Joe Johnson, Ph.D.
Entrepreneur. Investor. Startup Expert.
Philosophers and economists have helped to shape our understanding of the importance of entrepreneurship and of how entrepreneurs factor into an economy. This understanding hasn’t been static, however. As the world has changed, entrepreneurial thought has changed with it.
Nowadays, we tend to think of entrepreneurs as those risk-takers who develop and manage businesses in our global marketplace. They are frequently seen as the key drivers of the economy, but that wasn’t always the case.
Entrepreneurial thought has evolved a great deal over the past three centuries. A knowledge of its evolutions and of those who contributed to its development can provide modern day entrepreneurs with a framework in which to ground their activities.
Early Philosophers: Cantillon, Say, and Marshall
While economic thought didn’t begin in the 18th-century, any more than did economies themselves, it is then that ‘the entrepreneur’ is first mentioned.
Imagine the world in the 1700s: The Age of Enlightenment, Benjamin Franklin’s inventive genius, and the development of the steam engine. The first encyclopedia is printed and the United States wins its independence. In France, Richard Cantillon, whose Essai sur la Nature du Commerce en Genera would help introduce the idea of the entrepreneur, is helping to formulate economic philosophy.
For Cantillon, an entrepreneur was seen as the person who took on the responsibility of understanding the demand, producing the appropriate goods with the help of wage workers, and circulating them to meet the needs of the landowners (Van Praag, 1999). Importance was placed on the function of entrepreneurship, but not on the actual entrepreneurs.
Though this theory was groundbreaking, it was not accepted by the economists of the time as they were focused on the different economic categories rather than on the role of the individual in furthering economic development. Views of classical economists like Smith and Ricardo revolved around ownership or class interest, not on the concept of the entrepreneur as an economic agent.
By the end of the 18th-century, focus had turned to real-world economics which helped to revive the concept of entrepreneurship. During this time, Jean-Baptiste Say, an 18th-19th-century French economist, coined the term ‘entrepreneur’.
In Say’s view, the varied roles of an entrepreneur are to produce, distribute, and sell products and services using different production inputs such as labor, capital, and land. These different inputs were given fixed payment, while the speculative risk of gaining profit or suffering loss was taken over by the entrepreneur.
Further, Say saw the entrepreneur as a broker between buyers and sellers. The brokerage or commission was the profits he earned by assessing the demand at any given time, using factors of production to create the right number of products and services, and selling them at a price that would garner a profit without diminishing the demand. Thus, Say’s entrepreneur was not just a business manager, but also a person with an in-depth understanding of the market, a keen sense of judgment to understand the demand for a product, and the high levels of perseverance and optimism necessary to achieve his financial goals.
For Say, an entrepreneur was a person with the ability to effectively compare the cost of production with the final value of a product in order to generate income without reducing demand or causing problems with production. Say emphasized that those with such skills are successful, while others tend to suffer from losses or bankruptcies. With such ideas, Say became the first economist to focus on the personal skills of an entrepreneur and not solely on his role within the economy.
In addition to his ideas revolutionizing the way that people thought of the entrepreneur, Say also introduced the concept of supply and demand (known as Say’s Law), which would be used by James Mill and J.S. Mills and later disputed by John Maynard Keynes.
Other economists such as Alfred Marshall built on Say’s ideas and added that “the economy centers on entrepreneurs because they drive the production and distribution process by coordinating demand and supply as well as capital and labor” (Johnson, 2016, p.36). Marshall made an important contribution in his own right to the concept of entrepreneurship by emphasizing that entrepreneurs should be innovators who can make the most of existing resources. He also noted the high level of risk that entrepreneurs must take.
20th-Century Thought Fleshes Out Entrepreneurship
The reintroduction of the idea of entrepreneurship provided a jumping-off point for many economists who continued to expand on the concept. The twentieth century economists added to Say’s and Marshall’s assessments and delved more deeply into what it means to be an entrepreneur and how the role of the entrepreneur fit into the economy.
Schumpeter recognized the role of the entrepreneur in bringing about technological change and innovation. He coined the term “unternehmergeist”, meaning “entrepreneur-spirit”, to describe that urge to find new ways of doing things. Schumpeter did not view the entrepreneur as a risk bearer – he assigned that role to the investor (capitalist).
Schumpeter was a supporter of innovation, believing that it was critical for economic change, and explained the entrepreneur’s role in bringing about said innovation. Schumpeter believed in the idea of creative destruction, wherein innovation disturbs the status quo and creates a new way of doing things.
Alternatively, Israel Kirzner saw innovation in a more incremental way. Rather than a total restructuring of a product or a new idea, he believed that little changes were just as important. One modern example would be Facebook supplanting Myspace in online culture. On the face of it, both websites served the same function in essentially similar ways. However, Facebook’s algorithm and the way that they approached their roll-outs and growth were just different enough to be successful.
Kirzner’s work has focused on highlighting the importance of entrepreneurs and integrating entrepreneurship into neoclassical economics. He speaks of the role entrepreneurs play in discovering profit opportunities. “Kirzner described entrepreneurialism as a systematic sequence of error in the assessment of profit opportunity, discovery, and correction in what becomes the market process” (Johnson, 2016).
Frank Knight, a prominent institutional economist, raised the difference between risk and uncertainty while viewing entrepreneurship as the ability to make profits in an environment with both risk and uncertainty. His focus on uncertainty is especially important since, as any entrepreneur will tell you, it is a hallmark of entrepreneurship.
While the ideas of 18th, 19th, and 20th-century economists have helped us to achieve a better understanding of the entrepreneur and his role within the economy, there continue to be gaps in the definition of entrepreneurship, especially in light of the market’s ongoing evolution. To get a better understanding of the role of the entrepreneur in the current market, here’s a modern definition which unites and builds upon previous philosophies:
Entrepreneur: A Cohesive 21st-Century Definition
An entrepreneur can be defined as someone who seeks economic opportunity by engaging in activities that risk capital in any form, including money, time, talent, and reputation. The goal of an entrepreneur is to attain higher levels of profitability by coordinating managerial activities and capitalizing on opportunities.
Today, this is often accomplished through innovation or the reapplication of existing concepts into other markets/areas in order to improve existing products/services or to introduce new products/services via the development of new business models and processes.
Simply put, a “commercial entrepreneur is someone who is seeking an opportunity to achieve economic improvement for his or her investment (measured by time and money) by leveraging innovation, reapplication or improvement in a particular commercial market” (Johnson, 2016).
This definition helps to illustrate the importance of the entrepreneur as a leader of economic growth and change and incorporates the entrepreneur’s key roles:
- Increasing productivity or yields
- Constantly seeking opportunities
- Coordinating or overseeing the utilization of different resources
- Taking risks
- Innovating new ideas or creating new products from existing ideas
- Providing leadership
- Possessing a profit-seeking motivation
While this article provides a quick overview of some important economic ideas, I do recommend that you read more from the various sources or from my dissertation. I’ve found that learning more about entrepreneurial thought helped to inspire my entrepreneurial activities and I encourage others to do likewise.
Rothbard, Murray. (2012, May 17). J.B. Say Salvages the Entrepreneur. The Mises Institute. Retrieved from: https://mises.org/library/jb-say-salvages-entrepreneur
Johnson, Joseph. (2016). Examining Learning Antecedents to Entrepreneurial Success. ProQuest.
Van Praag, C. M. (1999). Some classic views on entrepreneurship. De Economist, 147(3), 311-335.
About the Author
Dr. Joe Johnson is an entrepreneur, investor, and startup expert. He is the founder and principal of GoodField Investments and the GoodField Foundation (www.GoodField.com).
Joe has a Ph.D. in Entrepreneurial Leadership and an MBA. He is the author of the upcoming book on The Science of Why Most Entrepreneurs Fail and Some Succeed.
Most importantly, he is the incredibly blessed husband of one amazing wife and father of six wonderful children. He resides in Bradenton, Florida. For more information on Dr. Johnson and his work, go to www.JoeJohnson.com.