Key Theoretical Developments Of The Term Entrepreneurship Commerce Essay


By the use of experts books and journal articles, the key theoretical developments of the term Entrepreneurship are discussed in this essay. Firstly, the author is attempting to define the term entrepreneurship whilst giving an insight in the historic development of the term. Furthermore, theories from key authors in the field of entrepreneurship are discussed in the main body of the essay.

As per Schumpeter (2003), an entrepreneur is a person who is willing and able to convert a new idea or invention into a successful innovation. Furthermore, an entrepreneur identifies or creates and acts on an opportunity (Rae, 2007). Accordingly, entrepreneurship is the subject of an enterprise and of entrepreneurs through applying practical and academic knowledge, skills and techniques used in being an entrepreneur (Rae, 2007). Being entrepreneurial involves creative thinking, behaviour and skills in order to come up with new ideas and concepts. Putting those ideas into practical solutions such as products or business models is then called 'innovative'. Recognising problems and finding solutions or ways to change these unsatisfactory situations by seeing the potential of the possible outcome and acting on it, makes one an entrepreneur. Successful entrepreneurship requires more than just luck and money; it is a process of creativity, risk taking and planning (Kuratko and Hodgetts, 2007). The most widely used form of entrepreneurship in today's business world is starting a new business where an entrepreneur sees an opportunity to make a maximum profit.

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However, the definition continues to be contentious. There is a lot of material on the subject, therefore it is difficult to critically evaluate which sources are reliable and which are not.

The beginning of 'entrepreneurship' can be dated back to the eighteenth century. According to van Praag (1999), at that time entrepreneurial thinking was considered robbery. In today's society, one could argue that the entrepreneur's role is of great importance. The ability to introduce and implement innovative ideas is what makes entrepreneurs so important to the economic development. These ideas can comprehend the innovation of new products or services, but also market innovation and organizational innovations (Bessant and Tidd, 2011) . The consumer's desires can be satisfied when an innovative idea is successfully implemented by an entrepreneur. Thus, entrepreneurs can be accounted for creating jobs when starting a new business (Carter and Jones-Evans, 2012). Therefore, a considerable contribution to the economy is made. Unfortunately, not every innovation turns out to be successful. Entrepreneurs are often unable to turn their business into a profitable organisation (van Praag, 1999).

This part of the essay gives an overview of the main thoughts and theories of some important contributors on the subject. According to van Praag (1999), the classic contributors are Cantillon, Say, Marshall, Schumpeter, Knight and Kirzner. They are key determinants of successful entrepreneurship. Their views shall be discussed and compared in the following section of this essay. The question is how and when did the theory of entrepreneurship develop? There are many ways of approaching the subject. In this essay a chronological approach is aimed for.

Dating back to the mid 18th century, Richard Cantillon was the first scientist known of who introduced the concept of 'entrepreneur'. According to him, there is an entrepreneurial function within the economic system where an entrepreneur is described as an arbitrager. Cantillon (1959) wrote in his book Essai sur la Nature du Commerce en Général (Engl.: Essay on the Nature of Trade in General) that there are three types of agents in an economic system: the landowners, the entrepreneurs and the hirelings. In Cantillon's point of view, landowners are capitalists, entrepreneurs are arbitragers and hirelings are wage workers. In comparison to the other two types of agents, an entrepreneur has to bear risk due to uncertain income. Van Praag (1999) describes that landowners and hirelings do not have to deal with uncertain incomes, because a landowner receives the rent which is fixed by the contract and the hireling receives a fixed wage. The entrepreneur on the other hand, has to be able to skilfully handle risks. According to Cantillon (1959), an entrepreneur should be alert and forward-looking, but there is no need for an entrepreneur to be innovative. Furthermore, Cantillon (1959) argues that an entrepreneur plays a central role in the economic system because an entrepreneur creates a balance between supply and demand.

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After Cantillon, Jean-Baptiste Say developed another theory regarding the affairs of an entrepreneur. In the very beginning of the 19th century, Jean-Baptiste Say wrote a book (A Treatise on Political Economy) expressing his classical thoughts on entrepreneurship. This was the beginning of the French school. In Say's point of view, "the entrepreneur plays a central coordinating role both in production and distribution (van Praag, 1999, p 314)." Furthermore, the entrepreneur is a modern leader and manager according to Say (2001). As stated in Say's book a distinctive position is assigned to entrepreneurs in the system of production and consumption. Say (2001) extends the entrepreneurial function as defined by Cantillon. Say also thinks that entrepreneurs are risk bearers who provide their own capital in order to reduce the risk of failing. A successful entrepreneur needs to have many skills. As per Say (2001), reasoning, endurance, and general knowledge of the world and business skills are essential for entrepreneurs. Furthermore, an entrepreneur should be experienced in what he does. Unfortunately, the combination of these qualities is rather rare in Say's point of view. Therefore, the number of successful competitors is limited.

Early neo-classical economists, like Alfred Marshall, paid a lot of attention to the theoretical development of entrepreneurship. According to van Praag (1999), these developments of entrepreneurial models have influenced the current research methods immensely, especially in microeconomics. In the neo-classical model all individual agents are familiar with the required information and have their economic objectives clearly stated. The firm aims to a plan of production packaging which maximizes profit. To achieve the maximum profit possible, the firm needs to "perform a calculation that yields optimal values [...which] constitute the profit maximizing business decision (van Praag,, 1999, p 317)." Barreto (1989) wrote in his book The Entrepreneur in Economic Theory - Disappearance and Explanation that the entrepreneur has vanished in the neo-classical model. This is due to the function of production, the logic of rational choice and perfect information, which leaves no room for an active entrepreneur. Thus, the firm runs itself.

However, Marshall (1930) does not share these modern neo-classical thoughts. In his point of view, the entrepreneur played an important role in neo-classical thought (Marshall, 1930). In a society described my Marshall, the entrepreneur's tasks include the supply of commodities and the provision of innovations and progress. To Marshall this was of particular importance, as the entrepreneur is the business undertaker who bears all the responsibility and exercises all the control in the firm. Furthermore, the entrepreneur guides production, he carries the business related risks and he coordinates the capital and the labour force. The entrepreneur is therefore the manager and employer in one person. Just as Say described that an entrepreneur needs to have a rare combination of qualities, Marshall (1930) builds on Say's theory and explains that the many required abilities an entrepreneur should have are very scarce in society.

Joseph Schumpeter was another very important contributor to the theory of entrepreneurship. He first published his book The Theory of Economic Development in 1911. According to van Praag (1999), Schumpeter's "theory was the first to treat innovation as an endogenous process (p 319)." This means that according to Schumpeter (1934), entrepreneurs have the ability to do more with the same amount of resources in order to be innovative. Unlike Marshall, Schumpeter saw the entrepreneur as the leader of the firm and as the innovator. Thus, entrepreneurs are the prime movers of the economic system, as stated in Schumpeter (1934). Furthermore, Schumpeter integrated the importance of creating new technology which supports his argument of entrepreneurs being innovators. Another difference that is shown in comparison to Marshall or Say, is that Schumpeter did not consider entrepreneurs as risk-bearers, managers or capitalists (van Praag, 1999). The emphasis lays on the innovative abilities of an entrepreneur, because that is what leads the economy to a balanced position. As per Schumpeter (1934), entrepreneurship is a temporary condition for any person, unless he keeps on innovating.

Only ten years after Schumpeter had fist published his views on the theory of entrepreneurship, Frank Knight wrote about the subject in his doctoral dissertation Risk, Uncertainty and Profit (1921). According to him, one has to explicitly distinguish between risk and true uncertainty. Knight has generalised Cantillon's theory of entrepreneurship through defining Cantillon's risk in a more specific manner. According to Knight (1921), entrepreneurship involves more than just arbitrage, moreover, an entrepreneur has to bear uncertainty. Furthermore, a set of characteristics and motivations are needed for an entrepreneur to be successful. In Knight's (1921) point of view, bearing uncertainty, making evaluative decisions and having enough capital available is essential for successful entrepreneurship.

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In 1973, Israel Kirzner gave the entrepreneur a central position within the market process in his book Competition and Entrepreneurship. Kirzner has contributed to the Austrian way of looking at the theory of entrepreneurship. According to the neo-Austrian view, it is unlikely for the market economy to be in a general equilibrium position (van Praag, 1999). According to Kirzner (1973), entrepreneurs are the equilibrating forces in the market process. However, the position of equilibrium is never reached in the market. Entrepreneurs are the persons in the economy who are alert to discover and exploit profit opportunities. Unlike Say and Marshall, in Kirzner's (1973) point of view, the entrepreneur does not require special abilities or character traits in order to carry out his function successfully. The entrepreneur is responsible for making decisions and for bringing long-term progress and growth to the firm.

Kirzner, Schumpeter and Cantillon all assign a crucial role to the entrepreneur. According to them, the entrepreneur is the mover of the market, directing the market to its equilibrium position. In Cantillon's (1959) point of view, the entrepreneur establishes equilibrium, whereas Schumpeter (1934) thinks that the entrepreneur destroys equilibrium and initiates a movement to a higher equilibrium position. On the contrary, Kirzner's (1973) entrepreneur achieves tendencies towards an equilibrium position, but it never gets realised. Furthermore, Cantillon's entrepreneur deals with 'risk', Knight's entrepreneur deals with 'true uncertainty' and Kirzner's entrepreneur deals with 'utter ignorance'. With the exception of Cantillon, all economists ascribe economic progress and innovation to the activities of an entrepreneur (van Praag, 1999). Moreover, Say, Marshall and Knight agree that the entrepreneur can be seen as the decision maker and manager of the firm. However, in Kirzner's point of view, "the firm results after the entrepreneur has completed some entrepreneurial decision-making, specifically the purchase of certain resources (van Praag, 1999, p 327). The views on the entrepreneur's tasks mainly overlap. Except for Schumpeter's entrepreneurs, all entrepreneurs are responsible for bearing risks. Schumpeter (1934) explicitly excludes the risk bearing from the entrepreneur's activities.

The most recent economist who contributed to the subject is Peter Drucker. In his book Innovation and Entrepreneurship (2007), he explains that innovation, resources and entrepreneurial behaviour are the keys to entrepreneurship. In Drucker's point of view, an entrepreneur needs to be able to use innovation and marketing in order to practise successful entrepreneurship. Drucker extended Schumpeter's definition of entrepreneurship.

As shown in the main body of this essay, there is a lot of information available concerning the development of the term 'entrepreneurship'. Even though there are so many contributors to the subject, one cannot agree on a definition of the term. Today, the definition continues to be contentious.