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NOTE 22. The Entrepreneur

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22. The Entrepreneur. Since the early 17th century, mention has been made of the projector,

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the ingenious ideasmith who was at the same time inventor, alchemist, reformer, but also

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fantasist and carpet-bagger, as well as the entrepreneur. The entrepreneur was described

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for the first time by Richard Cantillon, 1680-1734, an Irish-French banker, in his Essay sur la

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La nature du commerce en général, 1732 As follows, an entrepreneur is a person who

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assumes the economic risk by buying and combining factors of production in order to offer goods

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on the market with the intention of making a profit. The achieved profit is to be understood

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as a kind of risk premium. Members of the Austrian School delved more deeply into this

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basic description. Beginning with Carl Menger and Victor Mattheier and on through Ludwig

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Ludwig von Mises and Friedrich A. von Hayek, entrepreneurial action was assigned more significant,

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even central relevance. Schumpeter's Theorie der wirtschaftlichen Entwicklung, 1912, The

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Theory of Economic Development, erected more of a heroic literary monument to the personality

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of the entrepreneur. According to Schumpeter, risk was born not by the entrepreneur, but

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by the banker. In his main work, Grundsätze der Volkswirtschaftslehre, 1871, Principles

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Tools of Economics Carl Menger described the work of the entrepreneur

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as preparing and directing processes which serve the transformation of goods of higher

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order into goods of lower and first order. Specifically, this involves a. obtaining information

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about the economic situation, b. economic calculation, all the various computations

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that must be made if a production process is to be efficient, provided that it is economic

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in other respects, c. the act of will by which goods of higher order are assigned to a particular

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production process, and finally d. supervision of the execution of the production plan.

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In the early days of entrepreneurship, said Menger, the entrepreneur himself would still

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step into the production process with his technical labour services. His specific function

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became more clearly apparent only with progressive division of labour and an increase in the

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the size of enterprises, and finally it assumed the nature of an economic good. Even today

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the value of entrepreneurial activity has to be included in the value of all goods necessary

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for a production process. The distinctive features of this category of activities are

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twofold. First, they are by nature not commodities, not intended for exchange, and for this reason

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have no prices. And second, they have command of the services of capital as a necessary

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be pre-requisite, since they cannot otherwise be performed.

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Unlike other forms of income, for example, labour wages or capital interest, the income

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of the entrepreneur is, according to Victor Mataya, India Unternehmer Gewinn, 1884, The

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Entrepreneurial Profit, much more difficult to identify. There is a need to develop a

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precise conceptual definition of this income. Firstly, it is incorrect to view the use of

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Capital as a general feature of business ventures. For if this were the case, what would all

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those producers be who, solely through their own labour, place their products on the market?

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Another improper narrowing of the term is when one describes the intention of the entrepreneur

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to acquire income as part of the nature of the business venture. Purely benevolent institutions

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like savings banks, societies with businesses like natures that do not work to at their

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Their own ends, cooperatives, for example, and certain state institutions, etc., definitely

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bear the characteristics of business ventures and may even produce an entrepreneurial profit

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but are nevertheless not set up with the intention of achieving this or any other such income.

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But what all business ventures do have in common is the production of market values,

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goods destined to be sold, which is guided by the entrepreneur and that this production

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takes place on his behalf.

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According to Mataya, entrepreneurial profit is the income which results entirely from

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economic exchange and which furthermore accrues to the owner of the business venture absolutely

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and exclusively.

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Entrepreneurial income and entrepreneurial profit, therefore, need to be clearly distinguished.

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While the entrepreneurial income includes those incomes which befit the individual entrepreneur

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as capitalist and neighbourer according to the capital in his ownership and his amount

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of Work, the entrepreneurial profit is created only when the earnings of the business venture

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– difference between costs and revenue – result in a surplus over and above these two quantities.

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Capital profit, according to Mataya, is simply the reward for the productive involvement

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of capital in the creation of goods, whereas entrepreneurial profit is a premium for the

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most productive exploitation possible of already existing goods of a higher order. Effectively,

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proceeds for the administration of a kind of social office.

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Just as every human action is directed toward the future and is, as Ludwig von Mises wrote

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in Nationale Economie, human action always speculation, entrepreneurial action always

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involves the future use of the means of production.

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Economics calls those entrepreneurs who are especially eager to profit from adjusting

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production to the expected changes in conditions, those who have more initiative, more venturesomeness

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and a quicker eye than the crowd, the pushing and promoting pioneers of economic improvement

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and what distinguishes the successful entrepreneur from other people is precisely the fact that

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he does not let himself be guided by what was and is, but arranges his affairs on the

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ground of his opinion about the future. He sees the past and the present as other people

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do, but he judges the future in a different way.

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Ultimately, however, anyone can become a promoter, entrepreneur, if he relies upon his own ability to anticipate future market conditions better than his fellow citizens, and if he attempts to act at his own peril and on his own responsibility, are approved by the consumers.

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and Humanity.

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One enters the ranks of the promoters by aggressively pushing forward, thus submitting to the trial

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to which the market subjects, without respect for persons everybody who wants to become

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a promoter or to remain in this eminent position.

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Everybody has the opportunity to take his chance.

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A newcomer does not need to wait for an invitation or encouragement from anyone, he must leap

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forward on his own account, and must know for himself how to provide the means needed.

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The capitalists, the enterprises and the farmers, wrote Mises in bureaucracy 1944, are ultimately

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nothing other than those means which serve to manage economic affairs. They are at the

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helm and steer the ship, but they are not free to shape its course. They are not supreme,

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they are steersmen only, bound to obey unconditionally the captain's orders. The captain is the

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consumer. Neither the capitalists, nor the entrepreneurs, nor the farmers determine what

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has to be produced. The consumers do that. If the consumers do not buy the goods offered

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to them, the businessman cannot recover the outlays made. If he fails to adjust his procedure

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to the wishes of the consumers, he will very soon be removed from his eminent position

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at the helm. Other men who did better in satisfying the demand of the consumers replace him.

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In a capitalist system the consumers are the real bosses. They, by their buying and by

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By their abstention from buying, decide who should own the capital and run the plants.

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They determine what should be produced and in what quantity and quality. Their attitudes

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result either in profit or in loss for the enterpriser. They make poor men rich and rich

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men poor. Thus, the capitalist system of production is an economic democracy in which every penny

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gives a right to vote. The consumers are the sovereign people. The capitalists, the entrepreneurs

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Friedrich A. von Hayek described the role of the entrepreneur with an eye on competition

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in particular. By uncovering hitherto hidden knowledge in a systematic process of discovery,

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he is able to supply entrepreneurs with information relevant to them. Wherever we employ competition,

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we do not know the relevant circumstances. In sport or in exams, when awarding government

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contracts or awarding prizes for poems and, not least, in science.

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Hayek Roten is Freiburger Studien. It would obviously be absurd to hold a competition

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In addition, competition is a method for breeding certain types of mind.

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It is always a process in which a small number makes it necessary for larger numbers to do

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what they do not like, be it to work harder, to change habits, or to devote a degree of

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have attention, continuous application, or regularity to their work, which without competition

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would not be needed. Competition generally fosters discipline and helps motivate existing

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talent to achieve outstanding results.

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On revealing Mark of how poorly the ordering principle of the market is understood, Hayek

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wrote in The Fatal Conceit, The Errors of Socialism, 1988, is the common notion that

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But cooperation is better than competition. Of course cooperation is also useful but particularly

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in small homogenous groups in which there is a great amount of consensus. But when it

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comes to adjusting to unknown conditions, there is not much merit in cooperation. Ultimately

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it was competition that led man unwittingly to respond to novel situations. And through

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Through further competition, not through agreement, we gradually increase our efficiency.