Resume Introduction to Entrepreneurship
Week 1: Chapter 2: The evolution of entrepreneurship theory
2.1 Introduction
Entrepreneurship is often considered to be relatively new, the historical roots can be linked back
to the early economic thinkers of the eighteenth century. This chapter explains the economic
roots, exploring some of the early thinking and the different ways in which entrepreneurship was
considered to be important. It then introduces theories from the middle of the twentieth century
that moved away from the function of entrepreneurship in the economy to consider more
psychological, sociological and behavioural issues. Finally the chapter explores contemporary
theories and thinking and maps out the different forms theory has taken. (See timeline Figure
2.1). Entrepreneurship has been defined in different ways. The common contemporary view is
that entrepreneurship is synonymous with ‘venture creation’ or ‘fast-growing companies’. It’s
important to understand the highlighted differences in history.
2.2 Learning objectives
Understand historical nature of the subject of entrepreneurship;
Appreciate the broad sweep of entrepreneurship thought when relating one theory to
another;
Gain awareness of the differences in entrepreneurship thought and how this impacts how
entrepreneurs are defined and understood.
2.3 Economic perspectives
Economic perspectives contribute significantly to the field of entrepreneurship. To understand
entrepreneurship, economists are usually interested in the function that entrepreneurship plays
in the economic system. The economic perspectives can be classified in several ways:
Chronologically (Hébert and Link, 1988; Binks and Vale, 1990)
In schools of thought (Chell, Haworth and Brearley, 1991)
By the function the economist has given to the entrepreneur within the economic system
(Barreto, 1989).
There are several different schools of thought highlighted in the book:
French classical school
Hoselitz (1960:237) suggests that the word entrepreneur (French word) originated during the
Middle Ages, when it was applied to ‘the man in charge of the great architectural works: castles
and fortifications, public buildings, abbeys and cathedrals.’ French economists were the early
thinkers. Cantillon is recognised as the first to use the term ‘entrepreneur’ in an economic
context. His Essai Sur la Nature du Commerce en Général was published in 1732. Cantillon
introduced an economic system based on three classes of actors:
‘Landowners (financially independent aristocracy)
Hirelings (financially dependent on others, earned fixed incomes)
Entrepreneurs (financially dependent on others, set up with a capital to conduct their
enterprise, or are undertakers of their own labour without capital, and they may be
regarded as living off uncertainty).
For Cantillon, individuals who purchased a good at a certain price, used that good to produce a
product and then sold the product at an uncertain price could be considered ‘entrepreneurs’.
Risk and uncertainty play central parts in his theory. Successful entrepreneurs made better
judgments about market changes and coped with risk and uncertainty better than their
counterparts. Other French economists considered and reconsidered Cantillons theory.
Quesnay took a step away from Cantillon’s ideas about uncertainty and risk by offering up the
first mathematical general equilibrium system in the Tableu Économique. Turgot made an
,additional distinction to Cantillon’s idea by identifying that the ownership of capital and the act of
entrepreneurship could be two separate functions of entrepreneurial endeavour. Finally, Say,
who became the first professor of economics in Europe, further enhanced and built on
Cantillon’s ideas in two books: A Catechism of Political Economy (1821) and A Treatise on
Political Economy (1802). Jean-Baptiste Say was a professor and businessperson, founding a
cotton-spinning mill in Auchy. Say made the entrepreneur the central point, around which his
views about the economic system turned (See figure 2.2). Say’s theory of production and
distribution was constructed on three major agents of production:
Human industry
Capital - both physical capital (machines) and money
Land - including other natural resources
Say recognised that land and capital both were indispensible to production. He argued that the
key to production was human industry. Say made a tripartite division of human industry into
‘effort, knowledge and the applications of the entrepreneur’. Say saw the entrepreneur as the
coordinator of the system. The profit was the reward for the risk undertaken. Judgment or the
ability to assess the needs of the market and understanding how these could met were needed
qualities.
British classical school
The british classical school did not start with a strong appreciation of entrepreneurship (unlike
the french), and is usually considered to include early Scottish, English and Welsh political
economists - for example, Adam Smith’s (1904) The Wealth of Nations and John Stuart Mill’s
(1909) Principles of Political Economy. The authors of the British classical school never used the
term ‘Entrepreneur’ or introduced an equivalent Anglo-Saxon version, reasons:
1. There was no direct parallel for the French word ‘entrepreneur’ (Say);
2. The laws in England and France were different. In France, there was a clear distinction
between the ownership of capital or land and the ownership of property and business. In
England a capitalist was not only a creditor receiving interest, but also an active partner,
sharing in gains and losses of a business.
3. The two groups used different conceptual apparatus. French political economy was more
interested in microeconomic connections; British political economy in macroeconomic
ones.
The failure of British economic thought to consider the role of the entrepreneur in the economy
was unfortunate and may ultimately have led to the neglect of the subject in modern-day
economics.
Microeconomics and the neoclassical school
This school of thought includes many economists who use neoclassical approaches to explain
how the production and consumption system operates. Notable theorists include Leon Walras,
Alfred Marshall, John Bates Clark, Maurice Dobb and Charles Tuttle. Like the british classical
school, this group has been criticised more for their neglect of the entrepreneurial function than
their contributions to understanding entrepreneurship. This neglect, though, is important to
understand because it helps to explain why entrepreneurship grew out of and effectively left the
economics discipline. Barreto (1989) writes about this in The Entrepreneur in Microeconomic
Theory Disappearance and explanation. He says there are several reasons for the decline of
entrepreneurs in mainstream economic thought:
1. The decline of the entrepreneurial concept coincided with the rise of the theory of the
firm.
2. The theory of the firm contained three fundamental assumptions (production function,
rational choice and perfect information) that prevented the introduction of the
entrepreneurial concept.
, 3. The desire for consistency in the theoretical structure of the theory of the firm rested in a
‘mechanistic’ philosophy of the social world that was anathema to the concept of ‘human
action’ implied in entrepreneurial activity.
Austrian and neo-Austrian school
Mainstream economists developed theories that tended to exclude entrepreneurship.
Economists who began to revive the concepts have been categorized under this school of
thought. The theorists in this category regard uncertainty and risk as important features of
economic systems that allow entrepreneurs the opportunity to make profit. In this respect, they
build on the French policital economists thinking. Much Austrian school’s thinking can be traced
back to von Mangoldt (1855), however Knight’s (1921) Risk, Uncertainty and Profit makes the
first substantive contributions to understanding entrepreneurship. Knight tried to explain the real
market system as it actually operates and this sets him apart from the neoclassical school of the
time (rather than portraying an ideal state of affairs). Knight says other forces can change the
conditions of the market.
Schumpeterian school
While the role of the entrepreneur in economic systems had been considered in economic
thoughts before the 1920s, many contemporary researchers trace the origins of modern thought
in entrepreneurship back to Joseph Schumpeter’s work (1934,1963). His theories have been
widely discussed. Schumpeter introduced a concept of entrepreneurship that is quite different
from the others discussed so far. His theory is focused on economic development and the role of
the entrepreneur in the development process. He argues, somewhat contrary to the established
thought of the time, that the important question in capitalism is not how it supports existing
structures and markets, but how it creates and destroys them. In contemporary thought, ‘
creative destruction’ is now seen as one of the crucial functions of entrepreneurial activity within
an economy. The function of entrepreneurs in this new theory is that of innovating or making
‘new combinations’ of production possible. The concept of ‘new combinations’ covers five
potential cases:
1. The introduction of a new good or a new quality of a good
2. The introduction of a new method of production
3. The opening of a new market
4. The development of a new source of supply or raw materials or half-manufactured goods
5. The carrying out of a new organisation of any industry.
In his theory, the new combinations he presents can happen in existing businesses, by their very
nature, they typically occur in new firms that begin producing beside older firms. The concept
includes new businesses that are innovative or forming new combinations of resources
(Facebook) and existing businesses that are doing new innovative things (Apple). Individuals
and businesses are only being entrepreneurial when they carry out the new combinations
described. Once their innovative role has been completed, they revert back to normal economic
activity. Individuals may need specials characteristics and skills. These aspects raise important
implications for individual psychology, cognition and behaviour.
2.4 Early psychological and sociological perspectives
With quite different theories, both Kirzner and Schumpeter end by pointing out the potential
differences that might occur in entrepreneurial capability. Schumpeter does not specify these
characteristics, while Kirzner focuses on cognitive skills. Both, however, identify a need for
theories to explore the individual aspects of entrepreneurial activity. Schumpeter also suggests
that the best way to understand entrepreneurial activity and behaviour is to place it in its context.
He highlights the role of historical analysis and provides the basis for taking an historical
approach to understanding entrepreneurship. As a consequence, from the beginning of the
, 1960s on, entrepreneurship theorising shifts away from economics to focus more on
psychological, social psychological and sociological explanations.
2.4.1 Personality theory (early 1960s)
Started with the work of McClelland (1955).
o Used the concept of ‘achievement motive’ to describe entrepreneurs behaviour.
Most early personality theory is described as single-trait, because theorists sought to identify a
single-trait and link it to a greater propensity to be a successful entrepreneur. Single-trait
theories encountered difficulty proving a predictive capability. Theorist by 1970s therefore begun
to move to multi-trait approaches that presented profiles of entrepreneurial characteristics to
predict a person’s entrepreneurial potential (standard personality tests). These studies used
varied samples and struggled to define the entrepreneur and entrepreneurial success in a
common way. The predictive value therefore remained elusive and contentious.
2.4.2 Psycho-sociological theory
Searching for the correct constellation of entrepreneurial traits.
Two different forms of displacement theory (Shapero 1975; Kets de Vries 1977) and
social marginality theory (Scase and Goffee, 1980).
Basic premise of these two approaches is that entrepreneurs are displaced people or socially
marginal people who have been supplanted from their familiar way of life and have somehow
been forced into an entrepreneurial way of life due to their circumstances. Displacement
includes political refugees, immigrants, ethnic minorities and other marginalised groups in
society. In Shapero’s (1975) approach, displacement came about through both positive and
negative forces, although the majority were perceived to derive from negative forces (external
and societal), which were beyond the power of the individual to influence. Kets de Vries (1977),
in contrast, used Freudian psychology and sought out a psychological explanation for why
entrepreneurs feel displaced. He viewed displacement psychological and sociological, with a
rebellion against existing norms and structures being one of a few reasons for psychological
displacement. He links back entrepreneurial behaviour to a person’s family life and their early
family relationships.
2.4.3 Sociological perspectives
Personality perspective dominated thought in entrepreneurship research during 1970s and early
1980s. Although, significant theories were developed at the time that came to play an important
role later. Two most notable: sociological work on organisations that applied a population
ecology perspective to the birth and death of firms (Aldrich, Aldrich and Zimmer, Carrol) and
Greiner’s paper that laid the foundations for research on the growth stages of entrepreneurial
businesses. Aldrich and Carrol explored how the sociological characteristics of particular
markets could help explain success and failure and, in the latter, Greiner put forward a theory to
explain how entrepreneurial firms might need to evolve and change as they develop and grow.
2.5 Contemporary thought
Theory and research on entrepreneurship exploded because:
1. Significant changes during 1970s and 1980s. Landscape changed from a few big
organisations to an economy based on smaller businesses.
2. Policy shift in government started to recognise, support and promote entrepreneurship.
3. Cultural attitudes towards enterprise and entrepreneurs changed.
These contextual changes point towards a general shift in society towards more acceptance of
entrepreneurship. Contemporary thinking expanded exponentially.
