What Are The Functions Of The Entrepreneur?

What Are The Functions Of The Entrepreneur?

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From an economists point of view entrepreneurship is best considered as a function. The entrepreneur is what the entrepreneur does. Entrepreneurship was first described in economic terms by Cantillon (1755) who defined the components of trade but the term was accorded prominence by Say (1803). The modern theory of the entrepreneur is primarily concerned with the primary characteristic of the search for or the discovery of knowledge. The entrepreneur uses this knowledge in reallocating resources, where it is argued that the qualities of shrewdness and deviousness enter, to his own advantaged. The very nature of entrepreneurship, that is doing something new and remote making it unpredictable, makes it impossible to give a precise and universally acceptable characterisation of it. Consequently there is a diversity of opinion regarding its function and definition.

The neo classical theory of the firm, entrepreneurial activity is analogous to a fixed factor endowment because it sets a limit to the efficient size of the firm. The static and passive role of the entrepreneur in the neo-classical theory reflects the theory's emphasis on perfect information, which trivializes management and decisions making, and on perfect markets, which do all the coordination that is necessary and leave nothing for the entrepreneur. The classical and the neo-classical tradition both concerned primarily with the establishment of natural or equilibrium prices. It is the French classical tradition that the origin of the idea that profit is an income different from received capital and that it goes to the entrepreneur.

The Cantillion's entrepreneur, whether an undertaker, a land owner, or a craftsman is seen as an in between, a speculator who assumes the risk of buying goods, at one price and attempt to sell them for a profit, either in their original states or as new products. Thus as Kirzner (1973) would out it this act of entrepreneurship consists of ‘realising the existence of market value that has hitherto been overlooked'. The unique characteristic of Cantillion's entrepreneur is foresight and the confidence to operate under condition of uncertainty and he it is argued successfully associates risk and uncertainty with the administrative decision making process of entrepreneurs.

J. B. Say built on the ideas of Cantillon and places the entrepreneur in a much more specialised and detailed role. He insisted that profit was a quite separate category of income from interest, and it was this that established the major distinction between the English and the French Classical economists.

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He regards the entrepreneur as a rare phenomenon who is able to coordinate and combine the factors of production and his entrepreneur is portrayed as being almost a specialist at accommodating the unexpected and overcoming problems and should have " judgement, perseverance and a knowledge of the world as well of business." Say was concerned that the large number of qualities and characteristics an entrepreneur possessed had to be exhibited simultaneously to be successful. However Say, like Cantillon, did not emphasis risk but initially viewed profit as a wage accruing to the organiser of production. Thus it is clear that the activities of entrepreneurs were basically bound up with those of the market process and without their actions the market process could never change but as the conditions of demand and supply are dynamic it would therefore eventually fall apart. Thus the consideration of the entrepreneur was to consider the role of the entrepreneur in the adjustment process, as they were conveyors of the market process in conditions of disequilibrium.

According to Schumpeter (1934), who is from the Austrian school, entrepreneurs are the prime movers in economic development, and their function is to innovate or carry out new combinations. Five types of innovation are distinguished: the introduction of a new good or an improvement in the quality of an existing good, the introduction of a new method of production, the opening of a new market in particular an export market in new territory, the conquest of a new source of supply of raw materials or half manufactured goods, and the creating of a new type of industrial organisation in particular the formation of a trust or some other type of monopoly. Schumpeter explains in his book The Theory of Economic Development, "Whatever the type, everyone is an entrepreneur only when he actually carries out new combinations and loses that character as soon as he has built up his business, when he settles down to running it as other people run their business" His definition thus rests on discontinuity rather than gradual or smooth change .In addition he also clarifies what entrepreneurs are not, that is they are not inventors, but are people who decide to allocate resources to the exploitation of an invention, they are not risk-bearers. He argues that risk bearing is the function of a capitalist who lends to the entrepreneur. Therefore Schumpeter's entrepreneur has a managerial or decision-making role with the market.

Moreover, his view receives support from Hayek (1937) and Kirzner (1973), who emphasize the role of entrepreneurs in acquiring and using information. Entrepreneur's alertness to profit opportunities and their readiness to exploit these through arbitrage type operations makes them a significant element in the market process. As Kirzner puts it "boldness, impulse, hunch are the raw materials of entrepreneurial success and failure". Both Hayek and Kirzner regard entrepreneurs as responding to change as reflected in the information they receive whilst Schumpeter emphasises the role of entrepreneurs as a source of change. It is also clear that these two view are incompatible as changed effected by one entrepreneur may cause spill over effects, which changes the environment of other entrepreneurs. Moreover Hayek also distinguished between the neo-classical and entrepreneurial theory of competition in the market. He suggested that whilst the neo-classical theory regards knowledge as being a requirement in competition, as without complete knowledge competition is imperfect. In contrast the entrepreneurial theory views competition as a process through which knowledge is discovered and communicated. The Hayekian entrepreneur has " dispersed buts of incomplete and frequently contradictory knowledge". Knowledge is not perfect, production maybe less then maximum possible, resources maybe unemployed, there maybe errors and disequilibrium prevails. The economy is at point B inside the frontier; entrepreneurship plays an influential role in assisting to improve resources allocation in market and moves the economy towards a pint on frontier PP.


Knight (1921), who is from the French School, insists that decision-making involves uncertainty. Each business situation is unique and the relative frequencies of past events cannot be used to evaluate the probabilities of future outcomes. According to Knight, measurable risks can be diversified through insurance markets, but uncertainties cannot. Those who take decisions in highly uncertain environments must bear he full consequences of those decisions themselves. These people are entrepreneurs; they are the owners of businesses and not the salaried managers that make the day-to-day decisions.

Casson (1982) defines the entrepreneur as someone who specialises in taking decisions where, because of unequal access to information, different people would opt for different strategies. Casson however shows that the evaluation of innovations, as discussed by Schumpeter, and the assessment of arbitrage opportunities, as discussed by Hayek and Kirzner, can be regarded as special cases. He also shows how Knight's emphasis on the uniqueness of business situations is used to establish that differences of opinion are very likely in all business decisions, so the Knightian entrepreneur can be embraced within his definition as well. He describes the entrepreneur as "someone who specialises in taking judgmental decisions about the coordination of scarce resources" and by this he meant that different people make different decisions due to different perceptions and different interpretations. He also says that the entrepreneur is an agent of change.

Furthermore a significant point to be noted is that the predominance of the neo-classical approach to economic analysis and comparative statics, leaves little room for the entrepreneurial function, since it focuses attention on equilibra and the circular flow and away from the adjustment process. However the neo classical school do not entirely deny the existence of the entrepreneur and it acceptance does much to explain the neglect of entrepreneurship from the most popular economic analysis (Baumol 1968). Despite its avoidance, the concept of adjustment and its speed are clearly crucial in attempting to explain the economic contribution of entrepreneurs. Since the adjustment process refers to the allocation and reallocation of factor inputs, it would be right in arguing that those responsible for the adjustment, in these entrepreneurs, must also be capitalists as they clearly have the ability to control the allocation of plant and equipment. Moreover this raises an important point in the entrepreneurship debate of whether the entrepreneur is a capitalist or not, according to Schumpeter he is not. Furthermore, the theory of entrepreneurial discovery, it said to provides an interesting supplement to mainstream equilibrium theory

Kirzner in ‘How Market Work' suggests that the theory of entrepreneurial discovery offers the key to the understanding of the market process. Mises (1966) observation is that, " in any real and living economy every actor is always an entrepreneur and speculator" draws attention to the link between the ‘open-ended' conception of individual decision-making and the entrepreneurial function in the market process. He suggests that human action is discovery. Kirzner argues that the scope for entrepreneurial discovery occurs in a world of disequilibrium, which is quite different from the equilibrium world of mainstream economics where market outcomes are foreordained. It is entrepreneurial discovery according to Kirzner that explain why prices tend to prevail in a market and although new cause of price differences continually appear, entrepreneurs exploit the resulting profit opportunities and produce a inclination towards a single price. In addition it can also be argued that only with the introduction of entrepreneurship is it possible to appreciate how markets work, as without it, there would be no coordination. Baumol (1993) argues that entrepreneurship is a vital component of productivity and growth within the market. As imitators or innovators, they continually disturb the market equilibrium either productively or destructively, which gives rise to growth.

The firm itself can be viewed as a nexus of contracts established by the entrepreneur to facilitate the exploitation of his ideas, in order to reduce transaction costs associated with exchange in the market. It is argued that no firm is likely to survive without the entrepreneurial talent as continuous change and adaptation is required in order to stay in the market. They spot the opportunity for personal gain by internalising market transaction. In addition the entrepreneur may exist throughout a firm as any member of the team could be alert, but whether they act in the interest of their employer is questionable. The entrepreneur is also central to the establishment of new enterprises. The owner may supply capital and perform routine managerial tasks may also exercise entrepreneurial skills. However it can be argued that the owner is not necessarily the entrepreneur.

In conclusion, the entrepreneur is someone who specialises in judgemental decision making about the coordination of resources, perceives opportunities for change and acts upon them in hope for personal gain. Entrepreneurs assist the market to correct errors and moves the economy towards equilibrium, however as innovators they move the economy away from equilibrium. Therefore the world of disequilibrium offers scope for entrepreneurial discovery and real change, as it is time and change that gives rise to entrepreneurial profit. Successful entrepreneurship provides an avenue of social advancement that is particularly attractive to people who are deprived of opportunities elsewhere. This is explained by the high incidence of entrepreneurial talent between immigrant and other disadvantaged groups and hence some leading some to suggest that environmental conditions may induce entrepreneurship.
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