Some Classic Views on Entrepreneurship – Van Praag
Started to develop in the 18th century.
Historically:
- Not held in high esteem
- Not regarded as enhancing societies well-being.
Today:
- Importance of entrepreneur’s role in society
- Entrepreneurs are held responsible for economic development, by introducing and implementing
innovative ideas.
- The successful implementation, initiated by entrepreneurs, of these new ideas gives rise to the
satisfaction of new consumer wants and to the creation of firms => economic growth and supply
for jobs => stimulating product and labor market.
An Early thought on entrepreneurship
Richard Cantillon (17th century):
- 3 Types of agents in economic system:
o Land-owners (capitalists)
o Entrepreneurs (arbitragers)
o Hirelings (wage workers)
- The entrepreneur has a central role in the system because ‘he is responsible for all the exchange
and circulation in the economy’. The class of entrepreneurs brings about an equilibrium of supply
and demand. The entrepreneurial class accomplishes its task by engaging in pure arbitrage.
o Arbitrage: simultaneous buying and selling of securities (financial assets), currencies or
commodities in different markets or in derivative forms in order to take advantage f differing
prices for the same asset.
o The motivating factor: the potential profit generated from the activity of buying and selling.
This arbitrage always involves uncertainty.
- Cantillon’s entrepreneurs also engage in professional activities other than arbitrage (the farmer,
transporter, banker, or the seller in the marketplace for instance).
- Perception of market: ‘self-regulating network of reciprocal exchange arrangements’.
- Difference entrepreneurial task (with landowners and hirelings) compared to other agents is its
risk-taking nature.
- Entrepreneur’s task is basically comprised of arbitrage (buying at a certain price and selling at an
uncertain price): should be alert and forward-looking but he needs NOT to be innovative -> look
at supply and demand, adjusts quantity supplied but does not alter demand nor supply.
- Capital can be borrowed on the (assumed perfect) money market by paying the price of interest
to the banker, another entrepreneurial profession.
- Law of supply and demand determine the number of entrepreneurs in each occupation.
- First to give economic meaning to the concept of ‘entrepreneur’. Functionally described as an
arbitrager. By engaging in arbitrage and bearing risk, the entrepreneurial class has an
equilibrating function within the economic system. The prerequisite for the existence of an
entrepreneurial class is uncertainty.
,A Classical Thought on Entrepreneurship
Jean-Baptiste Say’s (18th century): the entrepreneur plays a central coordinating role both in
production and distribution. Within the firm, he is the coordinator and the modern leader, and
manager. First to stress the managerial role of the entrepreneur. Compared to other classical
economists, he gives a very prominent position to the entrepreneur in the entire system of
production and consumption. Extends the entrepreneurial function as defined by Cantillon.
- Treats entrepreneurship mainly as a superior kind of labor.
- Rejects zero-sum game in which the loss for an entity is the gain for another.
- Creation of utility => creation of wealth.
- 3 types of industry that can create value (utility):
o Agricultural industry
o Manufacturing industry
o Commercial industry
o The working of each of these ‘human’ industries consists of 3 distinct operation that are
seldom performed by one person: (a) theoretical knowledge construction, (b) the application
of knowledge, and (c) execution. B, the application of knowledge to the creation of a product
for human consumption is the entrepreneur’s occupation => sets industries in motion and
attains prosperity within a country.
- The entrepreneur function within the distribution sector is to gather the revenues from the
products sold and to distribute these amongst the production inputs: labor, capital, and land.
- Also supply his own capital. He is a risk bearer as well: chance of failure of entrepreneur activity.
- Entrepreneur has key position within own enterprise:
o Coordinator, modern leader and manager
o Should also perform tasks specific to trade
o Supply (usually) own capital
o Risk bearer
- Should have certain qualities: requires a combination of moral qualities, that are not often found
together. Judgment, perseverance, and a knowledge of the world as well as of business … the art
of superintendence and administration. Also have experience within, and knowledge of, the
occupation and be in position to provide the necessary funds => therefore limited number of
competitors in the market for entrepreneurs => and high prices of successful entrepreneurial
labor.
- In summary, the entrepreneur plays a pivotal role in Say’s theory of production, distribution, and
consumption. He is coordinator both on the market level as well as on the firm level. He is the
modern leader and manager within his firm. The successful entrepreneur needs a rare
combination of qualities and experiences. Consequently, the residual income of the firm when the
market is in equilibrium or entrepreneurial wage can become very high (limited supply).
A Neo-classical thought on entrepreneurship
Alfred Marshall (1842-1924), F.Y. Edgeworth (1845-1926), A.C. Pigou (1877-1959).
- Payed attention to entrepreneurship but models did not contribute to the theory of
entrepreneurship (too much focus on micro and research methods).
- Usual interpretation of the neo-classical model: All individual agents have perfect information
and have their economic objectives clearly stated.
o Firms choose profit maximization given product function.
o Attention on equilibrium results, achieved in a world without uncertainty.
,- The neo-classical model, with its production function, the logic of rational choice and perfect
information; leaves no room for an active entrepreneur. The firm runs itself. The entrepreneur has
vanished => no room for enterprise or initiative. No potential for profit or loss unless there is a
major external event that affects the economy, but will soon regain a state of equilibrium.
- The modern neo-classicists did not care to include entrepreneurs. Earlier neo-classically theories
do.
Marshall’s point of view
In a Marshallian society, the entrepreneur’s task is the supply of commodities and at the same time
as a by-product the provision of innovations and progress. => force that change the equilibrium.
- Highlights importance of innovation!
- Businesses that benefit the society most are not necessarily the firms which will survive within
the competitive Marshallian environment => that’s about private benefits.
- Within the firm, the entrepreneur bears all the responsibility and exercises all control. He directs
production, undertakes business risks, coordinates capital and labor, and he is both the manager
and employer.
- The alert entrepreneur continuously seeks opportunities (i.e. innovations to minimize costs for a
given result) => cost minimizers, reason for progress. Therefore, successful entrepreneurship
obviously requires some skills and capacities.
o General ability (opposite from specialized) and intelligence => depends on family background,
education, and innate ability. Act promptly, accommodate to changes, be steady and
trustworthy, be able to bear in mind many things at a time.
o Specialized ability => knowledge of trade, power of forecasting, seeing opportunity,
undertaking risk.
o Perform role as employer => natural leader of men.
- => ALSO required good fortune as well as business opportunities.
- Working with own capital is better than borrowing (as lenders will draw back loan if there is a
drawback).
- Kids of entrepreneurs have greater chances due to role model and because he closely
experiences from his youth on the proceedings of a real business.
- The number of successful entrepreneurs is but a small percentage of the whole.
- Returns to entrepreneurship differ from those in other branches of labor.
o Individual profits higher variance than ordinary earnings.
o Entrepreneurs earn a rent on the rare abilities required for their tasks.
o Difficulty and strain of the work and the variance of earnings will usually have a negative
effect on the decision, ‘though a few extremely high prices have a disproportionately great
attractive force’ (e.g. risk lovers are more attracted by the prospect of a great success than
they are deterred by the fear of failure). High esteem => major attraction.
- Entrepreneurial supply is constrained by the abilities required for it. Therefore the price is high.
Price and entry is dependent on supply and demand.
- The Marshallian market economy center on the class of entrepreneurs. Entrepreneurs drive the
production and distribution process, they coordinate supply and demand on the market, and
capital and labor within the firm. They undertake all the risks that are associated with
production. They lead and manage their firms. They are cost minimizers and are therefore also
innovators and the reason for progress. The abilities required are many and combinations of
them are scarce. Consequently, the supply price for entrepreneurship will generally be high.
, Entrepreneurship and Schumpeter
Joseph Schumpeter (1883-1950):
- His theory the first to treat innovation as an endogenous process in a dynamic economic system.
- The turned down the predominant paradigm of entrepreneurship as management of the firm
and replaced it with an alternative one: the entrepreneur as leader of the firm in modern business
management language and as the innovator and therefore, prime mover of the economic system.
o Integrated the dynamics of technology and business enterprise by defining entrepreneurship
as innovator and leader.
o Opposed the idea of entrepreneur as risk-bearer, manager and capitalist.
- World without entrepreneur (circular flow): static, repetition, without uncertainty and change,
decisions can be taken unconsciously.
- World with entrepreneur: seeks opportunity for profit, introduces innovations/new combinations
to reach goals => ongoing innovation = ongoing change and permanent disequilibrium into a
higher equilibrium. Prime endogenous cause of change (development) in the economic system.
- Circle, keep innovating, innovations create innovations.
- Innovation & growth, responsible for economic growth.
o If not interested in growth and innovation: self-employed.
- Entrepreneur is not necessarily the director and independent owner of a business. Entrepreneur
is a person who carries out new combinations in whatever position. Task is to innovate and lead.
o Rare attitude. I.e. deciding which objectives to pursue rather than deciding how. Not a risk-
bearer or a supplier of capital, these tasks are left to the banker.
o If no innovation, often failure.
- Rare attitude and particular conduct:
o Leadership is often required in order to ‘lead’ existing means of production into new channels.
o The entrepreneur should not feel reluctant to do something new.
o By doing something new and thereby showing deviating behavior => opposition arises in the
social environment. Entrepreneur should be strong enough to win against the tide of society.
o Special psychological motives. Entrepreneurs do not perform their task in the first place in
order to satisfy their own consumptions wants. The motivating factors are:
The dream and will to found a private kingdom in order to achieve social distinction.
The will to conquer, to fight, to prove oneself superior to others, to succeed for the sake of
success itself, not for the fruits of success.
The joy of creation, of getting things done, to change for the joy of changing.
- Entrepreneurial activity and the accruing profits are not lasting. Entrepreneurship is a temporary
condition for any person, unless he keeps on innovating.
- One need not to be rich, can be supported by credits.
o Anyhow, it is the banker who bears the financial risk pertaining to an innovation, not the
entrepreneur.
- Hence, being an entrepreneur is neither a profession, nor a lasting condition. Entrepreneurs do
not form a social class, though successful entrepreneurship may lead to certain class positions,
according to how the proceeds of the business are used => can keep up several generations by
inheritance of pecuniary results and entrepreneurial qualities. Therefore easier for descendants,
but you cannot inherit the entrepreneurial position itself. Depends mainly on the motivating
forces.
- Schumpeter’s entrepreneur is an innovator and leader. He is not a risk-bearer, nor a manager or
capitalist. The innovator is the engine of economic growth. He leads the economy away from its
