The term entrepreneur seems to have been introduced into economic theory by Cantillon (1931 [1755]) and was first accorded prominence by Say (1803). It was variously translated into English as merchant, adventurer or employer, though the precise meaning is the undertaker of a project. John Stuart Mill (1848) popularized the term in Britain.
In the neo-classical theory of the firm, entrepreneurial ability is analogous to a fixed factor endowment because it sets a limit to the efficient size of the firm. The static and passive role of the entrepreneur in the neo-classical theory reflects the theory’s emphasis on perfect information—which trivializes management and decision making—and on perfect markets—which do all the co-ordination that is necessary and leave nothing for the entrepreneur.
According to Schumpeter (1934), entrepreneurs are the prime movers in economic development, and their function is to innovate or carry out new combinations. Five types of innovation are distinguished: the introduction of a new good (or an improvement in the quality of an existing good); the introduction of a new method of production; the opening of a new market—in particular an export market in new territory; the ‘conquest of a new source of supply of raw materials or half-manufactured goods’; and the creating of a new type of industrial organization—in particular the formation of a trust or some other type of monopoly.
Schumpeter is also very clear about what entrepreneurs are not: they are not inventors, but people who decide to allocate resources to the exploitation of an invention; they are not risk-bearers: risk-bearing is the function of the capitalist who lends funds to the entrepreneur. Essentially, therefore, Schumpeter’s entrepreneur has a managerial or decision-making role.
This view receives qualified support from Hayek (1937) and Kirzner (1973), who emphasize the role of entrepreneurs in acquiring and using information. Entrepreneurs’ alertness to profit-opportunities, and their readiness to exploit these through arbitrage-type operations, makes them the key element in the market process. Hayek and Kirzner regard entrepreneurs as responding to change—as reflected in the information they receive—while Schumpeter emphasizes the role of entrepreneurs as a source of change. These two views are not incompatible: a change effected by one entrepreneur may cause spill-over effects, which alter the environment of other entrepreneurs. Hayek and Kirzner do not insist on the novelty of entrepreneurial activity, however, and it is certainly true that a correct decision is not always a decision to innovate; premature innovation may be commercially disastrous. Schumpeter begs the question of whether someone who is the first to evaluate an innovation, but decides (correctly) not to innovate, qualifies as an entrepreneur.
Knight (1921) insists that decision making involves uncertainty. Each business situation is unique, and the relative frequencies of past events cannot be used to evaluate the probabilities of future outcomes. According to Knight, measurable risks can be diversified (or laid off) through insurance markets, but uncertainties cannot. Those who take decisions in highly uncertain environments must bear the full consequences of those decisions themselves. These people are entrepreneurs: they are the owners of businesses and not the salaried managers that make the day-to-day decisions.
Leibenstein (1968) regards the entrepreneur as someone who achieves success by avoiding the inefficiencies to which other people—or the organizations to which they belong—are prone. Leibenstein’s approach has the virtue of emphasizing that, in the real world, success is exceptional and failure is the norm.
Casson (1982) defines the entrepreneur as someone who specializes in taking decisions where, because of unequal access to information, different people would opt for different strategies. Casson shows that the evaluation of innovations, as discussed by Schumpeter, and the assessment of arbitrage opportunities, as discussed by Hayek and Kirzner, can be regarded as special cases. Casson also shows that if Knight’s emphasis on the uniqueness of business situations is used to establish that differences of opinion are very likely in all business decisions, then the Knightian entrepreneur can be embraced within his definition as well. Because the definition identifies the Junction of the entrepreneur, it is possible to use conventional economic concepts to discuss the valuation of entrepreneurial services and many other aspects of the market for entrepreneurs.
Perhaps the aspect of entrepreneurship that has attracted most attention is the motivation of the entrepreneur. Hayek and Kirzner take the Austrian view that the entrepreneur typifies purposeful human action directed towards individualistic ends. Schumpeter, however, refers to the dream and will to found a private dynasty, the will to conquer and the joy of creating, while Weber (1930) emphasizes the Protestant Ethic and the concept of calling, and Redlich (1956) the role of militaristic values in the culture of the entrepreneur. Writers of business biographies have ascribed a whole range of different motives to people whom they describe as entrepreneurs. For many students of business behaviour, it seems that the entrepreneur is simply someone who finds adventure and personal fulfilment in the world of business. The persistence of this heroic concept suggests that many people do not want a scientific account of the role of the entrepreneur.
Successful entrepreneurship provides an avenue of social advancement that is particularly attractive to people who are denied opportunities elsewhere. This may explain why it is claimed that immigrants, religious minorities and people denied higher education are over-represented among entrepreneurs. Hypotheses of this kind are difficult to test without carefully controlled sampling procedures. The limited evidence available suggests that, in absolute terms, the most common type of entrepreneur is the son of an entrepreneur.
Mark Casson
University of Reading
References
Cantillon, R. (1931 [1755]) Essai sur la nature du commerce en générale, ed. H.Higgs, London.
Casson, M.C. (1982) The Entrepreneur: An Economic Theory, Oxford.
Hayek, F.A. von (1937) ‘Economics and knowledge’, Economica 4.
Kirzner, I.M. (1973) Competition and Entrepreneurship, Chicago.
Knight, F.H. (1921) Risk, Uncertainty and Profit, ed. G.J.Stigler, Chicago.
Leibenstein, H. (1968) ‘Entrepreneurship and development’, American Economic Review 58.
Mill, J.S. (1848) Principles of Political Economy, London.
Redlich, F. (1956) ‘The military enterpriser: a neglected area of research’, Explorations in Entrepreneurial History 8.
