Entrepreneurship is something of a ‘ghost in the machine’ so far as most economic theorising is concerned. It’s widely mentioned and tends to be encouraged by politicians, but detailed analysis of the concept is largely missing from standard economics. So, we ask: what is its nature, why is it important, and what (very briefly) might be done to encourage it?
Our first, broad answer to the ‘nature question’ is that is a specialised form of labour, where by ‘labour’ we mean the conjoined application of time, effort and individual human capital in ways that are of value to others. More specially, it is a specialised type of human capital in this labour trinity. Given this, two characteristics of human capital are worth noting at the outset: (a) it accumulates via repetitive learning by doing and (b) unlike physical capital it accumulates more quickly the more it is applied.
To get to a more specific answer, it is helpful to look at the etymology of the word entrepreneur. It comes, of course, from the French, as a conjunction between “entre” (from Latin ‘inter’, between) and “pretendre” (from Latin pretendere, to take hold of, seize, or grasp) with the meaning ‘to undertake a task or set of tasks’ or ‘to do something’.
It was later widely used to describe the organisers of theatrical productions, someone who brings together sets of human, physical and financial resources to supply, on a temporary basis, a play for a public audience. The equivalent usage today might also include the production of a movie, a TV series, or a new video game.
Later still it has come to be applied to ‘business managers’ of all types, but that, we think, is a broadening too far. Nowadays, most job descriptions with ‘manager’ in the job title specify activities far removed from the original meaning of the word. Indeed, many of those so titled are, in practice, agents of suppression of entrepreneurship, particularly at middle management levels.
The word appears to have been introduced into classical political economy by Jean-Baptiste Say in the early 19th century. He defined entrepreneurs as “individuals who create value in an economy by moving resources out of areas of low productivity into areas of higher productivity and greater yield”.
The particular skill set required for the task encompasses imagination (to ‘see’ how value might be created by an imagined reconfiguring of economic resources), ingenuity (to discover the best available reconfiguration), organizational ability (to actually effect the reconfiguration), a high tolerance of risk (because new ventures will frequently fail), and a disposition to learn from mistakes (of which there are likely to be many).
Say’s linking of entrepreneurship and higher productivity provides a first answer the ‘why important’ question and “moving resources” indicates that entrepreneurs are agents of change. Change, of course, has its costs: in practice most entrepreneurial ventures fail, but, even when successful, there can be costs to those who are, one way or another, invested in a status quo configuration of resources which is liable to be adversely affected by a reconfiguration. Opposition from them is always to be expected.
Our own view of the economic system (our schema or gestalt) readily accommodates Say’s concept of entrepreneurship. It ‘sees’ the economy as a vast network topology (a system of nodes and connections), with myriad interconnections among and between individual economic agents and the assets of the physical world. In this framework, entrepreneurial activity involves both the establishment of new connections within the system and the dissolution of old ones. In that sense, it is always innovative, even in the absence of technological innovation. It can add value (increase productivity) wherever and whenever an existing network topology can be improved. The value added can, however, be expected to be higher when technological change is occurring at a pace, because the latter is a wellspring of opportunities for the reconfigurations of the network topology that entrepreneurial activity can bring about.
What, finally, are the implications for public policy? One is the potential merit of a wu wei approach (doing by not doing, see Lao Tzu, Tao Te Ching). Roughly, don’t implement measures, eg via taxation or regulation, that have chilling effects on entrepreneurial activity.
Governments are, however, ever wont to do something and therefore tend to find wu wei too rigorous a discipline. For them a more salient implication might be simply to recognise that entrepreneurship is a form of human capital that accumulates via a learning-by-doing process and that learning curves tend to be steepest in their early periods. States do provide support for other means of accumulating human capital (colleges and universities, skills training, etc). If ‘something must be done’, modest encouragement to ‘have a go’ at entrepreneurial activity might be one of the better somethings to do.