The Entrepreneur Death and Resurrection

Dr. Peterson is the director of the Center for Economic Education and the Scott L. Probasco Jr. Professor of Free Enterprise at the University of Tennsesee at Chattanooga.

Guess who’s making a comeback in college classrooms on economics. The entrepreneur.

Traditionally economists identified four factors of production: land, labor, capital and thanks largely to Jean-Baptiste Say, an early 19th-century disciple of Adam Smith—the entrepreneur. Then, along about the late 1950s, entrepreneurless “resource allocation” or three-factor production became more and more the vogue—land, labor and capital. And even, here and there, two-factor production—labor and capital.

So a lot of college students have been given a presentation of Hamlet without the Prince of Denmark—pretty much left in the dark as to just how firms come into and stay in being. Or how firms die. They just do, maybe by osmosis, maybe by legerdemain, but, whatever, that is that. Paul Samuelson, for example, follows the three-factor pattern in his widely used text, Economics (though in his 10th edition he at least recognized that entrepreneurs could be “innovators” and that they could perform a limited function in developing countries).

But here of late quite a few text-books—Economics: Private and Public Choice by James Gwartney and Richard Stroup, for instance—are putting the entrepreneur firmly back into the production picture. Moreover, some 150 of our 1,200 business schools now provide courses or research facilities on entrepreneurship. Baylor University, for example, has set up a Center for Private Enterprise and Entrepreneurship which has already produced an encyclopedia on entrepreneurship. Babson College in Wellesley, Massachusetts has established an Academy of Distinguished Entrepreneurs which has brought to its lecture platform such hands-on en trepreneurs as Ray Kroc, chairman of McDonald’s until his death last January; Soichiro Honda, founder of Honda Motor; and Royal Little, former chairman of Textron.

In 1981-82 the late Jules Backman, a New York University research economist who applauded this rebirth of the entrepreneur, organized a conference to reaffirm the critical role of entrepreneurship in a free society.[1] Dr. Backman set the tone by defining the entrepreneur as the indispensable enterpriser, initiator, risk-taker, strategist, coordinator, innovator and decision-making leader of a business, the fellow who decides what to produce and how to produce it, who is ultimately responsible for the success or failure of the firm. Though, Dr. Backman conceded, it is sometimes difficult to identify this or that individual as the entrepreneur in a large firm, “the function, nevertheless, is an essential element in the production process.”

Dr. Backman blamed the two-decade demise of the entrepreneur on the dubious perceptions that large corporations are autonomous and perpetual, and that the separation of corporate ownership and management somehow negates the role of entrepreneurship. Too, he held Keynesian economics dwells on demand management, a distinctly macro concept, and thereby submerges the individualistic supply or entrepreneurial side of the economy.

Still, as noted, in recent years the pendulum is swinging back toward recognition of the entrepreneur. Why? I speculate that lagging productivity and economic growth in the 1970s called for new answers—or, in a sense, old answers. Moreover, even during the Carter administration Congress belatedly, if anything but completely, reached the conclusion that overregulation of industry and high marginal capital gains and income tax rates were entrepreneurial drags on undertaking new projects. And along came supply-side economics, with George Gilder, among others, hailing the “heroic creativity of entrepreneurs.”

Economist William Baumol, a participant in the Backman conference and a former president of the American Economic Association, sees entrepreneurs as necessary but not always as heroic or creative. Sometimes they are rather two-faced free enterprisers, especially when they launch a private antitrust suit against another firm as a means of evading painful competition, or when they inveigle the government into protectionist measures. When, for example, the ICC undertook to deregulate trucking, the howls of pain by the Teamsters Union were matched by those of the owners of the regulated trucking companies. So, too, did the “entrepreneurial” efforts of sagging Lockheed and Chrysler lead to bail-outs by Uncle Sam.

Accordingly Dr. Baumol censures doublespeak in entrepreneurs and businessmen who sing paeans of praise to competition but then condemn particular competitive practices as “cream-skimming,” “predatory pricing,” “dumping” or “unfair competition.”

Conference participant Moses Shapiro, executive committee chairman and former C.E.O. and self-de-scribed “practicing entrepreneur” of General Instrument Corporation, makes the point that the existence of the modern firm and consensual management in no way obviates the crucial need for the entrepreneur (who is frequently manifested in the corporation’s C.E.O.). He maintains that without ongoing and effective entrepreneurship a corporation suffers hardening of the arteries and loss of vision as well as loss of market. Change—frequently dramatic and sweeping change—is the order of the day, says Shapiro, and the future of a business lies in its entrepreneurial ability to capitalize on dynamism and manage change, to adapt and innovate successfully.

Economist Israel Kirzner, another participant in the Backman conference and a student of Ludwig von Mises, likes the stress on dynamism and innovation but argues entrepreneurship is more than that. He says it is an entrepreneurially directed information system seeking profit opportunities and ever tending to work on behalf of the consumer. He argues that at any given time market responses are likely to be less than fully coordinated (in economic jargon, in a state of relative disequilibrium). What the entrepreneur has to see, and see correctly and most skillfully, is information on faulty or incomplete market responses, on gaps somewhere along the line in the current and most variegated networks of technology, production, finance or marketing, industry by industry, location by location. Then, with no little risk, he has to discover or “create” entirely new information on just how to fill those gaps—or, more likely, gap—and thereby better satisfy consumer choices.

The stress on the consumer is vital to understanding entrepreneurship. Entrepreneurship is a market response—a response to the consumer. Israel Kirzner, in contrast to John Kenneth Galbraith and Ralph Nader, reminds us that the market system is a loss as well as a profit system, that the consumer is sovereign, wielding the all-powerful power of the purse, and thereby making the entrepreneur his agent and underling. If the entrepreneur acting on information is right, the consumer rewards him with profits. If he is wrong, the consumer punishes him with losses. And if he is repeatedly wrong, King Consumer applies the coup de grâce—relegates the entrepreneur to a business mortality statistic. Long live the King. []

1.   Conference proceedings are available in Entrepreneurship and the Outlook for America edited by Jules Backman (New York: Free Press-Macmillan, 192 pages, $12.95, 1983).