The Role of the Entrepreneur in Economic Science

This article is based on a discussion held in Plovdiv on December 4, 2014 and organized by the Institute for Market Economics and the Friedrich Naumann Foundation for Freedom, in cooperation with the Economic Library (Plovdiv). The text reflects the views of the author and should not be considered a summary of the discussion. 

The image of the entrepreneur in society can be described by highly ambivalent characteristics – from the highly negative “cheating” and “exploitative” to the inspiring “creative” and “being an explorer”. A recent opinion poll carried out in several post-communist countries[1] shows that to a large extent such an image is predetermined by the environment in which the entrepreneur operates and by public perceptions when it comes to the origins of profit. Somewhere at the root of this image comes the defining point of the discussion on the role of the entrepreneur in economic science. A discussion that is largely neglected.  

Economics students may read thousands of pages and memorize scary formulas and models without even touching upon this discussion or paying any significant attention to the entrepreneur itself. Economics as a science that is supposed to study human action and explain the world has been gradually subordinated to something that is perceived as a scientific method. This argument is presented brilliantly by Friedrich Hayek in his Nobel Prize lecture “The Pretence of Knowledge” in 1974. A discussion on the role of the entrepreneur sounds reasonable in a science that is studying human action and not in one that is striving to direct it. Hayek’s lecture on knowledge naturally concludes with words of humility towards the students of economics:

“The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men’s fatal striving to control society — a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.“

This insight about the boundaries of knowledge and the nature of economic science is needed for understanding the role of the entrepreneur as presented by Ludwig von Mises in his magnum opus “Human Action”. Mises uses the concept of “promoter” that differs from the one of manager, technician or bureaucrat. There is no place for promoters in a static world, where the only task is to follow the routine that supports the equilibrium and the balance of profit and loss. The entrepreneurial function cannot be equalized with the managerial one and has nothing to do with the bureaucratic organization. The promoter-entrepreneur bears responsibility for the key issues and challenges of his undertaking that is oriented towards profit. A better understanding of his role and functions fundamentally predetermines our attitude towards property rights and the distribution of incomes or in other words – the morality of profit.

Israel Kirzner examines the mental construct of the “pure entrepreneur” on which he makes the case for the moral right of the entrepreneur in regard to the ownership of the product and the distribution of income. Kirzner presents two alternative theories for the nature of production – first, as an automatic growth of the factors of production (labor and capital) and second, as a human creation. In his view the product emerges only because someone has decided to bring together the necessary productive factors, thus by deciding to initiate the process of production, this human being has created the product. This purely entrepreneurial element in practice overthrows the labor theory of value and fits perfectly into the so called subjective theory of value.

The better understanding of the role of the entrepreneur also goes through the classic text of Frank Knight “Risk, Uncertainty and Profit”. Knight describes the perfect society in which uncertainty is absent; a society with no intelligence, where all actions are automatic. Once we introduce uncertainty into this society the entrepreneur naturally emerges:

“We may imagine a society in which uncertainty is absent transformed on the introduction of uncertainty into an enterprise organization… Another feature of the adjustment is that a condition of perfect equilibrium is no longer possible.“

The last words on the equilibrium also imply that the entrepreneurial element is not to be found in the formal modeling of the economic system. The process of creative destruction as described by Joseph Schumpeter further develops this argument, examining the capitalist system by its nature as a form and method of economic changes that is never and can never be stationary. For Schumpeter, in order to fully comprehend the nature of the entrepreneur, one should overturn the formal view on competition:

“…in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the source of supply, the new type of organization…”

The unifying idea throughout all these authors is the uncertainty in society and the role of the entrepreneur to take this uncertainty upon his shoulders. This line of reasoning can be also traced from the arguments of Hayek on the dispersed knowledge and the limits of economic science through the separation of the function of the promoter-entrepreneur from that of the manager and the bureaucrat (after Mises) and the introduction of the pure entrepreneurial element and the ownership of the product (after Kirzner), reaching to the relationship between risk and uncertainty, on the one hand, and the entrepreneurial profit (after Knight), on the other, and the view on competition as a process of creative destruction after Schumpeter.

All these authors are putting the entrepreneur and the creative process at the core of the economic science. This, however, doesn’t mean that the initial impulse of the entrepreneur can be fully understood. In a short essay Llewellyn Rockwell writes that even if understanding economics does not require faith, there are actions undertaken by market actors themselves that require faith. Rockwell looks at the act of entrepreneurship as a leap of faith. The entrepreneurial way of thinking is not entirely explainable, but for Mises it is undoubtedly the result of a different view of the uncertain future:

“What distinguishes the successful entrepreneur and promoter from other people is precisely the fact that he does not let himself be guided by what was and is, but arranges his affairs on the ground of his opinion about the future. He sees the past and the present as other people do; but he judges the future in a different way.”

*All text that are cited in this article are available in Bulgarian language in IME’s recently published essay collection “Есета за предприемача“.

[1] See “Производителят на възможности: Образът на предприемача в България” (2013)