Question

1. Discuss the entrepreneurship theory and stock! approaches.

Answer 1

The importance of entrepreneurial behavior for economic development has always been stressed in economic history but the existence of entrepreneurship in orthodox economic theory has almost been undetectable. Economists wonder why the entrepreneur has almost vanished in economic theory. The reason apparently is that with the introduction of entrepreneurial behavior in orthodox theory a model runs the risk to lose its consistency, and therefore the entrepreneur still remained a stranger in economic theory. Classical economists touched this subject matter more than neoclassical theory, based on the equilibrium concept, might ever be able to do. Its strict, methodological apparatus appears to rule out the possibility to pick out an endogenous equilibrium-disturbing element as the centerpiece of economic development. The first who took up thinking about the role of entrepreneurs in the economy was Cantillon (1680’s - 1734). He classified the economic agents into three groups: (1) landowners (2) entrepreneurs and (3) hirelings. Whereas the first and the third group are characterized as being rather passive, the entrepreneurs play the central part in his Essai sur la nature du commerce en general. They play the role of the coordinator connecting producers with consumers, and, additionally, the role of the decision-maker engaging in markets to earn profits and struggling with uncertainty. His concept of uncertainty was constrained to the entrepreneurs, though, and it had to wait for Frank Knight (1921) for a detailed distinction between risk and uncertainty as an economy-wide feature affecting all economic agents. Cantillon was also the first who emphasized the entrepreneur’s economic function while distinguishing it from the agents’ social status. A functional perspective was maintained by Cantillon’s successors associated with the French school. Quesnay, the precursor of ’The Physiocrats’, shifted the field of concentration to the significance of capital for economic growth, thereby reducing the role of the entrepreneur - instead of an industry leader - to a pure independent owner of a business, though endowed with individual energy, and intelligence. Baudeau (1919)was the first to suggest the function of the entrepreneur as an innovator and thus brought invention and innovation into the discussion. Furthermore, he emphasized the ability to process knowledge and information, which makes the entrepreneur a lively and active economic agent. Another rather capitalistic view was set up by Jacques Turgot (1727-1781). According to him, the entrepreneur is the outcome of a capitalist investment decision: The owner of capital either can simply lend his money and just be a capitalist, or decide to buy land for lease and, hence, become a landowner, or he decides to buy goods to run a business and thus become an entrepreneur automatically. Jean-Baptiste Say (1767-1832) continued Turgot’s ideas and elevated the entrepreneur to a key figure in economic life. In contrast to Turgot, he made a sharp distinction between the entrepreneur and the capitalist. The entrepreneur might give capital to a firm but he does not have to. Consequently, this also allows for the negligence of risk and uncertainty, when considering the entrepreneurial element explicitly. Say suggested a twofold approach. He looked at the entrepreneur from an empiric perspective to find out the actual entrepreneurial behavior which he tried to reduce in a second step to a general entrepreneurial theory by subtracting all incidental aspects attributable to certain social and institutional circumstances. The function of his entrepreneur was to understand the technology and to be able to transfer that knowledge into a tradable product that meets the customers’ needs. Say paved the road to Schumpeter’s theory on entrepreneurship. And Schumpeter’s entrepreneurial concept has to be seen as the pivotal point in this field of research. Most of the economists before Schumpeter - with some exceptions - worked within equilibrium theory and most of the theories on entrepreneurship after Schumpeter is built on his ideas. Before we proceed to the discussion of Schumpeter’s concept, we briefly have to expose the neoclassical treatment of the entrepreneur.