WEBVTT NOTE Entrepreneurship and the Discovery of Economic Theory 1 00:00:00.000 --> 00:00:06.600 I do teach entrepreneurship at the school, which Peter Klein brings up, whether or not it can be taught by a professor. 2 00:00:06.600 --> 00:00:11.600 I think another question is whether or not it can be learned. 3 00:00:11.600 --> 00:00:15.400 However, in the literature they do distinguish between the art and science of entrepreneurship, 4 00:00:15.400 --> 00:00:21.400 and we usually don't question whether or not management or doctors or lawyers, physicians, 5 00:00:21.400 --> 00:00:25.400 whether that can be taught, but for some reason entrepreneurship is questioned. 6 00:00:25.400 --> 00:00:28.700 But if you distinguish between the art and science, I think it's a lot easier to think that 7 00:00:28.700 --> 00:00:34.900 The Science of Entrepreneurship, and I won't go into that, but actually can be taught. 8 00:00:34.900 --> 00:00:39.340 My co-author here is Mark Thornton, whom you probably know from the Mises Institute, and 9 00:00:39.340 --> 00:00:48.700 he's a real scholar in this area, so he'll be available for questions as well after this. 10 00:00:48.700 --> 00:00:53.740 Now our topic is on how entrepreneurship theory created economics, and we're really going 11 00:00:53.740 --> 00:01:01.060 Going back to the first economist and entrepreneur, millionaire that developed a full theory of 12 00:01:01.060 --> 00:01:04.680 economics and entrepreneurship, which is Richard Cantillon. 13 00:01:04.680 --> 00:01:07.980 Just by a show of hands, how many of you have heard of Richard Cantillon? 14 00:01:07.980 --> 00:01:10.880 Okay, we're in a good crowd here. 15 00:01:10.880 --> 00:01:13.580 How many of you have actually read Cantillon? 16 00:01:13.580 --> 00:01:16.060 Okay, great. 17 00:01:16.060 --> 00:01:18.460 For those that haven't, I highly recommend it. 18 00:01:18.460 --> 00:01:21.380 It pays really well, pays off really well. 19 00:01:21.380 --> 00:01:28.900 It's quite rewarding, I mean, in the book here, here in the bookstore. 20 00:01:28.900 --> 00:01:35.660 Now many people, many economists, of course, were the exception maybe, think that economics, 21 00:01:35.660 --> 00:01:42.980 as Rothbard wrote, would spring from the brow of Zeus, Zeus being Adam Smith, right? 22 00:01:42.980 --> 00:01:47.700 And he has a quote on this in his History of Economic Thought, he says, 23 00:01:47.700 --> 00:01:52.140 Because the honor of being called the father of modern economics belongs then not to its 24 00:01:52.140 --> 00:01:57.840 usual recipient Adam Smith, but to a Gallicized Irish merchant, banker and adventurer who 25 00:01:57.840 --> 00:02:02.260 wrote the first treatise on economics more than four decades before the publication of 26 00:02:02.260 --> 00:02:09.140 The Wealth of Nations. Cantillon is quoted in Adam Smith's book which is quite unique 27 00:02:09.140 --> 00:02:11.140 in that way. 28 00:02:11.140 --> 00:02:19.320 So looking at some of Cantillon's contributions of the entire essay, he goes into spatial 29 00:02:19.320 --> 00:02:25.540 economics which has to do with geography and area, population theory, things like that. 30 00:02:25.540 --> 00:02:31.180 He does talk about business cycle and he's quite Austrian in his formulation of the business 31 00:02:31.180 --> 00:02:32.220 cycle. 32 00:02:32.220 --> 00:02:34.420 In terms of methodology, he's also quite Austrian. 33 00:02:34.420 --> 00:02:40.180 He uses individualism, a subjectivist approach, and he creates these abstractions and theoretical 34 00:02:40.180 --> 00:02:50.180 Looking at the book here, it's basically three parts. I'm just going to give you a quick overview here. 35 00:02:50.180 --> 00:02:56.180 So you can see part one. I'm not going to go through all of these, but kind of see what he talks about. 36 00:02:56.180 --> 00:03:00.180 And here he develops his theory of the entrepreneur pretty much from the beginning. 37 00:03:00.180 --> 00:03:08.180 Then he goes into more barter, money, market prices, and then he has a section at the end on foreign trade, 38 00:03:08.180 --> 00:03:12.180 Foreign Trade, International Monetary Relations 39 00:03:12.180 --> 00:03:16.180 and on this I wanted to read a quote by 40 00:03:16.180 --> 00:03:20.180 Jevons and he says, this third part especially is 41 00:03:20.180 --> 00:03:24.180 almost beyond praise and shows that Richard Cantillon had a sound and pretty 42 00:03:24.180 --> 00:03:28.180 complete comprehension of many questions about which pamphleteers 43 00:03:28.180 --> 00:03:32.180 are still wrangling and blundering and perplexing themselves and other people. 44 00:03:32.180 --> 00:03:36.180 Rothbard has a 45 00:03:36.180 --> 00:03:54.180 I have a lecture on this, which is on the Mises.org, which talks about the Whig Theory of History and how some people believe that between science and time, there's sort of a positive relationship, and this, of course, is not the case, that we see from mainstream economics. 46 00:03:54.180 --> 00:04:02.180 That not only do they not learn from Cantillon, but they've actually taken backward steps. 47 00:04:02.180 --> 00:04:03.460 Jevons goes on to say, 48 00:04:03.460 --> 00:04:09.100 The Assai is more than a mere essay or even collection of disconnected essays like those of Hume. 49 00:04:09.100 --> 00:04:13.540 It is a systematic and connected treatise, 50 00:04:13.540 --> 00:04:19.900 going over in a concise manner nearly the whole field of economics with the exception of taxation. 51 00:04:19.900 --> 00:04:22.180 Possibly a good thing, right? 52 00:04:22.180 --> 00:04:26.860 It is thus more than any other book I know, the first treatise on economics. 53 00:04:26.860 --> 00:04:30.940 Sir William Petty's Political Arithmetic and his Treatise of Taxes and Contributions 54 00:04:30.940 --> 00:04:35.420 Cantillan's are wonderful books in their way, and at their time, but compared with Cantillan's 55 00:04:35.420 --> 00:04:41.540 essay, they are mere collections of casual hints. There were earlier English works of 56 00:04:41.540 --> 00:04:47.300 great merit such as those of von Locke, Childman, etc., but these were either occasional essays 57 00:04:47.300 --> 00:04:53.580 and pamphlets or else fragmentary treatises. Cantillan's essay is more emphatically than 58 00:04:53.580 --> 00:04:58.540 any other single work, the cradle of political economy. 59 00:04:58.540 --> 00:05:04.260 Now I want to go into the actors in Cantillon's economy, in the market. 60 00:05:04.260 --> 00:05:10.380 We've got landowners, and these are basically the people that create demand, so whatever 61 00:05:10.380 --> 00:05:15.540 their desires, whims, wishes, the fashion trends of the day, they're created by these 62 00:05:15.540 --> 00:05:16.540 landowners. 63 00:05:16.540 --> 00:05:21.380 It's not so important that it's actually the landowners or the property owners, but that 64 00:05:21.380 --> 00:05:23.700 demand is created. 65 00:05:23.700 --> 00:05:27.420 And then you've got wage laborers, which are basically just distinguished by whether or 66 00:05:27.420 --> 00:05:42.380 The Central Actor is the entrepreneur, simply distinguished as being on unfixed income. 67 00:05:42.380 --> 00:05:48.420 The entrepreneur responds to the demand created by the landowners that conduct all production, 68 00:05:48.420 --> 00:05:56.860 circulation and even exchange. 69 00:05:56.860 --> 00:06:04.060 This goes into the discussion that Stuart kind of brought up here, risk and uncertainty. 70 00:06:04.060 --> 00:06:08.160 Cantillon has quite a bit to say about this. 71 00:06:08.160 --> 00:06:11.740 Now the entrepreneur, one of our arguments in the papers, the entrepreneur is very pervasive 72 00:06:11.740 --> 00:06:14.860 throughout the treaties. 73 00:06:14.860 --> 00:06:23.460 He talks about the farmer entrepreneur sort of taking the, getting the material or the 74 00:06:23.460 --> 00:06:26.360 product from the land, from the land owner. 75 00:06:26.360 --> 00:06:33.780 So farming that and then selling that to a manufacturer who is also an entrepreneur based 76 00:06:33.780 --> 00:06:37.540 on the unfixed income. 77 00:06:37.540 --> 00:06:42.340 Of course the entrepreneur, the farmer entrepreneur doesn't know the future selling price which 78 00:06:42.340 --> 00:06:43.620 creates uncertainty. 79 00:06:43.620 --> 00:06:47.420 So uncertainty is because of the presence of time. 80 00:06:47.420 --> 00:06:51.520 Now Mises has said that uncertainty is inherent in human action, right? 81 00:06:51.520 --> 00:06:56.780 It burdens every actor, so all of us have to deal with time and make decisions based 82 00:06:56.780 --> 00:07:00.200 on our perception of the future, based on judgment and what not. 83 00:07:00.200 --> 00:07:06.600 However, what distinguishes this is the entrepreneur is trying to forecast the future selling price, 84 00:07:06.600 --> 00:07:07.600 right? 85 00:07:07.600 --> 00:07:10.640 Hopefully above his or her cost of production. 86 00:07:10.640 --> 00:07:15.620 So the manufacturer entrepreneur then sells to the middleman entrepreneur who's going 87 00:07:15.620 --> 00:07:19.060 to bear the cost of transporting the goods. 88 00:07:19.060 --> 00:07:23.300 And then, you know, on down the line until the product is exchanged with the consumer. 89 00:07:23.300 --> 00:07:29.260 So from production to consumption, again, the manufacturer entrepreneur has to sell 90 00:07:29.260 --> 00:07:30.580 the product. 91 00:07:30.580 --> 00:07:36.400 They're selling at an uncertain future price based on their certain cost, which again is 92 00:07:36.400 --> 00:07:40.540 just uncertainty all the way through because of the presence of time. 93 00:07:40.540 --> 00:07:46.140 Because of that, there's a profit or a loss, okay, which is a risk. 94 00:07:46.140 --> 00:07:47.140 What's the risk? 95 00:07:47.140 --> 00:08:00.140 I don't know if I'm characterizing you correctly, but if we had to choose between subjective or objective, I think that might be the wrong question. 96 00:08:00.140 --> 00:08:07.140 I'm not saying that's what you were saying, but it's a dichotomous question, and I think there's a danger in that. 97 00:08:07.140 --> 00:08:13.140 Subjective risk, if we wanted to call it that, might be, are they going to be able to, what do they want to eat? 98 00:08:13.140 --> 00:08:18.140 Pizza or salad or what not, but objective risk, are they going to eat at all? 99 00:08:18.140 --> 00:08:22.140 That's pretty objective, right? Because you're risking death. 100 00:08:22.140 --> 00:08:27.140 Same with bankruptcy, you know. Subjective risk might be how much profit they want to make 101 00:08:27.140 --> 00:08:31.140 versus objective risk, whether or not they make it at all. 102 00:08:31.140 --> 00:08:37.140 So more measurable. Anyway, compare this with Schumpeter's entrepreneur, 103 00:08:37.140 --> 00:08:42.140 probably the most well known entrepreneur, theory of the entrepreneur. 104 00:08:42.140 --> 00:09:12.140 and we can compare it to a violin, okay, so he's got what he calls, Schumpeter has what he calls the circular flow of economic life, everything's pretty much in equilibrium, and kind of like the violin strings are not resonating, so they're flat, right, and then along comes the entrepreneur, which acts as the, I believe that's called a bow or whatever, and strums it, right, and everything starts to vibrate and kind of get out of whack, but then it all starts to settle back down again, so the entrepreneur comes along, disrupts the 105 00:09:12.140 --> 00:09:28.740 Shimpeter departed from his teacher, Boehm-Bawerk, who associated the entrepreneur with the capitalist. 106 00:09:28.740 --> 00:09:29.740 So they were one and the same. 107 00:09:29.740 --> 00:09:35.460 The entrepreneur had to bear risk because he was the capital owner. 108 00:09:35.460 --> 00:09:39.660 Shimpeter said that even though the entrepreneur may risk his reputation, much less any financial 109 00:09:39.660 --> 00:09:44.780 Capital because Schumpeter distinguished between the two. The direct responsibility of failure 110 00:09:44.780 --> 00:09:52.260 never falls on him. So it's quite different from Cantillon's. In addition, we could talk 111 00:09:52.260 --> 00:09:56.300 about Schumpeter's creative destroyer, creative destruction that he talks about. So if we 112 00:09:56.300 --> 00:10:01.900 imagine Victoria and England, there's the horse and buggy, right? And everything's just 113 00:10:01.900 --> 00:10:06.860 fine again in the circuit flow of economic life. Along comes the entrepreneur, creates 114 00:10:06.860 --> 00:10:14.540 A car, right? Distorts everything just like the violin to mix metaphors here. What is 115 00:10:14.540 --> 00:10:19.080 important about this is Schumpeter's entrepreneurs only acting as an entrepreneur in creating 116 00:10:19.080 --> 00:10:25.260 the new good or the new source of supply or the new market. So Henry Ford, once he stopped 117 00:10:25.260 --> 00:10:30.140 doing this, right, and production just kind of continued, but once he had invented the 118 00:10:30.140 --> 00:10:58.300 The word entrepreneur over a hundred and ten times in the treatise. He considers tailors 119 00:10:58.300 --> 00:11:03.760 Butchers, entrepreneurs, artists or painters, all because of uncertainty, they're all on 120 00:11:03.760 --> 00:11:10.620 unfixed incomes, bakers, restauranteurs, or however you pronounce that, people that own 121 00:11:10.620 --> 00:11:20.980 their own restaurant or retail stores, carpenters, shoemakers, butchers, physicians, right? 122 00:11:20.980 --> 00:11:26.860 He even considers beggars and robbers entrepreneurs because of uncertainty, unfixed income. 123 00:11:26.860 --> 00:11:39.860 So our argument in the paper is basically Cantillon uses his theory of entrepreneurship and he creates these theoretical constructs which he uses to construct economic theory. 124 00:11:39.860 --> 00:11:45.860 Okay, so without the theory of entrepreneurship, all of his theoretical constructs pretty much fall apart. 125 00:11:45.860 --> 00:11:55.860 One of these, just to go into this, and there's more examples in the paper, has to do with spatial economics and location theory. 126 00:11:55.860 --> 00:12:06.860 So Cantillon talks about market towns where buyers and sellers come together, there's exchange and there's various advantages to having a market town where all exchange takes place. 127 00:12:06.860 --> 00:12:15.860 Outside of that, there's a village. Entrepreneurs locate around the village to reduce transportation costs and to travel to the market town. 128 00:12:15.860 --> 00:12:28.260 Cantillon says, In the village there must be enough blacksmiths and wagon makers for 129 00:12:28.260 --> 00:12:31.860 the tools, plows and carts that are needed, especially when the village is far from the 130 00:12:31.860 --> 00:12:37.540 town. The size of a village is naturally proportioned to the number of inhabitants the land requires 131 00:12:37.540 --> 00:12:41.620 for daily work and to the artisans who find enough employment there by serving the farmers 132 00:12:41.620 --> 00:12:49.140 and Labor. Finally, there's the city, which is where the landowners locate. So if enough 133 00:12:49.140 --> 00:12:57.660 princes and nobles and lords come together, they form a city. Okay, just to conclude here. 134 00:12:57.660 --> 00:13:03.200 So one key takeaway, entrepreneurship is pervasive, right? There's no restriction really on the 135 00:13:03.200 --> 00:13:10.620 entrepreneur other than being on an unfixed income, which implies uncertainty, which leads 136 00:13:10.620 --> 00:13:17.460 and Extricably to Risk being Bankruptcy or Starvation or even talks about risk in the 137 00:13:17.460 --> 00:13:23.300 form of an opportunity cost of what you could earn other than going into business on your 138 00:13:23.300 --> 00:13:26.220 own type of thing. 139 00:13:26.220 --> 00:13:31.380 So these theoretical constructs are based on the entrepreneur, the entrepreneur is central. 140 00:13:31.380 --> 00:13:39.780 Entrepreneurial actions, entrepreneurial plans, they take place spatially and temporally. 141 00:13:39.780 --> 00:13:43.740 So one of the implications of course is in mainstream economics the entrepreneur is pretty 142 00:13:43.740 --> 00:13:48.320 much removed from the models or if it is the entrepreneurial function is given a measurable 143 00:13:48.320 --> 00:13:54.480 degree of risk and that risk is equally distributed among all entrepreneurs in the model. 144 00:13:54.480 --> 00:14:01.940 So we argue that it will become much more exciting and relevant to both entrepreneurship 145 00:14:01.940 --> 00:14:07.380 and economics if the entrepreneur is fundamental and central as the actor that coordinates 146 00:14:07.380 --> 00:14:14.380 Production, Circulation, Exchange of Goods. Thank you very much.