Entrepreneurship
Entrepreneurship
There are some unresolved differences in the definitions of entrepreneurship, but there is agreement that the term includes at least a part of the administrative function of making decisions for the conduct of some type of organization. One group of scholars would restrict the term to strategic or innovating decisions, and an overlapping group would apply it only to business organizations. The basis for these differences can be understood from the history of the concept.
The word entrepreneur appeared in the French language long before there was any general concept of an entrepreneurial function. By the early sixteenth century, men engaged in leading military expeditions were referred to as entrepreneurs. From this usage, it was easy to move to applying entrepreneur to other types of adventurers. After about 1700, entrepreneur was frequently applied by the French to government road, bridge, harbor, and fortification contractors and, somewhat later, to architects (Hoselitz 1951, p. 195). Seeing such activities as the entrepreneurial function, the mid-eighteenth-century French writer Bernard F. de Belidor further defined it as buying labor and materials at uncertain prices and selling the resultant product at a contracted price (Hoselitz 1951, pp. 198-199).
Richard Cantillon’s Essai sur la nature du commerce en général (1755), probably written a generation before its publication date, drew attention to entrepreneur as a technical term. The essence of the function of the entrepreneur was to bear uncertainty. Conversely to the Belidor emphasis, Cantillon saw the entrepreneur as anyone who bought and sold at uncertain prices. Obviously, there is no contradiction between Belidor and Cantillon in theory, but merely in the type of examples chosen. Except for princes, landowners, and salaried workers, Cantillon regarded everyone engaged in economic activity as an entrepreneur.
The physiocratic economists of the later eighteenth century, such as Francois Quesnay and Nicolas Baudeau, called the agricultural cultivator an entrepreneur. Since the physiocrats also thought that only the land was a source of social product, this put the entrepreneur in a key position. In the sphere of agriculture, Baudeau credited the entrepreneur with all the essential characteristics of risk taking and innovation that were to be elaborated in later definitions (in his Premiére introduction a la philosophie economique). At about the same time A. R. J. Turgot, in his Réflexions sur la formation et la distribution des richesses, spoke of the entrepreneur in manufacturing as one who risked capital (Hoselitz 1951, pp. 205-212).
Thus, by 1800, many French economists had given special meanings to entrepreneur and entre-preneurship, with differences arising largely from the characteristics of the sector of the economy that chiefly attracted their attention. Those economists interested in government saw the entrepreneur as a contractor, the specialists on agriculture as a farmer, and the proponents of industry as a risk-taking capitalist. The “classic” definition, which was to survive until the twentieth century, was written by an aristocratic industrialist who had had unpleasant practical experience, Jean Baptiste Say.
In the Catechism of Political Economy, Say wrote of the entrepreneur as the agent who “unites all means of production and who finds in the value of the products … the re-establishment of the entire capital he employs, and the value of the wages, the interest, and the rent which he pays, as well as the profits belonging to himself” ([1815] 1816), pp. 28-29). This idea appeared earlier in A Treatise on Political Economy (1803), which was not translated into English until 1827. Say’s entrepreneur commonly, but not necessarily, supplies either his own or borrowed capital. To succeed, he must have “judgment, perseverance, and a knowledge of the world as well as of business. He must possess the art of superintendence and administration” (1803, p. 295 in the 1827 edition). Say does not, however, discuss the entrepreneur in relation to innovation or capital creation. As in the case of the British classicists, he was unable to make entrepreneurship a ponderable factor in his general economic theory.
In contrast to the tolerably consistent and expanding French definitions of entrepreneur, the English appear to have made rather less use of three terms: adventurer, undertaker, and projector. While the Merchant Adventurers of the sixteenth century were the equivalent of French entrepreneurs, adventurer did not come into general use. The seventeenth-century French use of entrepreneur for government contractor had its English counterpart in the term undertaker. Near the close of the century, the third term, projector, came into use. Daniel Defoe, in An Essay Upon Projects, equates the term projector with inventor, but also with fraud or swindler. In Malachy Postle-thwayt’s Universal Dictionary of Trade and Commerce the words adventurer and undertaker are referred to but these terms are not given precise definitions (Redlich 1949, p. 9). Bert F. Hoselitz (1951) finds that by the time of Postlethwayt, undertaker could be applied to businessmen in general but that the term was, in fact, becoming obsolete. [See the biographies of CANTILLON; QUESNAY; SAY; TURGOT.]
Early treatment in economic theory . As economic theory became more carefully formulated in all the western European nations, no operative place was found for the entrepreneur. This was particularly evident in English classic theory from Smith to Marshall, where many writers made no effort either to define or include entrepreneurship.
The difficulty was that English theory was based upon a normal state of equilibrium, established by the multiple reactions of businessmen, consumers, investors, and workers to the prices of goods and services. Individual variations in behavior were seen either as canceled out in the aggregate or suppressed by competition. In this highly aggregative system, any unknown element was to be derived from the relations of theoretically measurable quantities. Such a system could obviously not utilize unmeasurable social or cultural factors such as entrepreneurship. To say that the entrepreneur was rewarded for risk taking, that is, for uncertainty, was the negation of a proper theoretical explanation.
In addition to the inhospitability of classic theory, the mid-nineteenth-century business structure of small-sized to medium-sized family firms, or closely held firms, obscured the distinctive character of the entrepreneurial function. With few exceptions, the men performing this function were also capitalist owners. Their rewards could be seen as a return on capital rather than as special compensations for entrepreneurial ability per se. In his Principles of Economics, Alfred Marshall perceived the changed situation inherent in big, managerially run business: “Those general faculties, which are characteristic of the modern businessman,” he wrote, “increase in importance as the scale of business increases” (1891, p. 644). Yet Marshall did not elaborate upon the theoretical significance of this increasing factor, and in discussing the growth of English manufacturing he used capitalist and undertaker interchangeably (1891, pp. 40-43).
Perhaps the relatively early development of big corporations in the United States led American economists to think of entrepreneurship as a function separate from either ownership or the supply of capital. In the late 1870s, Francis A. Walker emphasized the distinction between capitalists and entrepreneurs and called the latter the engineers of industrial progress and the chief agents of production (Dorfman 1946-1959, vol. 3, p. 109). Frederick B. Hawley, writing in 1882, saw risk taking as the distinguishing attribute of the entrepreneur, and ranked this as a factor in production on a par with land, labor, and capital (ibid., p. ^32). At the end of the century, the unorthodox John R. Commons gave an explanation of risk-taking entrepreneurship and profit that anticipated some of the more fully elaborated ideas of Joseph A. Schumpeter (ibid., p. 283). According to Commons, one type of profits arose from the ability and risk taking of the entrepreneur and was temporary and contingent on changes in the economic situation. But Schumpeter himself, in 1912, gave John Bates Clark credit for being the first to connect “entrepreneurial profits considered as a surplus over interest (and rent), with successful introduction into the economic process of technological, commercial, or organizational improvements” (ibid., vol. 4, p. 1667i). The basic problem of finding an operative role for entrepreneurship in economic theory, however, remained unsolved; and economic theorists, in general, well aware of the incongruity of a nonmeasurable human element in a theoretical structure based on quantifiable assumptions, moved in other directions, such as the study of business cycles, income, saving, and investment. [See the biographies of CLARK, JOHN BATES; COMMONS; MARSHALL; WALKER.]
Schumpeter-Cole views . Schumpeter’s acceptance of a chair at Harvard, the translation of The Theory of Economic Development into English in 1934, and the great depression all called new attention to his position regarding the essential role of the entrepreneur in creating profits. According to Schumpeter, both interest and profit arose from progressive change, and would not exist in a static society, as he defined it. Change, in turn, was the work of innovating businessmen or entrepreneurs. Since one change was likely to stimulate others, there was a tendency for innovations to cluster and produce long upswings in profits and business activity.
Much additional interest in entrepreneurship arose from the work of two of Schumpeter’s colleagues at Harvard, economic historians Edwin F. Gay and Arthur H. Cole. In 1944, in his presidential address to the Economic History Association, Cole offered a historical analysis of the changing character of entrepreneurship. Four years later, he and Schumpeter cooperated in establishing at Harvard the Research Center in Entrepreneurial History. From the work of the center, influenced greatly by Cole and Leland H. Jenks, there emerged an approach to entrepreneurship differing from Schumpeter’s.
In the Schumpeterian view, innovation was the criterion of entrepreneurship; “… the defining characteristic is simply the doing of new things or the doing of things that are already being done in a new way (innovation)” (Schumpeter 1947, p. 151). The “new way” was a “creative response” to a situation that had, at least, three essential characteristics.
First … it can practically never be understood ex ante… . Secondly, creative response shapes the whole course of subsequent events and their “long-run” outcome… . Thirdly, creative response … has … something to do (a) with the quality of personnel available in the society, (b) … with quality available to a particular field of activity, and (c) with individual decisions, actions and patterns of behavior. Accordingly a study of creative response in business becomes coterminous with a study of entrepreneurship. (Schumpeter 1947, p. 150)
Thus, to Schumpeter, a manager was an entrepreneur only while he was making a creative or innovative response.
The Cole view of entrepreneurship, however, equates it with the continuing general activities of managers. It is “the purposeful activity (including an integrated sequence of decisions) of an individual or group of associated individuals, undertaken to initiate, maintain or aggrandize a profit oriented business unit for the production or distribution of economic goods and services” (Cole 1959, p. 7). “Novelty is successful in the business world only if the institution introducing it is being effectively maintained” (p. 15).
Since the difference in the two definitions involves only the scope within which the term may be applied, the followers of Cole and Schumpeter have worked together with a minimum of friction. Both definitions implied broad social approaches, close to the Germanic tradition of Gustav Schmoller, who had seen the need for “a deeper insight into the social context of the enterprise” (Lane & Riemersma 1953, p. 6), or Alfred Weber, who had regarded entrepreneurship as a socioeconomic function separate from profit making. Both definitions also suggest time spans longer than those of dynamic economic theory. [See the biography of SCHUMPETER.]
Recent thought . In spite of the difficulties inherent in long-run analysis and in unmeasurable human factors, the increasing interest of economists in economic development has directed their attention to entrepreneurship. While economists in this field include the entrepreneurial function in empirical studies of situations and in recommending appropriate economic policies, the theoretical problem of finding a place for unmeasurable and socially influenced forces in a mathematically oriented theory has not been solved. More specifically, the difficulty is that entrepreneurial earnings would have to be accounted for in a theory of profit, but no theoretical cost of entrepreneurship can be set.
Entrepreneurial study continues, however, in the unoccupied territory bordered by economics, history, and sociology. Two publications—Explorations in Entrepreneurial History (started by R. Richard Wohl and Hugh G. J. Aitken at the research center at Harvard and continued in the 1960s under the editorship of Ralph L. Andreano at Earlham College) and Economic Development and Cultural Change (initiated by Bert F. Hoselitz at the University of Chicago)—emphasized, during the 1950s and 1960s, the importance of entrepreneurship. In addition to scores of articles in these two publications, the Harvard center inspired a number of larger empirical studies. Of these, Fritz Redlich’s volumes on the military entrepreneur in Europe cover the longest historical time span. In all, a new field of specialization, not firmly attached to any single discipline, appears to have been established.
Students of entrepreneurship generally have come to agree that while it is a definable function, entrepreneur is a term denoting an ideal type rather than a term continuously applicable to a real person. Any businessman or other official may exercise entrepreneurship, but a classification cannot be devised that would empirically separate entrepreneurs and nonentrepreneurs.
One group of scholars has expanded the Cole point of view that entrepreneurship is a continuous function in business organization.
To the extent that behavior in a business firm is organized (formally or informally), to that extent we have entrepreneurship; to the extent that it is disorganized, random, or self-defeating, to that extent entrepreneurship is lacking… . The characteristics conventionally associated with entrepreneurship—leadership, innovation, risk-bearing, and so on—are so associated precisely because, in a highly commercialized culture such as ours, they are essential features of effective business organization. By the same logic, in a differently oriented culture, the typical characteristics of entrepreneurship differ. (Aitken 1963, p. 6).
Another school of thought prefers to keep the Schumpeterian distinction between the entrepreneurial function of making strategically important or innovating decisions and the managerial function of maintaining the more routine operations of a business organization. Nonspecialists, also, tend to emphasize strategic decision making in distinguishing entrepreneurship from management.
Thomas C. Cochran
[See alsoHISTORY, article onBUSINESS HISTORY.]
BIBLIOGRAPHY
Aitken, Hugh G. J. 1963 The Future of Entrepreneurial Research. Explorations in Entrepreneurial History Second Series 1:3-9.
Cantillon, Richard (1755) 1952 Essai sur la nature du commerce en général. Paris: Institut National d’Etudes Demographiques.
Cole, Arthur H. 1946 An Approach to the Study of Entrepreneurship: A Tribute to Edwin F. Gay. Journal of Economic History 6 (Supplement): 1-15.
Cole, Arthur H. 1959 Business Enterprise in Its Social Setting. Cambridge, Mass.: Harvard Univ. Press.
Dorfman, Joseph 1946—1959 The Economic Mind in American Civilization. 5 vols. New York: Viking. -> See especially volumes 3 and 4.
Hoselitz, Bert F. 1951 The Early History of Entrepreneurial Theory. Explorations in Entrepreneurial History 3:193-220.
Lane, Frederic C.; and RIEMERSMA, JELLE C. (editors) 1953 Enterprise and Secular Change: Readings in Economic History. Homewood, Ill.: Irwin.
Marshall, Alfred 1891 Principles of Economics. 2d ed. New York and London: Macmillan. ? The first edition was published in 1890. A ninth, variorum edition was published in 1961.
Redlich, Fritz 1949 The Origins of the Concepts of “Entrepreneur” and “Creative Entrepreneur.” Explorations in Entrepreneurial History 1:1-7.
Say, Jean Baptiste (1803) 1964 A Treatise on Political Economy: Or, the Production, Distribution and Consumption of Wealth. New York: Kelley. ? First published as Traitt d’economie politique: Ou, simple exposition de la maniere dont se ferment, se distribu-ent, et se consomment les richesses.
Say, Jean Baptiste (1815)1816 Catechism of Political Economy: Or, Familiar Conversations on the Manner in Which Wealth Is Produced, Distributed, and Consumed by Society. London: Sherwood. ? First published as Catechisme d’economie politique.
Schumpeteh, Joseph A. (1912) 1934 The Theory of Economic Development. Cambridge, Mass.: Harvard Univ. Press. ? First published in German.
Schumpeter, Joseph A. 1947 The Creative Response in Economic History. Journal of Economic History 7:149-159.