Economic Theories of Entrepreneurship

Entrepreneurs are crucial for economic development.
Entrepreneurship theory is still underdeveloped.
The study of entrepreneurship involves various approaches: economics, psychology, sociology, and business management.
There is no systematic theory of entrepreneurial development.

Pre-classical economics began in the 18th century.
Classical economists limited the entrepreneurs' role in production and distribution.
They mainly emphasized the supply side of the economy.
In a free, competitive, and specialized market, entrepreneurs bring demand and supply together.

First to present a theory of the entrepreneur.
The term "entrepreneur" is French, meaning "ability to take charge."
Entrepreneurs activate and stimulate economic activity, crucial for economic success.
Without entrepreneurs taking risks, economic progress would slow or stop.

Buying and selling products from villages to cities.
Buying and selling products from cities to villages.
Producing goods and services sold in villages or cities, including organizing inputs of production (land, labor, and capital) and distributing goods.

1st Theory - The Importance of the "Taking Charge" Role of Entrepreneurs
2nd Theory – Deals with the Critical Role of Entrepreneurs in Labor Value Determination
- Classical labor value depends on the interplay of demand and supply, fluctuating around the "subsistence wage" and natural price.
3rd Theory – Refers to the “Intrinsic Value” of Goods
- The intrinsic value of a good is the amount and quality of land and labor spent to produce it, considering opportunity cost.
- Cantillon’s intrinsic value implies equilibrium between production and consumption where the cost of goods equals the value of inputs.

Entrepreneurs bring goods and services from interdependent classes of people together.
Entrepreneurs regulate the flow of goods within the economy.

Contradicted the classical model.
Depends on both the cost of production (supply side) and the demand side of a closed economy.
Neoclassical economists emphasize the principle of diminishing marginal utility.
Entrepreneurs consider decreasing consumer satisfaction as more units of a good are consumed.
The production method is direct, assuming entrepreneurs know consumers’ demand before production.

Emphasized that demand and supply determine the price and output of goods.
Failed to explain how profit occurs at equilibrium.
Profit is justified as a special reward.
The contribution of many small entrepreneurs in partial equilibrium leads to economic progress.
Marshall focused on sustaining equilibrium; profit disappears in highly competitive markets, leading producers to innovate.
Focus is on sustaining entrepreneurial innovation through product differentiation.
Entrepreneurs possess perfect knowledge in a purely competitive market and can predict changes in production and consumer preferences.

First to specify entrepreneurship function under pure uncertainty and extend this uncertainty within a general equilibrium system
Entrepreneurs are strategic decision-makers who generate profits by deploying resources effectively in an uncertain environment.
Distinguished between entrepreneurs and managers based on uncertainty bearing and between self-employed and paid individuals.
Entrepreneurial income is pure ‘profit’ and not a contractual income.
Monopoly can be beneficial because without it, there could be no economic equilibrium.

The assumption of rational behavior ignores people's vulnerability to irrational behavior in maximizing utility and profit.

The Austrian school rejects the universal application of any economic theory.
Prices are subjective, based on individual preferences to buy or not to buy.
Emphasized subjective factors that determine the cost of production according to the value of alternative uses of scarce resources.
The entrepreneur uses information from prices and interest rates, exercises judgment about future prices, makes economic plans, and bears the risk of an uncertain future.
Entrepreneurs seek and communicate knowledge via price information and are responsible for innovation, satisfying market needs, and systemic change.

Emphasized the supply side via innovation.
Consumer preferences are passive and don't automatically change, so they cannot cause economic change.

Described development as a historical process of structural changes driven by innovation.
Entrepreneurs are responsible for innovation, adopting new things or ways of doing things and abandoning old ones.

He classified the historical process of change into five types:

Introducing a new product or a new kind of an existing product
Application of new methods of production or sales of a product
Opening of a new branch of the industry
Acquiring new sources of supply of raw material or semi-finished good
New industry structure such as the creation or destruction of a monopoly position.

Economic growth results from the diffusion of basic innovation, not just its discovery.
The entrepreneur's main function is to allocate existing resources to "new uses and new combinations."
Innovation is the prime driver of economic development, and the entrepreneur is the catalyst of change.