SOME HISTORY OF ECONOMIC THEORIES UNDERLYING ENTREPRENEURSHIP

At its most basic, the notion of economic theory is concerned with two major societal questions. First, how does a society utilize scarce resources to create and build wealth? Second, how does that society distribute the created wealth among its members? Wealth creation and wealth distribution present fundamental and, at times, even controversial questions pertaining to the development and progress of any society. It has long been established that entrepreneurship, human creativity, and the innovation of scientific ideas are major mechanisms and catalysts for the creation and distribution of societal wealth. The notion of entrepreneurship is not new. In fact, some authors have reported that entrepreneurship has been around for quite some time and, as a direct result, a number of different schools of thought have emerged, including the classical capitalist economic theory, the neoclassical theory, and the Schumpeterian school of thought.

Classical Capitalist Economic Theory

Back in 1776, Adam Smith, a Scottish social philosopher and economist, described a capitalist as an owner-manager who organized, synthesized, and combined resources into an industrial enterprise. It was during this time that the French term "entrepreneur" was introduced in order to identify the owner-manager, or entrepreneur, of an industrial enterprise.4

Neoclassical Theory

The classical capitalist economic theory espoused the view that "self-interest," also referred to as "the invisible hand," would guide participating individuals toward entrepreneurial behavior. However, by the end of the 19th century, economic theorists argued that the market comprised many buyers and sellers who interacted in a way that ensures that supply equals demand. The market was seen at equilibrium (i.e., balanced) and, thus, perfect. This would be achieved, it was argued, by fluctuations in prices and supply levels. Therefore, it was posited that wealth would be created and distributed due to the nature of the perfect market. Within this school of thought, there is little place for the traditional manager-owner, the entrepreneur. The neoclassical theory is widely regarded and taught as the mainstream view of economics. Also, within this framework, a perfect market is defined as having (1) many buyers and sellers, with neither group wielding a decisive influence on the market prices, (2) prices set by the markets themselves, (3) products and services that are equivalent in substance but differ in price, and (4) buyers and sellers that have access to complete knowledge of the market and the transactions that occur.5

Schumpeterian Vision

In the early 20th century, Austrian economist and political scientist Joseph Schumpeter rejected neoclassical economic thinking. He took a decisive pro-entrepreneurship stance and argued that innovation capability was the key driving force for new goods and services. Schumpeter posited that the market was chaotic rather than perfect due to entrepreneurs continually providing the markets with creative ideas and innovative solutions. In fact, the concept of "creative destruction" rescinds the neoclassical theorists' notion of a perfect market. New ideas, products, and services create a dynamic market mechanism, producing demand that leads to perpetual wealth creation and wealth distribution.6

Evolving Views of Entrepreneurship

Simply put, an entrepreneur is an individual involved in an entrepreneurial activity. As pointed out, a multitude of definitions on the notions of entrepreneur and entrepreneurship have emerged. Various professionals view these elements through the lenses of their respective disciplines. For instance, the economist views the entrepreneur as a factor of production, alongside land, labor, and capital. The sociologist asserts that certain cultures promote or impede the developing forces of entrepreneurship. In India, for example, the Gujaratis and Sindhis are known for their sense of entrepreneurship. To a psychologist, an entrepreneur is a person driven by certain intrinsic forces, such as the need to attain something, to experiment, to accomplish, or perhaps to escape the authority of others. To a businessman, an entrepreneur may be a threat or an aggressive competitor, whereas to another businessman the same entrepreneur may be an ally, a source of supply, a customer, or someone who creates wealth for others, as well as someone who finds better ways to utilize resources, reduce waste, and generate jobs that others are glad to assume.7

Various influential contributors have understood entrepreneurs in different lights over time. Some of the more notable views on entrepreneurs include the following:

Richard Cantillon (1725): An entrepreneur is a person who pays a certain price for a product to resell it at an uncertain price, thereby making decisions about obtaining and using the resources although consequently admitting the risk of enterprise.

J. B. Say (1803): An entrepreneur is an economic agent who unites all means of production—land, labor, and capital—in order to produce a product. By selling the product in the market he pays rent of land, wages to laborers, and interest on capital. The difference is his profit. He shifts economic resources out of an area of lower and into an area of higher productivity and greater yield.

Joseph Schumpeter (1934): Entrepreneurs are innovators who use a process of challenging the status quo of existing products and services and setting up new ones.

David McClelland (1961): An entrepreneur is a person with a high need for achievement. He is energetic and a moderate-high risk taker.

Peter Drucker (1964): An entrepreneur continually seeks change, responds to it, and exploits opportunities. Innovation is a specific tool enabling the effective entrepreneur to convert a source into a resource.

Peter Kilby (1971): Emphasizes the role of the imitator—entrepreneur who does not innovate per se but imitates technologies innovated by others.

Albert Shapero (1975): Entrepreneurs take initiative, accept the risk of failure, and have an internal locus of control. Gifford Pinchot (1983): Introduced the concept of the entrepreneur as an entrepreneur within an already established organizational entity.

Although many definitions and understandings of entrepreneurship exist, all stress four basic aspects of being an entrepreneur regardless of the field. First, entrepreneurship inherently involves the creation process. Something new is created, possessing value both to the entrepreneur and to the audience for which it is designed and developed. Such an audience may be the market of buyers for business innovation, the hospital's administration for a new admissions procedure, prospective students for a new college program, or the constituency for a new service provided by a not-for-profit organization. Second, entrepreneurship requires the full devotion of the necessary time and effort. Only those going through the entrepreneurial process appreciate the significant amount of time and effort it takes to create something new and to make it operational. Third, assuming risks is yet another aspect of entrepreneurship. Depending upon the field of effort of the entrepreneur, these risks take a variety of forms, but usually center around financial, psychological, and social areas. The fourth and final part of the definition involves the rewards of being an entrepreneur. The most important of these rewards include independence and personal satisfaction. Money is viewed less as a reward and more an indicator of the degree of success for profit-seeking entrepreneurs.

 
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