Entrepreneurial economics

Entrepreneurial economics is the study of the entrepreneur and entrepreneurship within the economy. Entrepreneurs can be considered one of the main driving forces for the nations economic growth.[1]

An entrepreneur is described as an individual who identifies and exploits opportunities, usually in the form of some sort of product or technology. These opportunities usually incite change in the market and increase the competition in their respected fields. Therefore, entrepreneurs play a key role in any economy. [2] However, just because an entrepreneur may create some form of innovation, does not always mean that they will be successful. Each decision that an entrepreneur engages in will ultimately determine whether or not they are successful and remain successful for the foreseeable future. Said decisions include the quality of their product, company investments, marketing strategies, competition in their field and ultimately delivering the product to the consumer.

Entrepreneurs create jobs not only for themselves but also others in society, and are frequently thought of as national assets[3]

Entrepreneurs are thought of as these assets due to the impact they can have on the nations overall economy. For starters, entrepreneurs may develop a new product or some form of technology to enter the market with, something that will grab the consumers attention. Furthermore, these new products can increase competition and accelerate change in their field so that economies do not remain constant. With the creation of new jobs, increased competition and the changes in their field, Entrepreneurial economics can be viewed as one of the most important drivers of economic growth.

Human creativity and productive entrepreneurship are needed to combine these inputs in profitable ways, and an institutional environment that encourages productive entrepreneurship becomes the ultimate determinant of economic growth.[4] Thus, the entrepreneur and entrepreneurship should take center stage in any effort to explain long-term economic development.[5] Early economic theory, however, did not pay proper attention to the entrepreneur.

Despite these apparently important roles in the economy, mainstream economic research generally ignored entrepreneurship for half a century[6].It was not until the late 1990’s that entrepreneurship was recognized as a crucial part of any nation's economy, and there were many reasons this occurred. The recognition of entrepreneurship sparked from the actual changes in the economy, in particular, numerous innovations in the information and communication technologies lead to an increase in 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 Baumol[7] in the American Economic Review. The article was a prod to the economics profession to attend to this neglected factor.

Coase believed that 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."[8]

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.[9] 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).[10]

Entrepreneurial Economics and Media

To understand how entrepreneurs became the driving force that they are today, it is important to acknowledge who played a role. Not only did the changes in the economy bring about the emergence of entrepreneurs, but the media also played a key role. The media would frequently run success stories on television and in the newspapers about entrepreneurs who became obsessed with their business venture and took incredible risks in order to be successful. Kim Klyver explored this relationship between the media and entrepreneurs explaining “stories about successful entrepreneurs, conveyed in mass media, were not significantly associated with the rate of nascent (opportunity searching).”[11] However he also went on to explain “there was a significant positive association between the volume of entrepreneurship media stories and a nation’s volume of people running a young business."[11] The more stories seen, the more encouraged young entrepreneurs became, showing the media's important role not only on entrepreneurs but on the economy as a whole. Furthermore, as the media industry continued to grow, it became a part of business, according to Amanda Quick. Quick explained “Whether it’s pitching or writing a press release, young entrepreneurs can use their media skills to help propel their business forward or market products."[12] The media had a great impact on new ventures, and especially in present time, the use of it from an entrepreneurial standpoint is as important as ever. Society has access to a plethora of media websites/applications, and an entrepreneur it is important to utilize them to propel your business forward.

How Entrepreneurs Impact the Economy

Over the past decade, the amount of entrepreneurial ventures has increased and has brought many economies to become more entrepreneurial in turn. This did not happen by chance, many decisions made by various entrepreneurs caused the changes in the economy. For starters, entrepreneurs often create new technologies, develop products or processes that open new markets.[13] These new markets often lead to economic growth by bringing key value-generating contribution to the economic process, compared to big companies that may be less likely to innovate. In turn, by generating these new products or processes, new firms can boost demand and create job opportunities which will have a great effect on the economy by reducing unemployment.

Furthermore, entrepreneurs increase competition between businesses. Researchers have developed a measure of market mobility, which identifies the effects of new business on existing firms.[14] This research states that new business formation has an indirect competition-enhancing effect by pushing established firms to improve their performance. This is good for the market, as it leads to survival of the fittest between firms and thus only firms with a competitive advantage or firms that are more efficient will enter the market. The entrance of the new firm diminishes the market power of incumbent firms and may force them to be more efficient or go out of business. In addition, by increasing competition, entrepreneurs also generate new jobs by entering the market "There is a direct employment effect from new businesses that arises from the new jobs being created."[14] New businesses need employees in order to function, and in creating a new venture hiring opportunities are presented.

Entrepreneurs may also incite structural change within the industry. Big firms often struggle to adjust to new market conditions, unlike entrepreneurs, and are unable to make the necessary adjustments in order to remain successful. This may often lead to the inability for "creative destruction," described by Schumpeter in 1934, which revolutionizes the economic structure from within.[15] The inability to adjust to changes in the market can cause firms to fail and allow for entrepreneurs to create new markets and industries that becomes successful for years to come.

Entrepreneurial innovation creates products or processes that open new markets and there are many examples of this happening over the past century. The entrepreneurs who founded companies like Google, Amazon, Facebook, Apple, etc. all had one thing in common, they greatly affected economic growth. New firms were often looking to invest in new opportunities such as these companies which in turn put more money into the economy.

Economic functions of the entrepreneur

Richard Cantillon

Richard Cantillon (1680?-1734) was the earliest scholar of whom we know that paid considerable attention to the entrepreneur.[16] He introduced the very concept of entrepreneur. The entrepreneur is functionally described as arbitrager. The motivating factor is the potential profit generated from the activity of "buying at a certain price and selling at an uncertain price".

Jean-Baptiste Say

Jean-Baptiste Say, who has been an entrepreneur during a period of his life, recognizes the "superior kind of labour" of the entrepreneur. He is the "coordinator, modern leader and manager within his firm".[16] He is a kind of "super-manager" because the exercise of the function needs a combination of rare qualities and experience: "Judgement, perseverance, and a knowledge of the world as well as of business...the art of superintendence and administration". To Say, a successful entrepreneur must demonstrate prudence, probity and regularity.[17]

Frank Knight

Frank Knight[18] saw the entrepreneur as someone who undertakes business decisions under conditions of 'uncertainty'. Knightian uncertainty exists where there is no basis for objective probabilities, so that it is unmeasureable and decisions have to be made using subjective judgment. The entrepreneur earns economic profits as a reward for good judgment. Entrepreneurs are seen as being confident and venturesome.

Schumpeter

Schumpeter's concept is a synthesis of three different notions of the entrepreneur: risk bearer, innovator and a coordinator. He assigned the role of innovator to the entrepreneur, driving economic growth through a process of creative destruction, and not to the capitalist. Capitalists supply capital while entrepreneurs innovate. He stated that "whatever the type, everyone is an 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."[19] The focus here is not on a category of person, but on a function. He was perhaps influenced by his family history.[20]

The Schumpeterian entrepreneur disrupts existing equilibrium. Innovation is a chaotic, unpredictable economic process, which cannot be modeled using the equilibrium based analytic methods used in mainstream economic theory.

Israel Kirzner

Israel Kirzner, an economist of the Austrian School, sees the entrepreneur as an arbitrageur who is alert to opportunities for profit that exist due to market disequilibrium.

Harvey Leibenstein

Harvey Leibenstein claimed that entrepreneurship is a creative response to x-inefficiency. Entrepreneurs are also gap-fillers, having 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 Richard Cantillon, Leibenstein suggests that entrepreneurs have the ability to combine various inputs into new innovations in order to satisfy unfulfilled market demand.[21]

Baumol

Baumol has argued that entrepreneurship can be either productive or unproductive.[22] Unproductive entrepreneurs may pursue economic rents or crime. Societies differ significantly in how they allocate entrepreneurial activities between the two forms of entrepreneurship, depending on the 'rules of the game' such as the laws in each society.

David Audretsch

Audretsch defines the entrepreneur as the missing link between investment in knowledge and growth. It is the entrepreneur who adds value to scientific discovery. Entrepreneurship capital is then, just as capital and labor in a macroeconomic model, an essential factor of production in the economy.[23]

Further reading
  • Casson, Mark C. (1982) The Entrepreneur: An Economic Theory, Oxford: Martin Robertson, [2nd. ed., Edward Elgar, 2003][24]
  • 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.
  • Vining 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 (2005), Abza Publications, India
  • Parker, S. C. (2009). The economics of entrepreneurship. Cambridge University Press.
  • Nightingale P., Coad A. (2013). Muppets and Gazelles: Political and Methodological Biases in Entrepreneurship Research, SPRU Working Paper Series 2013-03, SPRU - Science and Technology Policy Research, University of Sussex.

References
  1. "How does economics connect to entrepreneurship?". Global Entrepreneurship Institute. 2015-09-04. Retrieved 2019-03-03.
  2. Hayes, Adam. "What You Should Know About Entrepreneurs". Investopedia. Retrieved 2020-12-18.
  3. Seth, Shobhit. "Why Is Entrepreneurship Important to the Economy?". Investopedia. Retrieved 2020-12-18.
  4. Resources, Management Association, Information (2017-03-15). Entrepreneurship: Concepts, Methodologies, Tools, and Applications: Concepts, Methodologies, Tools, and Applications. IGI Global. ISBN 9781522519249.
  5. "Introduction to Entrepreneurship | Boundless Business". courses.lumenlearning.com. Retrieved 2019-03-03.
  6. Hindle, Kevin; Klyver, Kim (2007-06-01). "Exploring the relationship between media coverage and participation in entrepreneurship: Initial global evidence and research implications". International Entrepreneurship and Management Journal. 3 (2): 217–242. doi:10.1007/s11365-006-0018-8. ISSN 1555-1938.
  7. The Routledge Companion to Entrepreneurship. Routledge. 2015. p. 25. ISBN 978-0-203-09651-2.
  8. "Coase discusses famous theorem, future of applying economics in today's world". chronicle.uchicago.edu. Retrieved 2019-03-03.
  9. "Althusser and the Renewal of Marxist Social Theory". publishing.cdlib.org. Retrieved 2019-03-03.
  10. KILBY, Peter (1971). Entrepreneurship and economic development; edited by Peter Kilby. New York: Free Press; London: Collier-Macmillan. ISBN 9780029172704. OCLC 561429377.
  11. Hindle, Kevin; Klyver, Kim (2007-06-01). "Exploring the relationship between media coverage and participation in entrepreneurship : initial global evidence and research implications". International entrepreneurship and management journal. 3 (2): 217–242. doi:10.1007/s11365-006-0018-8. ISSN 1554-7191.
  12. Emerson, Eva (2013-04-10). "From the editor: Even bad news can help propel science forward". Science News. 183 (8): 2–2. doi:10.1002/scin.5591830801. ISSN 0036-8423.
  13. Kritikos, Alexander S. (2014-05-01). "Entrepreneurs and their impact on jobs and economic growth". IZA World of Labor. doi:10.15185/izawol.8.
  14. Koster, Sierdjan; van Stel, André; Folkeringa, Mickey (2012-10-01). "Start-ups as drivers of market mobility: an analysis at the region–sector level for The Netherlands". Small Business Economics. 39 (3): 575–585. doi:10.1007/s11187-011-9331-x. ISSN 1573-0913.
  15. Schumpeter, J. A. The Theory of Economic Development. Cambridge, MA: Cambridge University Press, 1934.
  16. Van Praag, M. (2005). A classical thought on entrepreneurship: Successful Entrepreneurship: Confronting Economic Theory with Empirical Practice. Edward Elgar. ISBN 9781843761617.
  17. Say, J. B. (1971) [1803]. A Treatise on Political Economy or the Production, Distribution and Consumption of Wealth. A.M. Kelley. p. 330–331. ISBN 9780678000281.
  18. Risk Uncertainty & profits, 1921
  19. Schumpeter, 1934, p. 78
  20. Scarr, Sandra; Weinberg, Richard A. (1978). "The Influence of "Family Background" on Intellectual Attainment". American Sociological Review. 43 (5): 674–692. doi:10.2307/2094543. ISSN 0003-1224. JSTOR 2094543.
  21. Leibenstein, 1995
  22. "Archived copy" (PDF). Archived from the original (PDF) on 2014-11-03. Retrieved 2014-11-24.CS1 maint: archived copy as title (link)
  23. Audretsch, D.; Keilbach, M.; Lehmann, E. (2006). Entrepreneurship and Economic Growth. Oxford University Press. ISBN 9780195183511.
  24. Sheldon, I.M.; Suckling, Charles; Copestake, T.B.; Epton, S.R.; Ong, C.H.; Epton, S.R.; Powell, N.K. (1984). "Reviews". R&D Management. Blackwell Publishing. 14 (3): 205–213. doi:10.1111/j.1467-9310.1984.tb00516.x. OCLC 320527209.
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