Understanding The Entrepreneur

Chris Coyne has a link to an article about entrepreneurs in this weeks issue of the Economist:

The French, according to George Bush, have no word for them, economic theory has surprisingly little room for them, and it is a mystery why anyone would choose to be one of them. Entrepreneurs are the leading men of capitalism, the venturesome protagonists who move the plot forward. But economic theory gives them few if any lines to read.

Translated literally, entrepreneur means one who undertakes—one of life's doers. To start a firm you need gumption, and to succeed you need an eye for a gap in the market. That in turn demands alertness, as Israel Kirzner, of New York University (NYU), has pointed out. But it does not always demand much originality or power of invention.

William Baumol, who holds positions at both Princeton and NYU, has been labouring for years to create more space for entrepreneurship and innovation in economic theory... Mr Baumol's work in turn pays homage to the insights of Joseph Schumpeter, for whom the settled equilibria and smooth adjustments of microeconomics held little interest.

Schumpeter wanted to dislodge the price mechanism from its “dominant position” in “the sacred precincts of theory”. In the real world, he said, the competitive weapon that counts is not lower prices, but new commodities and techniques. These weapons are much deadlier, striking “not at the margins of...the existing firms but at their foundations and their very lives.”

Chris then goes on to offer these thoughts about the article:

1. I am pleased that the entrepreneur is getting some well-deserved attention. However, given Kirzner's large body of work on this topic it is a shame he is not the focus of this piece.

2. We shouldn't forget the importance of prices for economic calculation. It is prices and profit/loss that serve as a disciplinary mechanism regarding the activities of entrepreneurs.

3. Perhaps obviously, the institutional environment that provides incentives to engage in productive innovation and reallocation of resources is key. Both Baumol and Kirzner recognize the role of institutions in the entrepreneurial process in their work.

I must confess that I am not very familiar with the work of Israel Kirzner, but know my professor Pete Boettke thinks incredibly highly of him. I certainly agree with Chris on points number 2 and 3. In my previous post discussing entrepreneurship, I discussed how technology is helping to lower of costs of starting a new business. These reduced prices in turn factors into the profit/loss calculation that Chris mentions, helping to increase the potential profit of entrepreneurial activity.

Additionally, I agree strongly with Chris' third point. Without the necessary institutional environment, individuals will have reduced incentives to engage in productive behavior. A reliable rule of law, coupled with strong property rights and low cost of starting new enterprises are all necessary elements for the entrepreneurial process to develop into productive outcomes. As I said in a previous post:

"You will never remodel your kitchen if you're not sure you can keep your house."

Frederic Sautet, one of my mentors at the Mercatus Center, wrote this great piece entitled "The Role of Institutions in Entrepreneurship: Implications for Development Policy". This policy brief was one of my first introductions into understanding how institutions shape the direction of entrepreneurial energies. In the paper, Frederic outlines how entrepreneurship is always present in all societal contexts, but can be directed into either productive, evasive or destructive activities. Institutions play a vital role in determining which direction these energies get channeled into by creating incentive structures to either reward or punish productive and unproductive behavior. This paper is a brilliant and concise piece and played a significant role in making me want to study economics at George Mason University and work at the Mercatus Center.

I am currently strongly interested in development work and am convinced that economies will not grow without successful avenues for entrepreneurs to emerge to use local knowledge to better their own situations by bringing successful innovations to the market which, in turn, helps their fellow man. I think I am in need of reading both Kirzner and Baumol to understand this process more.

For further reading:

Hernando De Soto's book, "The Mystery of Capital" was also very foundational in my understanding of the role institutions have in incentivizing productive behavior. For more a business perspective on how innovation can "dislodge" pre-existing firms from their positions of dominance, read Clayton Christensen's "Innovators Dilemma". Also see Peter Drucker's book, "Innovation and Entrepreneurship". (Like Baumol, Drucker was also strongly influenced by Schumpeter.)



I'll post more book recommendations on entrepreneurship from an economic standpoint as I expand my repertoire in this area...

P.S. -- Here's some proverbial wisdom for entrepreneurs.

P.P.S. -- More thoughts here.