The absence of the entrepreneur in economic theory

It was a choice either to come to France and to the meeting on J.-B. Say or go to Hong Kong and to the Mt Pelerin Society meeting. With some racing across France and then an all-night flight I might have made it for the last three days, one of which was an excursion to Macau, where I have already been. So here I went, not without some regrets, but this conference has been so exceptional and I will feed off the things I learned for a long time to come.

My own presentation was on the absence of the entrepreneur in the economics of the English speaking world, a problem few notice and about which there is generally little comment or even the slightest general recognition that it matters.

• the dominance over the past century of the economics of the English speaking countries

• the absence of discussion of the entrepreneur in the economic literature written in English

• the meaning of “entrepreneur” comes from the French entreprendre which means to undertake with the word for entrepreneur in English having literally been “undertaker” which has its other more common meaning as someone who buries people for a living – a morbid connection

• interestingly as a sidelight, the German word to undertake is unternehmen and therefore the German for entrepreneur is Unternehmer but in this case with none of the morbid connectivity of English

• John Stuart Mill in 1848 was discussing the need for an English equivalent of entrepreneur and lamented that no such term existed

• Schumpeter’s notion of an entrepreneur embeds innovation

• the Kirzner version of an entrepreneur is someone who exploits opportunities others have overlooked

• the meaning that is missing with such overtones is the plain notion of an entrepreneur as a factor of production that exists along with land, labour and capital – someone who runs a business and brings the other factors together in a productive profit making enterprise

• all such entrepreneurs are almost certainly creative in their own way, some more than others, but it is the notion of the organiser of a business that is needed

• economic theory has, however determined that it must follow physics in depending on external non-human forces, such as demand or utility with human decision making almost invisible

• the use of MC=MR as the profit-maximising position is paradigmatic in that no actual human decision making is visible other than to follow the dots to the highest possible profit

• although this is the essence of the theory of the firm, what is omitted is the possibility of novelty and innovation not to mention time

• an innovative entrepreneur is inconsistent with economics-as-physics since it opens up the possibility of discontinuity

• discontinuity via innovation makes mathematically-based economics a limited approach to understanding the dynamics of economic change since the future cannot be expected to be like the past.

The one point that was underscored for me at this conference is the importance of defining capitalism as an economic system in which economic decisions are made by entrepreneurs who are defined as a self-selected group who run businesses to earn their living. They are not chosen by governments or funded by governments but live or fail based on their own capabilities in providing buyers with the things they want. If you want to distinguish a true market-based economy from amongst the many fakes that now exist, just find out who owns their businesses and how such individuals ended up running such firms.

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32 Responses to The absence of the entrepreneur in economic theory

  1. Tel

    http://mises.org/document/5367/The-Capitalist-and-the-Entrepreneur-Essays-on-Organizations-and-Markets

    Unfortunately not an easily approachable book… but very clever author and he has been banging this topic for a few years now. Apparently banging away without much impact on Steve Kates, nor on “the economics of the English speaking world” but there you go. Looks like I’ve just got the job as Peter’s publicity agent, I hope he gets what he is paying for :-)

    Actually, I think the whole book needs re-writing. The theory is excellent, but very difficult to get a grip on, it just needs to be written in a way that more people can understand.

  2. Tel

    although this is the essence of the theory of the firm, what is omitted is the possibility of novelty and innovation not to mention time

    https://www.youtube.com/watch?v=aB9Ui34hjPQ

  3. Max

    the absence of discussion of the entrepreneur in the economic literature written in English

    Very important presentation thanks. Also note entrepreneurs look for “market failures”* to make their money. So temporary “market failures” in free entrepreneurial societies are not a bad thing at all.

    * e.g. from there is no dry cleaner in suburb X, or there is no Costco in Perth, or Gladys Berjekians is on a Jihad against Thai “Massage” parlours in her electorate…So these temporary market failures keep attracting new entrepreneurial efforts.

  4. .

    They do more than that.

    Being entrepreneurial is being creative. They create new products or services of value, or newer and better ways to produce them.

  5. manalive

    It looks like the US days of entrepreneurship are over.
    It seems to have lost its mojo just as Britain did towards the end of the 1800s.
    It’s remarkable that the population of Great Britain around the start of the Industrial Revolution was only about 10m (c.p. France ~ 30m) yet produced such a burst of true entrepreneurship (risk-taking innovation) that made it the leading world economy of the 19th c.
    It’s hard to see a true entrepreneurial spirit emerging in China, maybe India is the only hope amongst the emerging economies.

  6. Rabz

    Gladys Berjekians

    Get it right, man – it’s “Beryl Gladyschocklian”, FFS.

  7. Rabz

    the absence of the entrepreneur in the economics of the English speaking world, a problem few notice and about which there is generally little comment or even the slightest general recognition that it matters.

    In my formal economics studies at high school, and then university, entrepreneurs were blithely disregarded as an incidental, almost mythical creature, like unicorns.

    I’m still trying to unlearn most of the keynesian codswollop I was force fed over those years. This blog is helping with the process.

  8. Poor Old Rafe

    Nice work Tel, Peter Klein is my contact at the Uni of Missouri at Columbia and to honour his achievements and the meals that he provided at the Uni staff club he has been awarded the Critical Rationalist Scholar citation (see bottom of this list).

  9. Yohan

    Steve its great that you are doing work on the entrepreneur’s, as it’s an overlooked subject in modern economics.

    But I do feel it is a bit of a strawman to reduce the Austrian schools contribution to this subject (of which there are literally thousands of pages) to just Israel Kirzner’s ‘altertness’ definition of the entrepreneur. The Mises wing of the school does not agree with Kirzner, and their own definition is much more in line with what you are getting at.

    George Reisman, who is very steeped in classical economics like yourself, has a huge amount of stuff on the function of the entrepreneur in his massive book, Capitalism. But Reisman does not use that word, he uses the modern vernacular ‘businessman’. He means the same thing though.

  10. wreckage

    …. in short, “capitalism” is just a necessary extension and continuation of individual freedom. It’s not a science, it’s the only ethical way to organize an economy.

    That’s what the entrepeneur is. A free actor. Free to innovate or optimize or to move time money brains and effort into or out of a sector, region, or city. That’s it. That’s all that matters. The left and much of the right can’t handle that because it makes almost everything they cherish irrelevant.

  11. BilB

    You must live in a strange little corner of the world, SinclairD. No economist I have encountered is confused over the role of entrepreneurs. Quantifying entrepreneurialism is simply a matter of understanding it, and innovation is certainly no barrier to that aim unless the process of problem solving (innovation) is a mystery in the attempt.

    If one starts with the understanding that an economy is simply an engine structure that requires fuel to make it run, that has accelerators that speed it up and has retardants that slow it down, the whole process is fully understandable and quantifiable. The most important parts to appreciate are the fuel elements. These consists of what nature provides for free (finite), opportunities (perpetuual), human imagination and energy (variable). This applied with a hefty amount of insightful study and thoughtful integration will yield an economic powerfactor for any scale of performing community.

    It is important to note that the full algorithm quantifies all of the negative aspects of enterprise, along with the positives, and highlights the folly of those who seek freedom while ignoring the costs of that feedom.

  12. Aristogeiton

    BilB
    #1435143, posted on September 1, 2014 at 1:56 am
    You must live in a strange little corner of the world, SinclairD.

    It’s Steve Kates’ post, you bolshie dipshit.

  13. Aristogeiton

    If one starts with the understanding that an economy is simply an engine structure that requires fuel to make it run, that has accelerators that speed it up and has retardants that slow it down, the whole process is fully understandable and quantifiable.

    Why deny the world your unified theory of economics. Fuck off and complete your PhD and give us all a break. My theory is that this blog is an engine, and you’re one of the retardants.

  14. Aristogeiton

    .
    #1434846, posted on August 31, 2014 at 4:03 pm
    They do more than that.

    Being entrepreneurial is being creative. They create new products or services of value, or newer and better ways to produce them

    Is this Say’s Law? Have I learned something about economics?

  15. In education reform globally I hear constant rationalizing involving the words’ entrepreneur’ and ‘innovation.’ Following the phraseology to what is intended as I am prone to do inevitably turns up people willing to come up with new economic forms of cooperation not tied to traditions.

    Literally part of the reason for the Mind Arson I have been documenting goes to a lack of accurate knowledge means there’s no barrier to a willingness to take action on untried theories in the real world. It seems to be a dangerous by-product of believing economic resources ARE a fixed pie. Mind arson just mean others can get more in this misstaken vision of how they world can work.

    Someone please save us from a world intent on reconstruction from Normative Frameworks of what Should Be from people supported by the taxpayers or tax free foundations or both.

  16. Aristogeiton

    Robin
    #1435180, posted on September 1, 2014 at 5:02 am

    Your post is almost incomprehensible, but if I’m teading you right, you should read Hayek’s critique of ‘constructivism’.

  17. BilB

    Oops, yes indeed, Steve Kates item. Are they all travelling together? A cohort of confusion?

    Entrepreneurialism does not necessarily require creativity. Its primary requirement is the direction of capital to fill a (new) need (opportunity).

  18. Tel

    Its primary requirement is the direction of capital to fill a (new) need (opportunity).

    Creating something that wasn’t there before.

  19. Tel

    Is this Say’s Law? Have I learned something about economics?

    Now and then, on a very special day, Steve Kates talks about something other than Say’s Law.

  20. Aristogeiton

    BilB
    #1435231, posted on September 1, 2014 at 7:50 am
    Oops, yes indeed, Steve Kates item. Are they all travelling together? A cohort of confusion?

    It seems you’ve occupied the space where your apology should be with some other bullshit.

  21. Aristogeiton

    Tel
    #1435236, posted on September 1, 2014 at 8:09 am
    Is this Say’s Law? Have I learned something about economics?

    Now and then, on a very special day, Steve Kates talks about something other than Say’s Law.

    Speaking of Say’s Law, DilD demonstrates his ignorance of the concept with this clanger:

    Entrepreneurialism does not necessarily require creativity. Its primary requirement is the direction of capital to fill a (new) need (opportunity).

  22. BilB

    Say’s “Law” is at best an influence as there are far too many exceptions for it to be a Law. It is an understandable confusion as in a narrow set of circumstances it seems to be solid. A farmer grow corn on his land, sells it at the market then buries the money in a tin by the back shed. Say’s “Law” has failed.

    An entrepreneurial company discovers that a crushing mill requires iron balls but cannot source them. The company happens to know where there is a pile of balls that have been scrapped. The company acquires the balls at the scrap price and supplies them to the mill for a huge profit. This is an example of an entrepreneurial operation which required no creativity, only knowledge and capital, and actually took place.

  23. Aristogeiton

    Ok DilDo, I’ll indulge your agrarian fantasies. How much demand for bananas at $12/kg? Now how much at $2/kg?

  24. JC

    Bilby

    How long have you been on retard pills as they’re making you unusually stupid.

  25. BilB

    Sure, Aristo, supply and demand, but that is not what Say’s Law is about. Go back and read the definition carefully. What Say said was that if I sell goods, I then buy other goods with that money and that PASSES ON the demand to other parts of the economy. Say’s Law is about the circulation of supply and demand (as I read it). The problem comes when sellers do not buy in the short or medium term and accumulate their revenues (ie the 1%) or they spend all of their proceeds outside of the target economy (capital flight).

  26. BilB

    A sixteen word comment, JC! That would have been a huge effort for you. You should lie down now, for an hour or so, to recover.

  27. Nato

    So I’ve never had the training, but once upon a time I read a text book that linked the income from land to rents, labour to wages… and entrepreneurial ability to profit. It wasn’t an old book, either. This century, for sure. I just assumed this is the accepted wisdom.

    This post inspires feelings of gladness to have missed out on hearing smart people talk when learning stuff. Nothing ruins good theory like people.

  28. Tel

    This is an example of an entrepreneurial operation which required no creativity, only knowledge and capital, and actually took place.

    The synthesis of new knowledge from multiple individual facts, each of which is worthless on its own. Also the ability to negotiate in order to maximise the market value of the newly synthesised knowledge.

    AKA creating a product and selling the product.

  29. Tel

    A farmer grow corn on his land, sells it at the market then buries the money in a tin by the back shed. Say’s “Law” has failed.

    Only “failed” until the farmer digs it up again, and we know that she does intend to dig it up again, because otherwise she wouldn’t have been so careful packing it into a tin.

    Here’s the real question though: who or what threatened this humble farming community that they feel afraid to spend money openly like regular folks and instead turn to hiding their valuables?

  30. .

    BilB
    #1435231, posted on September 1, 2014 at 7:50 am
    Oops, yes indeed, Steve Kates item. Are they all travelling together? A cohort of confusion?

    Entrepreneurialism does not necessarily require creativity. Its primary requirement is the direction of capital to fill a (new) need (opportunity).

    Yes it does. You’re a liar and an imbecile.

    does not necessarily require creativity

    Huh?

    Its primary requirement is the direction of capital to fill a (new) need (opportunity).

    …and what does that entail, genius?

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