Entrepreneurial Economics is the study of the entrepreneur and entrepreneurship within the economy. The accumulation of factors of production per se does not explain economic development. They are necessary inputs in production, but they are not sufficient for economic growth.
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. Early economic theory, however did not lay proper attention to the entrepreneur.
“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. Baumol[1] in the American Economic Review. The article was a prod to the economics profession to attend to this neglected factor.
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. The characteristics of an entrepreneurial economy are high levels of innovation combined with high level of entrepreneurship which result in the creation of new ventures as well as new sectors and industries.
Entrepreneurship is difficult to analyse using the traditional tools of economics e.g. calculus and general equilibrium models. Current textbooks have only a passing reference to the concept of entrepreneurship and the entrepreneur. Equilibrium models are central to mainstream economics, and exclude entrepreneurship. Joseph Schumpeter and Israel Kirzner argued that entrepreneurs do not tolerate equilibrium.
Studies about entrepreneurs in Economics, Psychology and Sociology largely relate to four major currents of thought. Early thinkers such as Max Weber emphasized its occurrence in the context of a religious belief system, thereby suggesting that some belief systems do not encourage entrepreneurship. This contention has, however, been challenged by many sociologists. Some thinkers such as K Samuelson believe that there is no relationship between religion, economic development and entrepreneurship. Karl Marx considered the economic system and mode of production as its sole determinants. Weber suggested a direct relation between the ethics and economic system as both interacted intensively.
Another current of thought underscores the motivational aspects of personal achievement. This overemphasized 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).
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EDI Ahmedabad, of India conducted a study under the guidance of Prof. David C. McClelland, a renowned behavioral scientist, to identify a set of competencies or characteristics of successful entrepreneurs in India, Malawi & Ecuador. He found that certain characteristics are cross-culturally valid, and concluded that these competencies are necessary in varying measures in all the cultures and countries and linked these with the nature of socialization in the society.
A third group of thinkers emphasized the existence of economic entrepreneurship. The economists assume that factors of production are highly mobile; that inputs and outputs are homogenous, and that producers, consumers and resource owners have knowledge of all open possibilities. In underdeveloped countries, 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.
A 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, revelas 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[2] Hawley, A. C. Pigou and others opine that entrepreneurs bear the uncertainty & risk of production. The theory alone is unable to explain the occupational choice question. 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: risk bearer, innovator and a coordinator cum manager. He assigned the role of innovator to the entrepreneur and not to the capitalist. Capitalists supply capital while entrepreneurs innovate. He 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’.[3] The focus here is not on a category of person, but on a function. He was perhaps influenced by his family history.
The entrepreneur has been perceived as someone who disrupts an existing equilibrium. Innovation is a chaotic, unpredictable economic process, which cannot be modeled using the equilibrium based analytical methods used in mainstream economic theory. 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. Two types of theories attempt to explain entrepreneurs. One is a 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 identify and fill market gaps.
Following Schumpeter (entrepreneur as an innovator), Leibenstein postulates that the entrepreneurs are gap-fillers i.e. they have the ability to perceive market opportunities and to develop new goods/services that are not currently being supplied. He postulates that entrepreneurs have the special ability to connect markets and make up for market deficiencies. Additionally, drawing from the 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.[4]
Peter F. Drucker defines an entrepreneur as a person who looks out for change, responds to it and exploits the opportunity generated by the change. It may mean a new business, new product or a new service. He claims that a resource becomes an economic resource only when an entrepreneur finds a use for it. Some thinkers suggest that entrepreneurs are to be found in social sectors e.g., non-governmental organizations as well, i.e., social entrepreneurs. Another innovator type is the intrapreneur, who perform entrepreneurial functions, but bear less risk, because they work in an existing organization. These people innovate, but bear less risk, and also may not get rewards in proportion to the success of the new venture, but they certainly are change agents.[5]
Coase believes economics 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."
| Book: Entrepreneurship | |
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Palgrave Macmillan.