-dispute to his main thesis. His main point is that whether they saw the entrepreneur as a capitalist, a skilled manager or as a risk bearer, the classical economists had overlooked the most important role. The introduction of new products and processes requires organizational skills quite separate from simple management and it is this dynamic task of exploration and innovation that is the distinctly entrepreneurial one. Schumpeter (1912) is particularly associated with this idea of the entrepreneur as a revolutionary innovator.
In a period soon after the ‘men of business’ in the UK and the ‘robber barons’ in the US, Schumpeter emphasized the role in economic development of people with the vision and willpower ‘to found a private kingdom’. The role of the entrepreneur ‘is to reform or revolutionize the pattern of production by exploiting an invention or, more generally, an untried technological possibility …’ (Schumpeter 1942: 132). He coined the now famous metaphor ‘gale of creative destruction’ to describe the competitive processes of capitalist development. This unceasing gale derives from the energy of entrepreneurs who, through their innovations, undermine the market position of their rivals. Such competitive threats do not simply strike ‘at the margins of the profits and the outputs of existing firms but at their foundations and their very lives’ (p. 84). Entrepreneurship, for Schumpeter, is the force that prevents the economic system running down and continually resists the approach of the classical stationary state.
Two features of Schumpeter's work on the entrepreneur are particularly distinctive. The first is his view of innovation as revolutionary and discontinuous rather (p. 47) than small-scale, marginal, gradual and cumulative. The second is his (later) view that, as capitalism develops and matures, large firms become the powerhouses of innovation and usurp the entrepreneurial role that was originally so associated with extraordinary and energetic individuals. ‘Economic progress tends to become depersonalized and automatized’ (Schumpeter 1942: 133) while teams of technicians and specialists eventually receive ‘wages such as are paid for current administrative work’ (p. 134). The second of these propositions, somewhat paradoxically, is similar to Mill's mid-nineteenth century classical formulation mentioned above, with an additional emphasis on large firms. Both propositions have been subject to re-examination and criticism. Bhidé (2000), for example, uses the history of the microcomputer revolution at the end of the twentieth century to investigate Schumpeter's propositions and concludes that firms of varying sizes play a role in innovation as do large research departments and small-scale enthusiasts. ‘Individual entrepreneurs and large companies play complementary roles and (this) helps explain why new combinations evolve in a gradual rather than a discontinuous way’ (p. 337).
2.7 Entrepreneurship and economic efficiency
Schumpeter's conception of the entrepreneur focuses attention on the process of technological innovation. A complementary approach concerns the process of uncovering and exploiting all the economic possibilities latent in an existing state of technology—the process of diffusion. Here the emphasis is on the discovery of potential gains to trade and hence, by implication, the move from less to more efficient allocations of resources. Casson (1982: 23) for example, presents a theory which is built on Knightian foundations. ‘An entrepreneur is someone who specializes in taking judgemental decisions about the coordination of scarce resources’. Over time, opportunities for pure profit are continually occurring and the Walrasian conditions for ‘competitive equilibrium’ are never achieved. The entrepreneur fulfils the function of an intermediary or ‘market-maker’ exploiting divergences in the marginal valuations of goods on the part of consumers or marginal opportunity costs on the part of producers to achieve a pure profit. Wherever ‘market failure’ exists—that is, wherever some re-allocation of resources might conceptually harm no one and benefit at least one person—a profit might be achieved by effecting the re-allocation. Pure profit derives from the ‘gains to trade’ spotted, or better (p. 48) ‘conjectured’, by the entrepreneur and is captured by what is essentially a process of arbitrage which, assuming the entrepreneur's judgement is correct, yields a positive residual.
This rather abstract formulation of entrepreneurial activity encompasses simple trading activity, the establishment and growth of firms, the design of suitable incentive contracts, as well as the development of entirely new institutional arrangements. Where perfect Walrasian conditions are contravened and markets do not exist, or property rights in goods and resources are ill defined, entrepreneurial gains will be available to those who can think of ways of overcoming the resulting inefficiencies. Firms subject to external costs or benefits might merge their activities so as to ‘internalize’ these spillovers. Monopoly restrictions might open possibilities for new entry. Valuable information that cannot be traded in markets because of its ‘public good’ characteristics might be generated and protected within a firm and used by entrepreneurs to expand the scope of their own activities. Market failure thus implies the possibility of future gain and becomes a generator of entrepreneurial opportunities.
The idea of the entrepreneur as an intermediator, ‘market-maker’ and hence coordinator of transactions, has resulted in the development of various sub-branches of the literature during the last 30 years. One strand is represented by the neo-Austrian School and the work of Israel Kirzner. A distinctive feature of Kirzner's approach is his emphasis on alertness to currently unexploited opportunities for trade. Pure profit is not a return for bearing uncertainty as much as a reward for pure alertness. The gains from trade have to be noticed before they can be achieved. By spotting potential gains to trade and then arranging the transactions that will capture them, the entrepreneur is the instigator of changes that are efficiency-enhancing. Further, these changes move the economy towards equilibrium. ‘The movement from disequilibrium to equilibrium is nothing but the entrepreneurial-competitive process …’ (1973: 218).23
It is worth contrasting this view of the entrepreneurial process with that of Schumpeter. For the classical economists, entrepreneurial activities were associated with innovation and thus constituted a force acting against the ‘gravitational’ attraction of the stationary state. Schumpeter's entrepreneur is clearly of this type—innovative, disruptive and resisting equilibrium. The neoclassical economists had a different problem. No longer in thrall to Malthusian dynamics and the labour theory of value the neoclassical theorists had a sophisticated account of the state of competitive equilibrium but not of the process by which it was approached. Walras introduced a hypothetical ‘auctioneer’ into his system to adjust prices up or down in response to excess demands or supplies, but although this provided a reasonable theoretical ‘model’ of a dynamic adjustment process the auctioneer was (p. 49) still a ‘deus ex machina’. To explain equilibrating change without recourse to a fictional outside auctioneer required the introduction of some agent of change within the system. Kirzner's entrepreneur provides this dynamic element and it is generally, though not exclusively, the ‘Austrian’ tradition that has emphasized its importance.
The ‘neo-Austrian’ view of entrepreneurship, because it derives from a recognition that resource allocation is an information problem and not simply a calculation problem, tends to see it as an activity capable of being pursued by virtually any economic agent. Entrepreneurs are not necessarily specialists and they do not necessarily operate on a very large scale. They may make use of very local knowledge—‘knowledge of people, of local conditions and of special circumstances’24—and some of this knowledge may be ‘tacit knowledge’,25 difficult or impossible to communicate to others verbally or in the form of written documents and blueprints. Entrepreneurship moves the system from the bottom up, so to speak, rather than the top down and it does so through the trading activities of market makers. In this, the neo-Austrians are in the tradition of Alfred Marshall whose theory of economic progress is ‘an incremental, experimental, evolutionary theory’.26 It should be apparent, however, that the subjectivism of the neo-Austrian economists is capable of undermining the whole concept of ‘equilibrium’. In the absence of any objective set of constraints waiting to be discovered through entrepreneurial alertness, Austrian thinking could lead to a view of economic change that was all process and no particular destination. Once entrepreneurs were conceived to be creative, the economic system, not unlike the natural world, was liable to large Schumpeterian shocks and not merely long periods of incremental adaptation to given underlying conditions.27
2.8 Entrepreneurship and the theory of the firm
Almost all approaches to the entrepreneur have one thing in common. The entrepreneur contracts with a set of other people and, after all contractual commitments have been honoured, claims the residual. Cantillon, Von Thünen, Schumpeter, Knight, Kirzner and Casson, in spite of very great differences of (p. 50) emphasis, could at least agree to this basic conception. It is a conception that inevitably places the entrepreneur at the heart of the modern theory of the firm first proposed by Coase (1937). This theory was originally developed without explicit reference to entrepreneurship although Coase was tutored by Arnold Plant at the London School of Economics in the 1930s and there was undoubtedly an LSE tradition in business organization which was well aware of its importance. The tradition can be seen running through to Edwards and Townsend (1967) and in the writings of Jack Wiseman and Basil Yamey.
The problem faced by Coase was the apparent inability of neoclassical economics to explain the structure of firms or indeed their very existence. Then, as now in elementary treatments of the subject, the firm was defined as a technological relationship between inputs and outputs and the details of its internal organization were simply omitted as unnecessary for the purposes of price theory. Any attempt to explain organizational structure thus required adjustments to the Walrasian framework and Coase's contribution was to introduce transactions cost as the key ingredient. For Austrian theorists, the problem with the Walrasian system was its implicit assumption of full information. For Coase, the problem was its assumption of a zero cost of transacting. The two ideas are obviously closely related since transactions cost derives from incomplete information, but Coase's formulation was more suited to the comparative analysis of contractual arrangements and could be approached using standard techniques of rational maximization.
Coase rationalized the firm as the centre of a set of ‘internal’ employment contracts which substituted for ‘outside’ market contracts. Other things constant, resources would be administered within the firm when the costs of doing so were lower than the costs of contracting outside. The boundary of the firm was defined in typical neoclassical style such that the transactions cost of the marginal contract was the same in ‘the firm’ and in ‘the market’. If transactions costs are treated as objective and are known to all transactors, the theory can be developed without reference to entrepreneurship. Alchian and Demsetz (1972) for example, present a model in which ‘team production’ and the impossibility of measuring and rewarding individual contributions to output lead to the requirement for a ‘monitor’ to detect and punish ‘shirking’. This person is a residual claimant in order to provide the incentive to monitor the team which, on the assumption that the monitoring technology is well known, is a purely routine managerial task. The residual will turn out, in equilibrium, to provide a competitive market return to monitoring. Thus firms exist even in a purely neoclassical world once information is no longer perfect and has to be ‘produced’ but, as would be expected, it is the manager who is the central contractual agent.
If, on the other hand, transactions costs are subjective, conjectural and uncertain the firm as the coordinator of a set of contracts can be seen as an organization inherently associated with the entrepreneurial process. Knight's view of the entrepreneur, the neo-Austrian approach to the entrepreneur and Coase's conception (p. 51) of the firm can therefore be regarded as complementary28 and the tradition has been developed further in recent years by Casson (2001). The theory of the firm is re-orientated around the analysis of information flows rather than flows of physical inputs and outputs. Casson criticizes neoclassical thinking that tends to ignore ‘cultural’ factors and is built not simply on methodological individualism but on a particularly desiccated and socially unconnected type of individualism.29 Some features of the firm can no doubt be explained as a response to predicted opportunism on the part of contractors but entrepreneurs are in the business of reducing transactions costs and improving the quality of information flows by building trust through continuing associations as well as by the power of leadership. Casson prefers a ‘theory of the firm centred on the entrepreneur as the founder and prime mover within it.’30
The firm is also a significant element in discussions of the finance of the entrepreneur. Knight, as we have seen, thought that pure entrepreneurship could be envisaged only in ‘rare and improbable cases’. The entrepreneur will almost always have to provide some capital and labour (managerial) services in addition to pure entrepreneurship. Modern theory, however, has explained several observed financial arrangements as methods of mitigating contractual hazards and directing resources to otherwise ‘unqualified’ entrepreneurs. One example is the existence of debt contracts with agreed repayment schedules and finance secured upon slowly depreciating and non firm-specific capital. Equity sharing arrangements with venture capitalists can also enable entrepreneurs with very limited access to personal wealth to finance their ideas. These methods can be viable even when contractual performance is completely ‘unverifiable’.31 However, they apply to ‘start-ups’ and the finance of entrepreneurs without a track record or an established reputation. A further theoretical development makes the long-established corporation itself a mechanism for channelling resources to pure entrepreneurs.
Kirzner (1979: 105) argues that modern corporations represent ‘an ingenious, unplanned device that eases the access of entrepreneurial talent to sources of large-scale financing.’ The argument is most fully explored by Wu (1989). Wu sees economic development since mediaeval times as leading to the gradual emergence of specialized markets in land, labour and capital. Apparently insuperable contractual hazards prevented a market in entrepreneurship from developing. The non-contractibility of entrepreneurial services leads the entrepreneurs to ‘take the (p. 52) initiative to organize production through non market means, that is, by organizing a firm’ (p. 232). Although for centuries entrepreneurship was associated with the provision of capital, the modern corporation permits the final stage of specialization to occur. ‘The long historical evolution towards functional specialisation among factors of production had reached its destination’ (p. 224). The word evolution is important here, for it is the evolution of reputation that provides some assurance to capitalists that a return will be provided on their capital. The firm is ‘a coalition of entrepreneurs’ who share ‘pure entrepreneurial profit’ between them while paying a market return to the providers of capital. Loss of confidence in the willingness of the entrepreneurs to pay such a return would deprive them of future access to capital and the entrepreneurial profit that might be generated with it. This view of the modern corporation is certainly consistent with business ideas about ‘intrapreneurship’,32 ‘corporate venturing’ and ‘corporate entrepreneurship’.
2.9 Entrepreneurship and economic development
As Baumol (1968) argued, the omission of the entrepreneur from neoclassical analysis was inevitable given the central place accorded to models of constrained optimization. Even early neoclassical models of economic growth33 relied upon exogenously given rates of technical change and rates of population growth rather than any discussion of the sources of entrepreneurial initiative. Attempts to make the rate of technical progress endogenous linked it automatically to the rate of capital accumulation or required the introduction of theoretical innovations such as ‘invention possibility frontiers’ to act as a constraint on entrepreneurial ‘choice’.34 The ‘supply of entrepreneurship’ did not seem amenable to neoclassical treatment and Schumpeter (1954: 897) explicitly warns against drawing ‘supply curves for entrepreneurial services even if we believe in supply curves for any other kind of work’.35
One line of enquiry, however, has proved much more amenable to neoclassical treatment. Baumol (1968: 70) suggested that the question of what can be done to encourage the entrepreneur's activity can be approached by examining ‘the determinants of the payoff to his activity’. This is a theme to which he returned more than twenty years later. Baumol (1990) treats the overall supply of entrepreneurial talent as given but argues that its allocation to innovation on the one hand or depredation, crime or ‘rent-seeking’ on the other is a matter of choice. Clearly, societies that manage to encourage entrepreneurial talent to undertake ‘productive activities’ are likely to develop faster than those societies that give relatively high rewards to ‘unproductive’ or purely redistributive activities. Historical instances such as the dynamism of the ‘High Middle Ages’ in Europe and the relative failure of mediaeval China are, argues Baumol, consistent with this thesis.
The theory of rent-seeking was developed initially to explain why the social losses associated with tariff restrictions, quotas, monopoly privileges, taxes and regulations often seemed to be much larger than the simple ‘static’ efficiency estimates suggested.36 One straightforward answer was that these interventions were usually beneficial to some partial private interests and permitted monopoly returns (rents) to be made. It therefore made sense for private interests to invest real resources in trying to create these rents—lobbying governments to impose differential costs on their rivals and to erect barriers to entry. These ‘rent-seeking’ activities were socially wasteful and re-distributive rather than efficiency-enhancing. They represented a form of social loss in addition to, and quite distinct from, the resulting static inefficiency in the allocation of resources. Clearly talents suited to entrepreneurship are likely to be equally well adapted to exploiting potential private gains to rent-seeking.
This approach to entrepreneurship directs attention to political and legal factors such as the security of property rights, the burden and administration of the tax system, the enforcement of contracts, the development of company law, the impact of bankruptcy provisions and so forth. De Soto (1987), for example, argued that workers in the ‘extra-legal’ sector in Peru were not passive proletarians ripe for revolution but actually represented talented entrepreneurs trying to overcome the institutional barriers that confronted them. This change of view has had a profound impact on development economics. It has led to empirical work such as De Soto (2000) in which poor or non-existent title to property and other legal restrictions are highlighted as inhibitions to entrepreneurship. Conversely, Olson (1982) made growing returns to rent-seeking an important component of his explanation for the gradual ossification of previously dynamic societies. Rent seeking has also played a part in more formal models of economic growth. Murphy et al. (1991) develop a model in which talent is allocated across various sectors (p. 54) including a ‘rent-seeking’ sector. The overall rate of growth of each productive sector depends upon the talent of the best entrepreneur present in the sector because it is his of her ideas that are imitated in future periods. The incentive to enter a sector depends upon the private rate of return available, with high ability individuals able to earn larger returns than lower ability individuals. Where rent-seeking is highly rewarding to the most talented, society loses both by sacrificing immediate output and by experiencing a lower rate of growth because the productive sector is made up of the less talented entrepreneurs. To encourage entrepreneurs to reject rent-seeking it is thus necessary to investigate the determinants of the relative rewards accruing to the two activities.
2.10 Concluding comments
The central importance of entrepreneurship to economic development and competitive processes is not something that has been discovered just recently. The systematic incorporation of the entrepreneur into economic theory, however, posed enormous methodological difficulties. Economics, whether classical or neoclassical, was primarily concerned with the analysis of long run ‘natural’ or ‘equilibrium’ states and this focus tended to divert attention from entrepreneurial activity. Treating entrepreneurship as another ‘factor of production’ made it difficult to distinguish it from a species of ‘management’. Treating entrepreneurship as something qualitatively different from other ‘inputs’ tended to subvert the calculating rationalism underlying economics and opened up doctrinal disputes that had no solution. Some neoclassical economists such as Alfred Marshall tried to chart a middle way unacceptable to purists on both sides by introducing elements of entrepreneurship informally into their work as a descriptive and interpretative commentary to the theory.
By the mid-twentieth century the divide between the so-called ‘Austrian’ and neoclassical theorists had become particularly pronounced and inextricably bound up with the dispute over the relative merits of central planning and competitive markets. For the ‘Austrians’, neoclassical theory in itself had nothing much to say on this fundamental organizational question and could be used to buttress the claims of either side. This was because it ignored the information problem and implicitly assumed that planners were a perfect substitute for entrepreneurs. For the neoclassical economists the Austrians seemed guilty of lack of scientific rigour and even pure ideological bias.
During the later years of the twentieth century, however, these divisions narrowed. Simple observation of the performance of centrally planned systems compared with market economies redirected attention away from the problem of planning flows of physical inputs and outputs to encouraging institutions for generating, transmitting and using information. Whether explicitly recognized or not, this refocusing of attention was about establishing the preconditions for entrepreneurial activity. The ‘New Institutional Economics’37 with its interest in the evolution of rules to govern social inter-action, the development of property rights and the importance of transactions costs is quite consistent with methodological individualism and much neoclassical theory. But it is more open to an investigation of the factors that might encourage or discourage entrepreneurial activities.38 Further, because many social institutions that neoclassical economics took as ‘exogenous’ could instead be seen as ‘endogenous’ and ‘unplanned’ outcomes of ‘repeated co-ordination games’ the door opened to a much more explicit evolutionary view of economic change.39 The simultaneous advances of evolutionary theory in other scientific areas such as animal behaviour perhaps played a part in encouraging its greater acceptance in economics.40
In microeconomics, for example, Nelson and Winter (1982) proposed an evolutionary model of the firm. The firm is seen as operating according to an established set of ‘routines’ and in addition it ‘searches’ for new ones. Search ‘is the counterpart of that of mutation in biological evolutionary theory’ (p. 18). Successful routines lead to growth and imitation by others. The entrepreneurial function is here associated with search and ‘mutation’. Competitive advantage is not conferred merely by access to special information but also by the ability through the firm's ‘routines’ to generate a flow of such information. Clearly, entrepreneurial ‘mutation’ and economic selection through competition are not quite the same as random mutation and natural selection. Nelson and Winters' searchers are not acting randomly and blindly but actively looking ahead at future possibilities. Nevertheless, the system is evolutionary rather than deterministic.
Entrepreneurship is thus gradually finding a somewhat more formal place in economic theory. This does not imply that the methodological disputes discussed earlier have been resolved. Nor does it mean that a general theory of entrepreneurship has become accepted. It does, however, reflect the central importance of the economics of information in the research efforts of the late twentieth and early twenty-first centuries.
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(1) The Chambers Dictionary (1993). Curiously, this dictionary definition singles out ‘an organizer of musical or other entertainments’ for special mention, presumably on the grounds that the entertainment business is particularly individualistic, risky and demanding of novelty.
(2) Gray (1957: 46) sums up as follows: ‘No one, under any circumstances, should take advantage of his neighbour. This is the sum and substance of mediaeval economic teaching.’ More modern scholarship credits mediaeval economic thought with greater insight than Gray's statement would seem to imply. The relationship between the idea of the ‘just price’ and a ‘competitive market price’ has long been debated while certain schools of thought—especially the School of Salamanca—developed sophisticated accounts of trade and prices Grice-Hutchinson (1977).
(3) For example Landes (1999). In all these societies, however, transaction rights were undeveloped and restricted by modern standards. The ability to interact with new entrants and come to novel agreements was circumscribed by established interests that feared competition and private loss. Witt (1987) argues that only innovations that threatened very few losers would find a footing in such societies. Restricted transaction rights might not, however, result in continual pressure towards liberalization. In a context where ‘the true potential for individual improvement by innovative competition … remains unknown, there is no incentive to challenge the restrictions.’ (p. 188). On the other hand a sufficient ‘critical mass’ of innovative behaviour would tend to lead all agents to become more entrepreneurial and innovative, partly because they are more aware of the potential gains and partly as a defensive response to feared losses. The problematic transition from one mutually re-enforcing state to the other is discussed in Witt (1986).
(4) Centralized state control was far more destructive of entrepreneurial endeavour in China than it appears to have been in the context of Europe. European princes were locked into a competitive struggle with other emerging states. This resulted in military conflict but also in commercial, industrial and later scientific and cultural competition. China, having suffered grievously from the Mongol invasions, created a centralized monopoly of power that stifled new ideas and rendered her ill-equipped to meet the eventual challenge of the west. Landes (1999: ch. 4) discusses some of the reasons why even Mediaeval Europe was able to introduce and make use of technical developments long known to, but undeveloped in, China. Pomeranz (2002) argues, however, that the economic performance of China was much better than is usually assumed until more recent times. The ‘great divergence’ did not occur until the late eighteenth century and thereafter.
(5) Defoe, The Complete Tradesman and Voltaire, Lettres Philosophiques, ‘Sur le Commerce’, quoted in Mantoux (1964: 134–5).
(8) Rothbard (1995) is particularly critical of the English ‘classical’ school seeing it as a diversion away from a path running from the School of Salamanca through the French enlightenment tradition of Cantillon (1755), Say (1803) to the Austrian School and the development of subjectivism and marginal analysis.
(11) For Marx these ‘wonders’ of nineteenth century industrial development were, of course, compatible with the impoverishment and exploitation of the working class—a view held tenaciously by generations of socialist thinkers until shown to be unsustainable by more recent historical scholarship on the ‘standard of living controversy’. For a survey see Hartwell (1972).
(13) It is in a footnote at this point in the ‘Principles’ that Mill mentions his ‘regrets’ concerning the lack of an English equivalent to the French word ‘entrepreneur’.
(15) Emphasis in original.
(19) ‘The produce of society is similarly divided into two kinds of income, and two only, contractual income, which is essentially a rent, as economic theory has described incomes, and residual income or profit. Knight (1921: 271).
(22) It will still, in practice, be true that the venture capitalist will be bearing Knightian uncertainty and will also therefore be an entrepreneur. Complete separation of function remains ‘rare and improbable’ in Knight's framework.
(28) For further discussion see Holcombe and Boudreaux (1989) and Foss (1996). Foss (1993) contrasts the contractual (Coasian) perspective with the competence (evolutionary) perspective. As mentioned in the text, Coase's original approach is neoclassical and Foss argues that ‘the firm as a repository of tacit knowledge is neglected in the contractual perspectives, it occupies center stage in the competence perspective’.
(39) A classic early example is Carl Menger's account of the evolution of money. See Menger (1871). Sugden (1986) looks more generally at the evolution of social conventions including property rights.