Posted by As the 2016 Drucker Forum Abstract notes: entrepreneurship is “an activity once regarded as peripheral, even suspect, but now ‘cool’ and celebrated by politicians”. Entrepreneur, a charming word borrowed from old French, came into economists’ discourse around the time Adam Smith was writing. It has a positive uplifting feel, entrepreneurs and entrepreneurship are ‘good’ – who is going to say we need less of them? But the term carries burdens that loom as our global socioeconomy changes.
First, since the time of Cantillon (who used the term in its modern business-oriented sense in 1732) business has become vastly more important, pushing back against lineage, religion, and political maneuver as sources of social and economic power. Thus entrepreneurship is foundational to democratic capitalism, another ‘good’.
Second, and a topic in Drucker’s writings, entrepreneurs are a ‘good’ as they push back against large-scale corporatism, advancing capitalist democracy to its ‘next phase’. The general view, framed by 19th century Anti-Trust activists, revelations about ‘robber barons’, and especially by Berle & Means in 1932, is that large corporations have become too influential to serve our socio-economy well, being run by un-elected self-interested managers who maximize shareholder wealth rather than social benefit.
Entrepreneurship suggests a different kind of socioeconomy with higher aims – Entrepreneurial Society and its ‘creatives’. These urge increased freedom for individual entrepreneurs and the development of ‘entrepreneurial culture’ in existing corporations; so advancing capitalist democracy towards greater growth and ‘lifting all boats’.
Familiarity covers up important details. Cantillon’s entrepreneur was an individual (like himself, a rich Parisian banker) who spots an opportunity for ‘arbitrage’ – buying low and selling high. This is about information and its availability. Long before the Internet and ‘high speed trading’ many bankers had ‘private’ sources about what might tilt the economy, a pigeon carrying news of Waterloo being a famous (and scurrilously Anti-Semitic) legend.
The point here is that arbitrage is not creative, it simply signals uneven information in an existing market. Cantillon’s notion was refreshed by Kirzner and lives on as ‘effectuation’. Several decades after Cantillon, Jean-Baptiste Say, a founder of Paris’s ESCP, the first modern business school, and a great proselytizer for Adam Smith, re-purposed the term entrepreneur as the creator of a new business. Smith, of course, wrote that the division of labor, the ultimate source of wealth, is ‘limited by the extent of the market’. One of history’s curiosities is that Smith paid little attention to entrepreneurs even as he argued for ‘free markets’. In contrast, Say’s idea of entrepreneurship led to ever-popular but still un-proven claims that ‘small business’ is the main source of economic growth, though entrepreneurs like Henry Ford, Jamsetji Tata, and the Michelin brothers clearly built huge corporations.
The contrast of Cantillon’s and Say’s ideas remains a source of confusion. Say’s view is broader for it does not presuppose an existing market to carry the arbitrage. Rather the economy is extended, the new firm implementing an ‘entrepreneurial idea’ that existing markets do not allow, implying firms arise in reaction to ‘market failures’ that may well include desired but un-provided products and services or competition to monopolists. Entrepreneurial society facilitates such extension.
But there are traps for the unwary. While Cantillon’s notion hinges on maldistributed knowledge about the world that exists, Say’s notion pushes out into the unknown, to a world re-made by entrepreneurial activity. Who knew the world hungered for TV dinners or messages of less than 140 characters? Say’s idea seems more interesting but there is not much that can be said about it beyond ‘go forth!’ It is not a testable theory. Rather it defines search that is ‘under-determined’, probing what is uncertain and not known.
Ultimately it takes us beyond rational analysis and into the realm of imagination, a place of some challenge. Only those profoundly ignorant or dismissive of human history would presume that acting on what we imagine leads necessarily to a ‘good’. Thus the distinction between Cantillon and Say contrasts re-making what we know into something better versus throwing it over with revolution.
Many pontificating about entrepreneurship seem blissfully unaware of these implications. For instance, only this month (February 3rd) Stanford University President John Hennessy defined entrepreneurship as “transforming an idea into something real that can have a wide impact” – very laudable for those on the right side of history, but evils often result. The bankers and ‘rocket scientists’ who developed derivatives were very entrepreneurial.
The technical point here is that if entrepreneurship ever becomes a testable science, we can anticipate avoiding entrepreneurial tragedies like Thalidomide or the Dust Bowl or cigarettes; the science being supported by rational markets that reveal truth as they respond to valuation errors. Behavioral economics helps show the way here.
But this is not Say’s view. In which case entrepreneurship is an utterly different term for how we explore our socio-economy’s uncertainties – an inherently moral and ethical matter. While Schumpeter’s ‘creative destruction’ is much cited, it is not a testable theory that explains economic growth. Nor does it provide any guidance about ‘new combinations’. In fact, he anticipated the obsolescence of the entrepreneur as large corporations corralled the R&D that drove economic growth.
Thus the enthusiasm for entrepreneurship is a curious resurgence of old political debate about the role of wealth and government in our socioeconomy. It is new political language that prioritizes anti-statism and ‘freedom’ over structure and predictability, without justification. Even if this language seems adequate for policy decisions, entrepreneurship is enmeshed with deeper social questions about, for instance, rising inequality, declining educational access, structural unemployment, and defense spending. Stanford graduates’ talk about becoming entrepreneurs is trifling, for as members of the elite they have access to funds, connections, and new science, with plenty of Plans B should they come unstuck (as most entrepreneurs do).
But when these ideas infect government policies will they benefit more than the already privileged? Will they help those trying to create employment in Arkansas, Marseilles, or Basilicata? There is urgency here, for in our post-Keynesian age governments around the world, especially in the EU and US, have chosen hands-off encouragement of private sector entrepreneurs over policies that can be monitored directly. Indeed, there is reason to suspect governments are deploying entrepreneurial arguments in precisely the ways Berle & Means feared, to hide their responsibilities, especially when the consequences include growing corruption – albeit cloaked in widely varying national garments sewed entrepreneurially out of political opportunity.
About the author:
JC Spender trained first as a nuclear engineer then in computing with IBM. He moved into academe as a strategy theorist, opening up a subjectivist/creative approach that complements mainstream rational planning notions of strategizing. This 40-year project was brought to completion in Business Strategy: Managing Uncertainty, Opportunity, and Enterprise (OUP 2014).
This is a very useful antidote against too much enthousiasm about the entrepreneurial society. However, just calling for more direct monitoring by government is certainly not going to solve the problem, because as we know, close monitoring by government aganecies is a cumbersome process, not vey innovative by nature, a process which has already shown its inefficeincy in avoiding the problems that private entrepreneurship supposedly or really creates.
Thanks for your kind comment Erhard. Yes, it is all about freedom, especially in the socio-economic sphere. We know centralized authority does not work too well if economic growth is the aim. But just as most of us are deeply committed to liberty and democracy’s political aims – and we know that means setting up laws and other constraints on what individuals can do (and say), so entrepreneurial activity only becomes a social good when similarly constrained. How are we to organize this as the necessary complement to encouraging entrepreneurial activity?
That’s a really helpful distinction between entrepreneurship as arbitrage in existing markets and entrepreneurship as innovation to create new markets. Is it fair to say that the former is more likely be digitized and performed by an algorithm, while the latter depends upon humans and their experiences?
Thanks David – precisely the point, that there can be no ‘theory’ of the second, as we presently use the term ‘theory’. Entrepreneurship, like the rest of business (and managing) is an art form. The widespread attempts to ‘theorize’ it are ludicrous, showing the way the ‘theorists’ misunderstand the phenomena of interest (economic value-creation). At the same time the ‘art of value-creation’ is constrained by many limits or boundaries. As an ex-engineer I normally mention the 2nd Law of thermodynamics (the one that ensures that even if we can imagine perpetual motions machines we cannot build them). We would do better to focus our research on such constraints to the entrepreneurial art form.