Ludwig von Mises Institute

Entrepreneur

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In all conceptions of the Entrepreneur in Austrian Economics, a functional paradigm is taken. I.e., entrepreneurship is described as a process or activity that is taken, as opposed to a job category or structure or some concrete object. The definition, however, varies slightly from author to author and the precise definition and its nuances remains a part of the debate. In all definitions, the entrepreneur remains an agent of change, and is critical in the growth of a market economy. Often, the entrepreneur is used or defined via a reference to the Evenly Rotating Economy in order to help describe how growth in an economy takes place.

Conceptions of the entrepreneur[edit]

Even among Austrians, the precise definition and conception of the entrepreneur slightly varies.

Mises[edit]

According to Ludwig von Mises:

"[Economics] also calls entrepreneurs those who are especially eager to profit from adjusting production to the expected changes in conditions, those who have more initiative, more venturesomeness, and a quicker eye than the crowd, the pushing and promoting pioneers of economic improvement."[1]

The entrepreneur is distinct from the capitalist because he does not risk capital while the capitalist does.[1][2] This distinction is made by Mises to better explain the different roles individuals play in the economy and is part of the "imaginary construction of functional distribution."[1] Individuals, in the market economy, often perform both functions.

Mises suggests the term "promoter" in addition to term entrepreneur:

"The driving force of the market, the element tending toward unceasing innovation and improvement, is provided by the restlessness of the promoter and his eagerness to make profits as large as possible."[1]


Entrepreneurs are primarily concerned with the future state of prices. In anticipating the direction of the market, entrepreneurs must also predict the length of time which will pass before the desired change in prices have emerged. In fact, timing can determine whether a definite project will have success or not.[3]

Entrepreneurs make profits by providing for future needs which have been neglected by other businessmen. It is not foresight itself which brings profits, but foresight better than the majority.[4] Mises writes:

"The entrepreneurial idea that carries on and brings profits is precisely that idea which did not occur to the majority...The prize goes only to those dissenters who do not let themselves be misled by the errors accepted by the multitude."[4]

According to Mises, the entrepreneur:

"...discovers a discrepancy between the prices of the complementary factors of production and the future prices of the products as he anticipates them, and tries to take advantage of this discrepancy for his own profit."[5]
And:
"An entrepreneur can make a profit only if he anticipates the future conditions more correctly than other entrepreneurs."[6]

Schumpeter[edit]

To Shumpeter, the entrepreneur performs the function of carrying out major innovations in "new combinations" of labor, natural resources or capital goods for the purpose of making a profit.[2]. For Schumpeter, entrepreneurship consists of innovation. From this perspective, the entrepreneur performs a negative and disruptive act, as from the perspective of the ERE, the entrepreneur undoes the steady state calculus possible in a rotating economy.

Knight[edit]

Uncertainty played a key role in the conception of the entrepreneur for Knight. And as such, for Knight, an entrepreneur is anyone who bears uncertainty, and is a frequently occurring element of an economy. To this end, it is crucial to carefully distinguish the difference between uncertainty and risk. Risk is simply a probabilistic event, whose outomce might remain unknown, but fails under the purvey of probability. Thus, insofar as the ERE is defined to be a thought experiment of an economy without any entrepreneurs, insurance companies would still exist in an ERE. Therefore, uncertainty remains a category of unpredictability separate from that of risk. Knight, however, was still a determinist, and Knight has said that, "The problem stems from the inability to accumulate sufficient empirical data (my emphasis) relating to particular classes of subject and events."[7]

However, unlike Schumpeter's conception. Entrepreneurs perform more of a function of a random walk, and in this sense, after bearing uncertainty, through the profit and loss system, he discovers as opposed to innovates.

Kirzner[edit]

For Kirzner an entrepreneur perceives opportunity, or "is alert". The entrepreneur is a discoverer and as such the class of entrepreneurs is very large. Kirzner views himself as coming from Mises' theory of action, the perceiving comes before the 'felt unease' that the entrepreneur will take. As such, in contrast to Schumpeter, the entrepreneur is equilibrating. He discovers the imbalances. If it were equilibrated already, there would be no opportunities to discover.[8]

Examples of Entrepreneurship[edit]

A recent example of entrepreneurship is facebook founder Mark Zuckerberg. After winning Times 2010 person of the year Zuckerberg said:

"If you create value for other people then you might be able to realize a portion of that value yourself. I never thought about facebook as starting a business that would grow its own value, but its really good that the world works this way. If someone does something that is valuable, that is enough to build a good business based off of. I don't think that I focus on the same thing that other business people do. But every day we just come in and try and build the best product for people."[9] (emphasis added)

Other notable living entrepreneurs are Steve Jobs (Apple), Bill Gates (Microsoft), Jeff Bezos (Amazon) and Richard Branson (Virgin).

References[edit]

  1. ↑ 1.0 1.1 1.2 1.3 Ludwig von Mises. XVIII. The Scope and Method of Catallactics, 7. The Integration of Catallactic Functions, Human Action, online version, referenced 2011-02-05.
  2. ↑ 2.0 2.1 Joseph Schumpeter, The Theory of Economic Development, trans. Redvers Opie (Cambridge, Massachusetts: Harvard University Press, 1961) 75
  3. ↑ Ludwig von Mises. XXIII. The Data of the Market, 5. The Period of Adjustment, Human Action, online version, referenced 2011-03-30.
  4. ↑ 4.0 4.1 Ludwig von Mises. XXXVII. The Place of Economics in Learning, 3. Forecasting as a Profession, Human Action, online version, referenced 2011-03-30.
  5. ↑ Ludwig von Mises. XXVI. Economic Calculation under Socialism, 6. The Differential Equations of Mathematical Economics, Human Action, online version, referenced 2011-04-25.
  6. ↑ Ludwig von Mises. XV. The Market, 8. Entrepreneurial Profit and Loss, Human Action, online version, referenced 2011-05-19.
  7. ↑ Taylor, . An Introduction to Austrian Economics
  8. ↑ Klein, Peter. The Capitalist and the Entrepreneur: Essays on Organizations and Markets
  9. ↑ An Interview with Mark Zuckerberg, Time Magazine. [1]

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