Entrepreneurial economics

The accumulation of factors of production per se – be they knowledge, physical or human capital – cannot alone explain economic development. They are necessary inputs in production, but they are not in themselves sufficient for economic growth to occur.

Human creativity and productive entrepreneurship are needed to combine these inputs in profitable ways, and hence an institutional environment that encourages free entrepreneurship becomes the ultimate determinant of economic growth.

Thus, the entrepreneur and entrepreneurship should take center stage in any effort to explain long-term economic development. The Economic theory, however did not lay proper attention to the entrepreneur and to the entrepreneurship.

“The theoretical firm is entrepreneurless – the Prince of Denmark has been expunged from the discussion of Hamlet”. This oft-quoted observation was made by William J. Baumol1 exactly five decades ago in the American Economic Review. The article was an urge to the economics profession to start paying serious attention to the role of entrepreneurship in economic development.

If entrepreneurship remains as important to the economy as ever, then the continuing failure of mainstream economics to adequately account for entrepreneurship indicates that fundamental principles require re-evaluation. "Entrepreneurial Economics" is the study of the entrepreneur and entrepreneurship within the economy. The characteristics of entrepreneurial economy (regional or national level) are high level of innovation combined with high level of entrepreneurship which result in the creation of new ventures as well as new sectors and industries.

Mainstream economics does not include much disscussion on entrepreneurship though it assigns an important role to the entrepreneur. This is not by chance, but because entrepreneurship is difficult to analyse using the traditional tools of economics e.g. calculas and general equilibrium model. Entrepreneurship is reffered to in the mainstream theory; different economists assign different important roles to the entrepreneurs but the coverage is much less as compared to the important role entrepreneurs play in th eecomomy and in t he economic theory. Current textbooks have only a passing reference to the concept of entrepreneurship and the entrepreneur. In fact mainstream theory makes the entrepreneur an invisible man. The reason for that is that the construct of equilibrium models, which is central to mainstream economics, is exactly what by definition excludes entrepreneurship. Joseph Schumpeter and Israel Kirzner have argued in their writings, that entrepreneur does not tolerate equilibrium. According to Baumol, mainstream theory has ignored entrepreneurship not because it does not fit here, but because the tools available to the economists, the general equilibrium model etc. cannot ensure a comprehensive analysis of the entrepreneur without adding more tools to the toolkit the economists are at ease with.

Studies about entrepreneurs made in Economics, Psychology and Sociology largely relate to four major currents of thought. Early thinkers (like Max Weber, 1930) emphasized its occurrence in the context of religious belief system, thereby suggesting that the belief systems of some, do not encourage entrepreneurship. This contention has, however, been challenged and refuted by many sociologists. Some thinkers like K Samuelson believe that there is no relationship between religion and economic development (and entrepreneurship) Karl Marx considered economic system and mode of production as its sole determinants, Max Weber suggested a direct relation between the ethics and economic system as both interacted intensively. The role of cultural-socio-religious factors has been debated for its role on the economic development, which can be extended to entrepreneurship development as well.

Another current of thought underscors the achievement motivation aspects. In this, there was overemphasis on the individual and his values, attitudes and personality. This thought, however, has been severely criticized by many scholars such as Kilby (1971) and Kunkel (1971).

EDI Ahmedabad, India conducted a study under the guidance of Prof. David C. McClelland a renowned behavioral scientist to find out a set of competencies or characteristics of successful entrepreneurs in three countries India, Malawi & Ecuador and found that certain characteristics are cross culturally valid, and concluded that it is necessary to possess these competencies in varying measures by all entrepreneurs in all the cultures and countries and linked these with the nature of socialization in the society. The third group of thinkers emphasized the existence of economic entrepreneurship. The economists assume that the factors of production possess a high degree of mobility; that inputs and outputs are homogenous, and that producers; consumers and resource owners have knowledge of all the possibilities open to them. As is well known, in an underdeveloped country such ideal conditions do not exist. As such, the entrepreneurship envisaged by economists cannot be developed in such a country by considering the economic dimensions alone.

The fourth school of thought attached importance to the managerial aspects. They emphasized perception of market opportunities as well as operational skills, required to run a business or an industry.

A critical evaluation of these four major currents of thought however, brings to surface certain common characteristics. These include the identification and perception of economic opportunity, technical, organizational and behavioral skills, managerial competence, and motivation to achieve results.

The various concepts and theories propounded by researchers seem to indicate that the developing entrepreneurs in a society depend upon closely interlinked economic, social, religious, cultural and psychological variables.

Prof. Frank Knight, (Risk Uncertainty & profits, 1921) Hawley, A C Pigou and others opine that the entrepreneurs bear the uncertainty & risk of production. The theory alone is unable to explain the occupational choice question. Thus, in order to build a development model of entrepreneurship it is necessary to look at some of the other characteristics that help explain why some people are entrepreneurs; risk may be a factor, but it is not the only one.

Schumpeter’s concept is a synthesis of three different notions of entrepreneur i.e. a risk bearer, innovator and a coordinator cum manager. He assigned the role of an innovator to the entrepreneur and not to the capitalist. Capitalists supply capital and entrepreneurs constantly innovate and are usually the large-scale businesspersons. He (1934, p. 78) stated that ’whatever the type, everyone is entrepreneur only when he actually carries out a new combination and loses that character as soon as he has built up his business, when he settles to running it as other people run their business’. The focus here is not on a category of person, but on a function.He was perhaps influenced by his family history.

Entrepreneur has been perceived as some one who breaks an existing equilibrium, maybe by innovations, a chaotic, unpredictable economic process, which cannot be modeled using the equilibrium based analytical methods used in mainstream economic theory. It seems no longer possible to expect that only theoretical refinements and extending known principles can provide for a theory of entrepreneurship. Challenging 'fundamental principles' like equilibrium models, rational agent, maximization paradigm, the traditional production function, by applying insight from other disciplines like theoretical physics (thermodynamics, entropy) might be the way forward in the study of entrepreneurial economics. There are two types of theories termed as gap filling theories; the sociological approach, which suggests that as a result of withdrawal of status, some social classes will work to fill the void and be more entrepreneurial. The other is an economic approach which implies entrepreneurs fill up the gaps in the market. The proposal concentrates on the later approach, explained below.

Following the Schumpeterian line of thought (entrepreneur as an innovator), Leibenstein postulates that the entrepreneurs are gap-fillers i.e. they have the ability to perceive where the market fails and to develop new goods or processes that the market demands but which are not currently being supplied. This can be regarded as a special kind of innovation. He postulates that entrepreneurs have the special ability to connect different markets and make up for market failures and deficiencies. Additionally, drawing from the early theories of J.B. Say and Cantillon, Leibenstein suggests that entrepreneurs have the ability to combine various inputs into new innovations in order to satisfy unfulfilled market demand (Leibenstein, 1995).

Peter F. Drucker (1985) defines an entrepreneur as a person who looks out for any changes, responds to it and exploits the opportunity generated by the change. It may mean provision of a new business, new product or a new service. He feels that a resource becomes an economic resource only when somebody finds a use for it. Some thinkers suggest that the entrepreneurs are to be found in the social sectors e.g. NGOs as well, and are called Social entrepreneurs. They are an agent of change and help increase the standard of living. Some other thinkers have identified Intrapreneurs, who perform all the functions of entrepreneurs, but are not the risk bearers as they are employed in some organizations. These people innovate, go through all the labor pains of creating new divisions within existing organizations, they do not bear the risk, or uncertainty, and also may not get any reward in proportion of the success of the new venture/ division but they certainly are agents of change in the organization.

Coase surveys the field of economics and believes it has become a "theory-driven" subject that has moved into a paradigm in which conclusions take precedence over problems. "If you look at a page of a scientific journal like Nature," he said, "every few weeks you have statements such as, 'We’ll have to think it out again. These results aren’t going the way we thought they would.' Well, in economics, the results always go the way we thought they would because we approach the problems in the same way, only asking certain questions. Entrepreneurial Economics challenges fundamental principles, using insights from models and theories in the natural sciences.

ee also

* Social entrepreneurship
* Serial entrepreneur


* Chen J. (2005). The Physical Foundation of Economics – An Analytical Thermodynamic Theory. World Scientific.
* Farmer J.D., Shubik M., Smits E. (2005). Economics: The Next Physical Science?
* Glancey, Keith D. , Mcquaid, Ronald W (2000) Entrepreneurial Economics.Palgrave Macmillan.
* Tabarok A. (2002). Entrepreneurial Economics – Bright Ideas from The Dismal Science. Oxford University Press.
* Vinig G.T., Van Der Voort R. (2005). The Emergence of Entrepreneurial Economics. Elsevier.
* Vogel J.H. (1989). Entrepreneurship, Evolution and the Entropy Law. The Journal of Behavioral Economics. Vol. 18, No. 3.
* Sharma, Vivek , Workbook on Entrepreneurship, Abza Publications, India

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