Emerging out of the beginning of the Industrial Revolution was a different kind of individual who later became known as the entrepreneur. The entrepreneur has been a driving force for change and hasbeen responsible for shaping the material lifestyle for different socioeconomic institutions ever since (McDaniel 2002, 4- 11). The position here is that not all entrepreneurial efforts have hadresults that are beneficial to society but rather much benefit has been derived from the efforts of many of the entrepreneurs. However, the entrepreneur has been given little credit for thosebeneficial contributions over the past three centuries. While entrepreneurs exist in all economic institutions, they are most visible in capitalism. Part of the reason for this visibility is theeconomic freedom given to the entrepreneur to innovate within a capitalistic structure, and this economic freedom is not present in other socioeconomic systems. Moreover, in market capitalism it isthe capitalist who receives kudos for the success of the economic structure, and the entrepreneur is often overlooked and undervalued. The distinction must first be clearly made between theentrepreneur and the capitalist in order to better understand the role and contributions of the entrepreneur in a modern capitalist economy.<\/p>\n
If it is the entrepreneur and not the capitalist who has been responsible for the industrial and technological advancements of the past 300 years, then a clearer distinction needs to be made between them. Further, if the capitalist receives undue credit for these advancements and this undeserved credit diminishes the importance and value of the entrepreneur, then the social economy is in danger of losing the creative innovations brought about by the entrepreneur (Schumpeter 1947, 134). Once this dichotomy between the entrepreneur and the capitalist is understood, then the transition from entrepreneur to capitalist can be seen as it erodes the creative nature of the entrepreneur.<\/p>\n
Differentiating the Entrepreneur and the Capitalist<\/p>\n
Since the beginning of the Industrial Revolution, economists have attempted to understand and incorporate the entrepreneur into economic literature. One of the earliest attempts to explain the entrepreneur, a French term for risk taking, was made by Robert Cantillon before 1734 (Oser and Blanchfield 1975). Cantillon correctly separated the activities of the capitalist from those of the entrepreneur. By the late 1700s Jean Baptiste Say used the term entrepreneur to describe the economic activities of changing resources from a lower productive use to a higher productive use (1821). In this same era, Adam Smith began combining the activities of the entrepreneur with the activities of the capitalist (1776, book 1, chap. 1). By the mid 1800s John Stuart Mill started associating the activities of the entrepreneur with the activities of the capitalist through risk taking (1871). Mill correctly recognized both endeavors as taking a risk but confused the underlying issues by combining both endeavors. Risk was viewed as only one activity, and the risk of each group was viewed as one collective risk assumed and directed by the capitalist.<\/p>\n
Out of the heritage of Smith and Mill, current microeconomic market analysis has failed to adequately accommodate the contributions of the entrepreneur. Risk is assumed to be the supreme domain of the capitalist, and profit is assumed to be of ultimate importance and the only reward for taking risks. Smith often referred to the entrepreneur as a capitalist who attempted to gain profits from risk taking. Although Smith adequately described the activities of the entrepreneur, he missed a great opportunity to emphasize the separate nature and activities of the entrepreneur. As a result, neoclassical microeconomics has developed an entire theoretical body of knowledge based on the efforts of the capitalist with the complete absence of the entrepreneur.<\/p>\n
This theoretical framework went almost unchallenged until Joseph A. Schumpeter reintroduced the entrepreneur and the associated activities of innovation into economic analysis in the 1930s (1939, 87). While the entrepreneur has not become a part of microeconomic analysis, the innovative changes brought about by entrepreneurs are today a major driving force in any dynamic capitalist market economy. Schumpeter almost single-handedly transformed the entrepreneur and the resulting concepts of innovation from the realm of speculative reasoning in the scientific laboratory to a functional model of the market process, allowing for both new firms and the rise of new individuals to product and process leadership. This development of new products and new processes appears to be the real meaning of entrepreneurship according to Schumpeter. Inovation is, therefore, the function of a sociologically distinct type of individual known as the entrepreneur (1936, 66). Here the view of Schumpeter that entrepreneurs are sociologically distinct individuals is accepted, while the view of Schumpeter that pecuniary benefit is a motivating force that drives the entrepreneur into action is not accepted.<\/p>\n
Entrepreneurs and capitalists can be distinguished by the particular type of risk taken by each group. This is a very important distinction and helps to separate the activities of the capitalist from those of the entrepreneur. The capitalist takes a financial risk with the potential of profits if the endeavor is successful. The entrepreneur also takes a risk, but the risk is quite different from that of the capitalist. The entrepreneur takes a risk of change to make a new or improved product or to change a production process in order to make that endeavor work more smoothly or more efficiently. The entrepreneur may have no capital investment and the entrepreneur may not share in any profits of the endeavor or the firm if the change is successful, but nonetheless the entrepreneur is willing to change the way things are being done currently in an attempt to make the product or process work better.<\/p>\n
Entrepreneurs who set out to transform an idea or scientific theory into a useable functional product are motivated by a sociologically distinct drive toward successful completion of the innovation. Risks are taken through trial and error, product modification, or product redevelopment with the optimistic view that eventually the product will be useful and fully accepted by the consuming public. At the point that an invention is commercialized, the invention becomes an innovation (McDaniel 2000). Success is seen as acceptance of the innovation by the public, and profits are neither a motivator nor a goal. After the innovation has proven successful, profits may flow to the entrepreneur and these newfound profits may transform the innovative entrepreneur into a capitalist. Profits are a potential opportunity of success in a capitalistic system and not therefore a motivator of creative innovation within the individual entrepreneur. However, once profit and wealth become sufficient in quantity, the entrepreneur begins reassessing the drive to innovate compared with the desire to protect accumulated wealth and profit. Profit is not seen as an entrepreneurial motivator but is seen as a realized potential or product of success. Again, it does not drive the entrepreneurial effort to innovate but may be realized as an outcome of success. A current example of this transformation might be seen in the case of Bill Gates and the Microsoft company. In the early stages of development of Microsoft, Gates was a very effective entrepreneur who created many innovations. At some point in the process of accumulating profits and wealth, a transformation occurred in which the desire for protecting wealth replaced the drive to create innovations. At some point, wealth protection and monopoly control dominated the focus and innovations were reduced in both number and significance. An exception to this transformation might be an opposite example such as Thomas Edison, who continued to profit but remained an entrepreneur continuing to innovate years after the successful accumulation of wealth. Edison is viewed as a rare exception in a capitalistic market economy.<\/p>\n
As discussed above, the entrepreneur is a sociologically distinct individual who innovates by making changes in products and\/or production processes. The motivation for the entrepreneur is not profit but rather the successful change to make better products and\/ or production processes. This drive to make things work better is sometimes associated with the pioneer farmers in the early American economy that fabricated tools through trial and error and gained much recognition and satisfaction from the knowledge that the new product was successful. This scenario is augmented by the capitalist who took the fabricated tool, mass produced the innovation, and profited from the sale of the new tool. Note that profit is not, in this example, the motivation for the entrepreneur although profits may be a common result of a successful innovation. Many entrepreneurs become capitalists after innovations become successful; however, far fewer capitalists ever become entrepreneurs. Also, if a capitalist in a sufficiently large firm seeks “temporary monopoly profits,” then an entrepreneur will likely be hired to innovate. Sometimes these entrepreneurs are cal\\led “intrepreneurs” in the current literature and will likely not profit from the successful innovation (Hirsh and Peters 2002, 49-51). This exemplifies the tandem nature of the entrepreneur innovating and the capitalist profiting from, those innovations. Profits may be a compensatory measure of success after an innovation, but they do not constitute a motivation toward innovation for the entrepreneur. This sociologically distinct individual is self-motivated by a desire to innovate in order to make a change in a product or process and not by the capitalist profit motive (McDaniel 2002, 67-72).<\/p>\n
The Creative Role of the Entrepreneur<\/p>\n
It is not the capitalist who leads the social economy into new directions with new material provisioning opportunities, for the capitalist is a follower of the thrust for profit opportunity and therefore by nature not a leader but a follower. It is the entrepreneur who has the potential to be a creative leader in the social economy, always looking for new opportunities for change. Industrial reorganization, technological advancement, and even product improvement are avenues that propel the entrepreneur to seek change. This sociologically distinct trait is most visible in capitalism, where the entrepreneur has freedom of opportunity and social encouragement to make the material life of society better.<\/p>\n
In a traditional economic structure, the entrepreneur is seen as an unwanted outcast since tradition and not change become the mode of both the present and the future. The entrepreneur still exists but is thwarted in the efforts to change the ways that society accomplishes material provisioning. If tradition is embraced, then change must be shunned. The socioeconomic system encourages the individual to thwart the desire to create innovations.<\/p>\n
In a politically controlled economic structure, change is administered by a polity that decides when, where, and how change is accomplished. The entrepreneur is still present in such a system but offers innovations for change at the bequest of the political structure. Ideas are offered when asked by a committee or politburo, not when envisioned. The entrepreneur takes on a role of being subservient to the political structure and thus is not a leader for change. This leadership for innovations surfaces through a committee format when asked, but change is not offered or suggested at a point of discovery or enlightenment.<\/p>\n
In any socioeconomic system that fosters individual freedom, the entrepreneur will evolve to a role of creative innovator forming avenues for change in the material well-being of society. The distinct desire to make things better through innovative change will drive entrepreneurs if the individual freedom is present to allow innovative creativity. This human characteristic of exploration is most easily observed in capitalism, but it remains a distinct creative characteristic of the individual and certainly not the product of the economic structure set upon society.<\/p>\n
The entrepreneur is creative just as the artist is creative with the creation of a painting or a bronze figure, just as the composer is creative with notes or verse, or just as the literary author is creative with prose or poetry. The entrepreneurial creativity is seen through change, and the innovative result is a new product or improved production process. The end result of each individual in each endeavor is different; however, each endeavor is a creative process. Entrepreneurs do not continuously innovate, but the innovations that do occur are a result of a creative process.<\/p>\n
An Extended View of Creative Destruction<\/p>\n
One of the most distinctive theories of Schumpeter is that of creative destruction (1939, 84). Schumpeter held the view that in order to continue profitability in a capitalist society, new innovative products and production processes were continually required. These products and processes would then be sought by society’s consumers and such sales would render profits for the producing capitalist. The previous section differentiated the roles of the capitalist from those of the entrepreneur, but in tandem they could continually destroy the demand for existing products and processes by creating a consuming desire for new products and processes. The role of the capitalist included producing products and generating profits, and the role of the entrepreneur included innovating new products and new production processes. So long as this tandem union operated together in a capitalist society, market capitalism could be perpetuated. However, according to Schumpeter, once the role of the entrepreneur was diminished or eliminated, the demise of capitalism was insured (1947, 134).<\/p>\n
Schumpeter described the evolution of a capitalistic society in which capitalists would become giant industrial bureaucrats and lose interest, respect, and concern for the entrepreneurs who innovated the changes responsible for temporary monopoly profits. According to Schumpeter, these small fragile entrepreneurs would be cast aside and this action would begin the destruction of the social and institutional framework of the capitalist society. There seem to have been brief economic periods where this view may have occurred, but these historic periods have been short lived and afterward the entrepreneur seems to be resurrected to new life in the capitalistic socioeconomic system. There may be a different perception of this tandem interaction between the entrepreneur and the capitalist and, therefore, an outcome other than the demise of capitalism.<\/p>\n
The motivation of the entrepreneur is to make changes in an attempt to make better products and better production processes. The reward for the efforts of successful innovation is the satisfaction of a successful fully developed end product or process. This combination makes the entrepreneur in Schumpeter’s view a sociologically distinct individual. However, as a result of success in a modern capitalist society the entrepreneur may eventually receive some, most, or all of the profits generated by this success. This bequeath of profits to the entrepreneur starts changing the behavior of the entrepreneur. Once profits are established and the innovation has proven successful, the efforts of the entrepreneur become more capitalistic in nature and less innovative as a characteristic. In an attempt to secure, protect, and exploit those profits, the entrepreneur begins spending less time innovating and more time policing the administrative duties of profit protection. The result is that an entrepreneur has been lost as society gains another capitalist. What was once a productive innovative successful individual with entrepreneurial drive has been transformed into a self-protecting profit-motivated capitalist.<\/p>\n
This transition from entrepreneur to capitalist is in itself a destructive social transition because it decreases the innovative results of the entrepreneurial effort. The creative drive of the entrepreneur becomes transformed into a position of protector of profits and wealth. This creative destruction does possess a threat to the capitalist socioeconomic structure. However, society may not be doomed and capitalism may not be destroyed in this destructive transition. If these sociologically distinct individuals known as entrepreneurs exist in volume in a free society, then this transition may benefit society by offering new opportunities for aspiring entrepreneurs to become creative, innovative changers in a capitalist society. While society loses an entrepreneur through this capitalistic transition, it may also gain entrepreneurs through creating opportunities for new innovations to emerge. If society remains free and socioeconomic opportunities for creative, innovative individuals are fostered, then entrepreneurs will have the occasion to continue to enhance the material well-being of society.<\/p>\n
The conclusion opens up a distinct division in the final analysis of the ultimate outcome of capitalism. On one hand, if entrepreneurs are turned into capitalists or they are dismissed and discarded by capitalists, then it appears that the giant industrial bureaucracy will doom capitalism as Schumpeter predicted. That is, if we run out of entrepreneurs or abandon them, then society will be transformed into some other socioeconomic institutional framework. Juxtaposed to this view is the possibility that transforming entrepreneurs into capitalists may not doom the capitalist society. In this view, removing the entrepreneur from the role of creative innovator, changer, or modifier to that of a profit protector safeguarding financial success may actually strengthen capitalism. In this scenario, the chasm that is created by the transition from entrepreneur to capitalist may offer vast new opportunities for budding entrepreneurs to fill the ever-increasing opportunity for industrial and technological advancement. This transformation may offer a creative avenue for successful innovators who are truly sociologically distinct individuals. If institutional adjustment offers entrepreneurs the freedom and opportunity to be creative and innovate, then the technical and industrial well-being of society may ultimately be enhanced within the socioeconomic institution that prevails.<\/p>\n
JOURNAL OF ECONOMIC ISSUES<\/p>\n
Vol. XXXVII No. 2 June 2003<\/p>\n
References<\/p>\n
Hirsh, Robert D., and Michael P. Peters. Entrepreneurship. 5th ed. New York: McGraw-Hill Irwin, 2002.<\/p>\n
McDaniel, Bruce A. “A Survey on Entrepreneurship and Innovation.” The Social Science Journal 37, no. 2 (2000): 277-284.<\/p>\n
___. Entrepreneurship and Innovation: An Economic Approach. New York and London: M. E. Sharpe, Inc., 2002.<\/p>\n
Mill, John S. Principles of Political Economy. 7th ed. 1848. Reprint, London: The London School of Economics and Political Science, 1871.<\/p>\n
Oser, Jacob, and William C. Blanchfield. The Evolution of Economic Thought. 3d ed. New York: Harcourt Brace Jovanovich, Inc., 1975.<\/p>\n
S\\ay, J. B. A Treatise on Political Economy. Translated by C. R. Prinsep. 2 vols. 1803. Reprint, Boston, Mass.: Wells and Lily, 1821.<\/p>\n
Schumpeter, J. A. The Theory of Economic Development: An Inquiry into Profits, Capital Credit, Interest, and the Business Cycle. Cambridge, Mass.: Harvard University Press, 1936.<\/p>\n
____. Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capital Process. New York: McGraw-Hill, 1939.<\/p>\n
____. Capitalism, Socialism, and Democracy. 3d ed. New York: Harper and Row, 1947.<\/p>\n
Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. 1776.<\/p>\n
The author is at the University of Northern Colorado, Greeley, Colorado, USA.<\/p>\n
Copyright Association for Evolutionary Economics Fiscal Office Jun 2003<\/p>\n","protected":false},"excerpt":{"rendered":"
Emerging out of the beginning of the Industrial Revolution was a different kind of individual who later became known as the entrepreneur. The entrepreneur has been a driving force for change and hasbeen responsible for shaping the material lifestyle for […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[],"class_list":["post-306","post","type-post","status-publish","format-standard","hentry","category-hedgeco-news"],"_links":{"self":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/posts\/306","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/comments?post=306"}],"version-history":[{"count":0,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/posts\/306\/revisions"}],"wp:attachment":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/media?parent=306"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/categories?post=306"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/tags?post=306"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}