The Changing Entrepreneur

The word entrepreneur is tossed around a lot today, but it’s meaning changes depending on the context.  The concept was first introduced in 1723 by French economist Richard Cantillon but was more clearly articulated, codified, and coined in the writings of Jean Baptiste Say beginning in 1803. However, this concept of the entrepreneur has drastically changed over the past 200 years.

Say defined an entrepreneur as an economic agent who organizes the means of production – land, labor, and capital – to produce a given product. He then sells this product to generate revenue to cover his costs of production – rent to the landowner, wages to labor, and interest to capital – and the leftover residual is profit. However, Say’s entrepreneur does not simply produce and profit, but constantly seeks to increase profits by lowering costs of production or increasing the efficiency of resources by moving them from areas of low productivity to areas of high productivity. If this definition sounds familiar, it is because it is the one found in most standard textbooks in economics. It might also sound familiar because cost-cutting strategies and the relocation of economic resources are common practices today. But, is this the image that comes to mind when we think of an entrepreneur? 

Economist and political scientist, Joseph Schumpeter, believed Say’s definition was too narrow. Writing over 100 years later, Schumpeter articulated that entrepreneurs are not those who simply follow along the road of the lowest cost of production; they are the ones paving the road.  For Schumpeter, entrepreneurs are the innovators, and innovation goes hand-in-hand with technological change. Thus, it is not enough to reduce costs and increase profits by whatever means possible, but to reduce costs by increasing productivity through innovation, i.e. through the introduction of new technology or through new ways of doing things. For Schumpeter, entrepreneurs shatter institutions and old ways of producing; the innovator-entrepreneur drives “creative destruction.”

Schumpeter’s contemporary, economist Thorstein Veblen, disagreed with Schumpeter because he believed that the creative, industrious, entrepreneur disappeared from the modern business enterprise. During the early 20th century, there was a separation of business owner from the day-to-day operations of the business; this is left to managers. Former entrepreneurs then become absentee-owners, generating incomes from ownership (rent) rather than from creativity and industriousness (their entrepreneurial ability). As a self-proclaimed entrepreneur, Say clearly distinguished the landowner, who receives rent, from the entrepreneur who generates profit. Schumpeter would also agree that “ownership” is not the spark of innovation.

Peter Drucker, corporate management guru and educator, agrees that innovation is essential, but does not believe that it completely defines the entrepreneur. Innovation is simply one of the many tools that entrepreneurs have at their fingertips. For Drucker, “the entrepreneur upsets and disorganizes” the production process as it is currently defined, which may or may not involve technological innovation. Contemporary economist, Richard Florida, would agree that creativity is an essential attribute of the entrepreneur. However, he believes that the environment plays a critical role in nourishing the entrepreneurial spirit. In short, entrepreneurs thrive in environments that score high on the talent, technology, and tolerance scale.

Many view this entrepreneurial spirit as part of the American identity. But, what does that mean? Is the entrepreneur the one that moves operations abroad to cut costs and generate a profit? Are they hedge fund managers that profit by betting against pension funds? Are they the financial CEOs that profit by shorting or buying insurance on their clients’ portfolios? Is this the entrepreneurial spirit we all cherish? Profit at all costs? Or, do most of us envision the entrepreneur as emerging captains of industry? If so, who are they and what are they are doing?

Perhaps, Harvard business professor Howard Stevenson has it right. “Entrepreneurship is the pursuit of opportunity without regard to resources currently controlled.” This means that an entrepreneur sees the opportunity, even if they don’t currently have the resources to achieve it. It’s not about deciding what to produce based on an efficient allocation of available resources, but having a vision of what to produce and then figuring out how to acquire the necessary resources. It is no surprise that the research shows that entrepreneurs that exhibit this spirit are more likely to have been raised poor than rich. 

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