In India, entrepreneurship is becoming a popular subject among students, faculties and researchers. Increasingly, many people ranging from policymakers to media are emphasizing that entrepreneurship is the key to economic development.
The word “Entrepreneur” is a French derivation. In 1755, Richard Cantillon first introduced the term. Cantillion‟s entrepreneur is someone who engages in exchanges for profit; specifically, he is someone who exercises business judgment in the face of uncertainty.
Writing in Harvard Business Review, Geoffrey Jones and R. Daniel Wadhwani said, “During the 1940s and 1950s business historians pioneered the study of entrepreneurship. The interdisciplinary Center for Research on Entrepreneurial History, based at Harvard Business School which included Joseph Schumpeter and Alfred Chandler, and its journal Explorations in Entrepreneurial History were key institutional drivers of the research agenda. However the study of entrepreneurship ran into formidable methodological roadblocks, and attention shifted to the corporation, leaving the study of entrepreneurship fragmented and marginal. Nevertheless business historians have made significant contributions to the study of entrepreneurship through their diverse coverage of countries, regions and industries, and – in contrast to much management research over the past two decades – through exploring how the economic, social, organizational, and institutional context matters to evaluating entrepreneurship.”
Since then literature on entrepreneurship has developed and expanded its horizon after interacting with economic theories and business histories. In the following text, I will discuss various theories on entrepreneurship which is postulated by leading experts and economists.
Jean-Baptiste Say: Father of Entrepreneurship
Jean-Baptiste Say was the second author to take an interest in entrepreneurs. He regarded economic development as the result of venture creation, and hoped the English Industrial Revolution would spread to France (Say, 1815, 1816). Cantillon and Say regarded entrepreneurs as risk-takers basically because they invested their own money.
In Cantillon’s view, entrepreneurs bought a raw material – often a farm product – at a certain price, in order to process it and resell it at an uncertain price. Entrepreneurs were therefore people who seized opportunities with a view to making profits, and assumed the inherent risks. Say drew a distinction between the entrepreneur and the capitalist, and between their profits (Say, 1803; 1827: 295; 1815; 1816: 28-29; Schumpeter, 1954: 555).
In doing so, he associated entrepreneurs with innovation. He viewed entrepreneurs as change agents. He himself was an entrepreneur, and became the first to define the boundaries of what an entrepreneur, in the modern sense of the term, actually is.
Schumpeter (1954) admitted that a major part of his own contribution was to tell the Anglo-Saxon community about the world of the entrepreneur as described in the writings of Jean-Baptiste Say. As Say was the first to lay a foundation for the field, we have described him as the father of entrepreneurship (Filion, 1988).1
It is perhaps interesting to note that what Say did was basically to draw together two major trends of thought of his time: that of the physiocrats and that of the Industrial Revolution in Great Britain. He was a great admirer of Adam Smith (1776), whose ideas he brought to France, and of the English Industrial Revolution (Say, 1816). In fact, he tried to establish a framework of thought that would enable the Industrial Revolution to move across the Channel to France. He applied the liberal thinking proposed by Quesnay, Mercier de La Rivière, Mirabeau, Condorcet, Turgot and other physiocrats as a means of developing farming, to the entrepreneur.
Joseph Schumpeter on Entrepreneurship
Joseph Schumpeter is seen as the foremost theoretician of entrepreneurship. In addition, Schumpeter, whose “creative destruction” is as famous as Milton Friedman’s “there is no free lunch,” is increasingly recognized as a major economist, often given the same stature as John Maynard Keynes.
Schumpeter spent the last twenty years of his life as a Professor of Economics at Harvard University. English-speaking readers may be familiar with some of his works, especially The Theory of Economic Development and the classic Capitalism, Socialism, and Democracy. However, very few of Schumpeter’s key texts on the entrepreneur and entrepreneurship have been available in English. (2)
W. Michael Cox and Richard Alm write, “Joseph Schumpeter (1883–1950) coined the seemingly paradoxical term “creative destruction,” and generations of economists have adopted it as a shorthand description of the free market’s messy way of delivering progress. In Capitalism, Socialism, and Democracy (1942), the Austrian economist wrote:
The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. (p. 83)
Although Schumpeter devoted a mere six-page chapter to “The Process of Creative Destruction,” in which he described capitalism as “the perennial gale of creative destruction,” it has become the centerpiece for modern thinking on how economies evolve. (4)
Innovation by the entrepreneur, argued Schumpeter, leads to gales of “creative destruction” as innovations cause old inventories, ideas, technologies, skills, and equipment to become obsolete. The question is not “how capitalism administers existing structures…[but] how it creates and destroys them.” This creative destruction, he believed, causes continuous progress and improves the standards of living for everyone.(3)
In online version of Library of Economics and Liberty, Timothy Sandefur stated: “According to Schumpeter, the process of technological change in a free market consists of three parts: invention (conceiving a new idea or process), innovation (arranging the economic requirements for implementing an invention), and diffusion (whereby people observing the new discovery adopt or imitate it). These stages can be observed in the history of several famous innovations. The Xerox photocopier was invented by Chester Carlson,5 a patent attorney frustrated by the difficulty of copying legal documents.6 After several years of tedious work, Carlson and a physicist friend successfully photocopied a phrase on October 22, 1938. But industry and government were not interested in further development of the invention. In 1944, the nonprofit Battelle Corporation,7 dedicated to helping inventors, finally showed interest. It and the Haloid Company (later called Xerox) invested in further development. Haloid announced the successful development of a photocopier on October 22, 1948, but the first commercially available copier was not sold until 1950. After another $16 million was invested in developing the photocopier concept, the Xerox 915 became the first simple push-button plain-paper copier. An immense success, it earned Carlson more than $150 million.8 In the following years, competing firms began selling copiers, and other inventions, such as the fax machine, adapted the technology.”
Sandefur further added, “Schumpeter limited his analysis of innovation to its economic aspects, but Friedrich Hayek pointed out that the same process takes place at the level of social mores and political philosophy. Hayek and his contemporary Karl Popper developed the political theory of the “open society,” stressing the importance of innovation for the discovery and testing of social values. In Hayek’s words, “the existence of individuals and groups simultaneously observing partially different rules provides the opportunity for the selection of the more effective ones.”10 This process, however, creates discomfort as well.” Friedrich Hayek was leading economist. He popularized the Austrian School in economic thinking and various towering figures are associated with this school.
Israel Kirzner and Entrepreneurship
Israel Kirzner(born 1930) refined the academic understanding of entrepreneurship and postulated concepts of entrepreneurial alertness and discovery. His book, Competition and Entrepreneurship criticizes neoclassical theory for its preoccupation with the model of perfect competition, which neglects the important role of the entrepreneur in economic life. His contribution to entrepreneurship is widely recognized.
Russell S. Sobel said in Liberary of Economics and Liberty, “In contrast to Schumpeter’s view, Kirzner focused on entrepreneurship as a process of discovery. Kirzner’s entrepreneur is a person who discovers previously unnoticed profit opportunities. The entrepreneur’s discovery initiates a process in which these newly discovered profit opportunities are then acted on in the marketplace until market competition eliminates the profit opportunity. Unlike Schumpeter’s disruptive force, Kirzner’s entrepreneur is an equilibrating force. An example of such an entrepreneur would be someone in a college town who discovers that a recent increase in college enrollment has created a profit opportunity in renovating houses and turning them into rental apartments. Economists in the modern austrian school of economics have further refined and developed the ideas of Schumpeter and Kirzner.”
For more than three decades, Professor Israel M. Kirzner has developed the economic theory emphasizing the importance of the entrepreneur for economic growth and the functioning of the capitalist process. In his theory building on entrepreneurship, Kirzner links the idea of the highly individual skills and knowledge of man with the entrepreneur of Ludvig von Mises, Kirzner’s teacher and mentor. He has thereby become the single most important scholar in modern Austrian economics. In the 1970s and 1980s he was instrumental in laying the foundation for a new research community in Austrian economics and the theory of the competitive market process.
Kirzner spells out a theory of the entrepreneurial market process that fills the theoretical gap in traditional price theory. The entrepreneur is posited as the prime mover in the economic system and as such s/he is alert to gaps in the market and enticed by the lure of pure profit. The gaps discovered by alert entrepreneurs are continuously closed through arbitrage. The market is depicted as an unending process of the entrepreneurial discovery of opportunities for mutual gain from exchange.(5)
David C. McClelland and Entrepreneurship
In Journal of Enterprising Culture, Louis Jacques Filion wrote in 1997, “For the purposes of this paper, the term “behaviorists” includes the psychologists, psychoanalysts, sociologists and other specialists of human behavior. One of the first authors from this group to show an interest in entrepreneurs was Max Weber (1930). He identified the value system as a fundamental element in explaining entrepreneurial behavior. He viewed entrepreneurs as innovators, independent people whose role as business leaders conveyed a source of formal authority. However, the author who really launched the contribution of the behavioral sciences to entrepreneurship was undoubtedly David C. McClelland.”
According to Filion, McClelland did not define entrepreneurs in the same way as the rest of the literature. His definition was as follows: “An entrepreneur is someone who exercises control over production that is not just for his personal consumption. According to my definition, for example, an executive in a steel-producing unit in the USSR is an entrepreneur.” (McClelland, 1971; see also 1961: 65)
Filion further added, “In fact, McClelland’s (1971) work concentrated on managers of large organizations. Although he is strongly associated with the field of entrepreneurship, a careful reading of his writings shows that he never made a connection between the need for achievement and the decision to launch, own or even manage a business (Brockhaus, 1982: 41). McClelland also identified the need for power, but he paid less attention to this aspect in his later work, and it is less well-known. A number of researchers have studied need for achievement, but nobody seems to have obtained conclusive results that associate it with entrepreneurial success (Durand and Shea, 1974; Hundall, 1971; Schrage, 1965; Singh and Singh, 1972).”
To be continued…
(1) http://web.hec.ca/creationdentreprise/CERB_Backup-12-mai-2008/pdf/1997 05EPIEntreprenology.pdf