February 22, 2004
The Idea of the Entrepreneur Role as Distinctly Human Action:
A History of Progress
This paper concerns the concept of the economic entrepreneur as the personification of the distinctly human, as opposed to robotic or exclusively behavioral features of the interaction, under the conditions specified in the definition of the hypothetical pure market economy. It presents a history of the gradual development of this concept. Beginning with the mid 18th century, it traces the concept through the early Austrian economists, Clark, Hawley, Davenport, Schumpeter and Knight. It culminates with Ludwig von Mises's treatise on Human Action (1966).
Since Mises was the first to actually define entrepreneurship in this way and to provide hints about how to elucidate it, the paper includes a more detailed description of his contribution. Of particular significance is his "method of imaginary constructions," in which a contrast is made between an imaginary robot economy and an economy comprised of human actors, the characteristics of whom the economist knows on the basis of intuition and experience.
The aim of this paper is to present an interpretation of progress regarding the idea of the entrepreneur role, which I define as distinctly human action under the conditions of the pure market economy. Because this definition may at first seem strange, I begin in part one by distinguishing it from other uses. Part two defends the notion of studying the progress of an idea in the history of economics. This is necessary for two reasons. First, the recent trend in the history of economics has been away from the study of ideas. Second, the recent trend has been to avoid the alleged normative connotations of the term "progress." Part three presents a brief preview of the history. Part four describes the role of the entrepreneur and the method of elucidating it in greater detail. Since a watershed in the development of this concept was H. Davenport, part five begins by discussing the pre-Davenport ideas of uninsured risk and static equilibrium. Part six describes Davenport's ideas. Part seven discusses F. Knight. Part eight turns to L. Mises's methodological approach and shows how that approach was enhanced by I. Kirzner.
1. The Entrepreneur as a Distinctly Human Actor
In the 1980s no less than five books were published on the history of entrepreneurship. Each of these were concerned with how economists have used the term "entrepreneur."(Barreto 1989; Casson 1982; Hebert 1982; Reekie 1984; and Wu 1989). It is evident from reading these books that professional economics contains at least three fundamentally distinct and different concepts of the entrepreneur. I shall call these, respectively, (1) the stipulated entrepreneur, (2) the ideal type, and (3) the role. The stipulated entrepreneur is a mechanism that simulates the discovery of given wants and/or means of satisfying them.
The Stipulated Entrepreneur
The stipulated entrepreneur is said to cause a tendency toward equilibrium. There are two examples, which seem to lie at different extremes. The first is the Walrasian entrepreneur. Walras says:
...Under free competition, if the selling price of a product exceeds the cost of the productive services for certain firms and a profit results, entrepreneurs will flow towards this branch of production or expand their output, so that the quantity of the product [on the market] will increase, price will fall, and the difference between price and cost will be reduced; and, if [on the contrary], the cost of the productive services exceeds the selling price for certain firms, so that a loss results, entrepreneurs will leave this branch of production or curtail their output, so that the quantity of the product [on the market] will decrease, its price will rise and the difference between price and cost will again be reduced. It is to be observed, however, that although the multiplicity of firms conduces to equilibrium in production, such multiplicity is not absolutely necessary in order to bring about this equilibrium, for, theoretically, one entrepreneur alone might do so, if he bought his services and sold his products by auction, and if, in addition, he always decreased his output in case of loss and always increased it in case of profit...[I]n a state of equilibrium in production, entrepreneurs make neither profit nor loss...(224-5)
The Walrasian entrepreneur is basically a stipulated set of behaviors that are said to cause equilibrium, as defined by mathematical equations. This idea has become part of the mathematical notion of competition. It has limited relevance. In a realistic image of the market economy, neither consumer wants nor the means of satisfying them are given. Moreover, wants are cognitive, or mental, phenomena. So are the largest contributors to the means of satisfying them -- human knowledge and a willingness to bet that it is correct. The mathematical notion of the stipulated entrepreneur cannot capture these cognitive elements and is thus irrelevant to describing distinctly human action.
The second example is the entrepreneur of Israel Kirzner. Entrepreneurship, according to Kirzner, simulates a stipulated subconscious process of spontaneous alertness to price discrepancies. The spontaneous discoveries are assumed to be followed by behavior that causes the price discrepancies to disappear. Thus, the behavior causes a tendency toward equilibrium which would be achieved if the world was not continually changing.(Kirzner 1979: 174) Kirzner's entrepreneurship disregards or de-emphasizes the individual appraisals that give rise to a person's willingness to make a decision and to bear the uncertainty necessarily accompanying that decision.(Gunning 1997a) By relying totally on the subconscious, Kirzner disregards the complex mental process involved in constructing images of future interaction that aim to predict the profitability of alternative actions.
The Ideal Type Entrepreneur
The second, and most popular, concept is the ideal type. It is a composite of particular characteristics. For example, the ideal type entrepreneur may be a composite of (1) venturesomeness, (2) alertness to the conditions of consumer demand and supply of the factors of production, (3) innovative ability, (4) competence in managing factors, (5) willingness to bear uncertainty and risk, (6) leadership, and perhaps others. Other ideal types besides the entrepreneur are the banker, the thief, the police officer, a cat, a tree, and a rock. The drawings of animals in prehistoric caves may represent ideal types. The ideal type is most widely used in business economics. It is a vague term referring to a set of personal characteristics.
The ideal type entrepreneur is a deficient device for scientific communication because each separate communicator constructs his ideal types on the basis of his own unique personal experiences. You may define "venturesomeness," for example, by referring to particular businesspeople you have encountered in the past. Since I am likely to have encountered different businesspeople, my meaning of venturesomeness will probably be different from yours. Even if we base our ideal types on "shared" experiences with the same businesspeople, our interpretations of the experiences will differ. We may be able to improve our communication by discussing our experiences. However, we cannot achieve the efficiency of communication that is possible when we use the third concept.
The Entrepreneur as a Role
The third concept refers to a role that represents what we take to be the undeniable "category of human action" (Mises 1966: chapter 4), as it becomes manifest in the hypothetical pure market economy. "It means: acting man exclusively seen from the aspect of the uncertainty inherent in every action."(Mises, 1966, 253) Or, "acting man in regard to the changes occurring in the data of the market."(Mises, 1966, 254) To use this concept, we must begin by identifying the necessary properties of action. Then we must devise a means of showing how these properties come to be manifest under the conditions of the market economy.
The distinguishing advantage of using the role of the entrepreneur is greater efficiency of communication. Because each of us economists, as normal human actors, can form an identical concept of distinctly human action and because we can reason logically about how that action will become manifest under particular conditions; there is no doubt about our ability to know exactly what we mean by the role of the entrepreneur. From this point of view, the role of the entrepreneur is an intuitive notion based on an a priori assumption about normal human beings. It corresponds to what we know intuitively about the meaning of normal human action. These points will become clearer later in the paper.
2. The Study of the Progress of an Idea
Modern historians of economics have increasingly been drawn to other disciplines, such as sociology and history of science. Supporting this change are two beliefs. The first is that the history of economics is the history of people. To understand people, the argument goes, one must use the tools of the disciplines that specialize in the study of people. Since sociology and history are disciplines of this nature, it seems logical to borrow from those fields. The second belief is that economics is a science of the natural science type, which contains empirical regularities that can be identified by means of statistical observation and hypotheses testing. The result, one hopes, will be laws like the so-called laws of physics. Therefore, historians of economics can learn something from studying the work of historians, especially the historians of the natural sciences.
This paper does not subscribe to these views. It proceeds on the basis of three assumptions, the first two of which seem at variance with this trend among professional historians of economics. First, it assumes that economics refers to a set of ideas that are independent of the particular people who happen, at any particular moment, to hold them. It follows that economics is the study of ideas and not the study of people. Of course, ideas exist in the minds of people. Thus, one cannot study ideas without referring to the people who have them. The essential implication, however, is that we are less concerned with personal histories of the people or their interaction with peers than we are with the relationship between the ideas and the ideas held by predecessors and successors. It follows from this assumption that the beginning point in the study of the history of economics consists of identifying sound ideas. This requires making an argument that a particular idea is a correct way to achieve some purpose.
The second assumption is that the ideas in economics and natural science are fundamentally different. Economics is the study of individuals who have the distinct ability to choose and to act in ways that are not inferior to those of the people who study them. The phenomena of natural science are not distinctly human beings and thus cannot possess the essential qualities that we associate with the scientists who study them.
The third assumption is that in the history of the particular idea described in this paper, more adequate ideas have replaced less adequate ones. Thus there has been progress. Although few professional economists would deny progress in the discipline, the history of economics has recently been tending toward relativism, suggesting that the ideas of today are not necessarily superior to the ideas of a previous era regarding the same phenomena. Relativism is discussed below.
These assumptions are derived largely from the definition of economics adopted in this paper. Economics is defined as the theory of distinctly human action under particular conditions. Distinctly human action is action that is carried out by beings that are distinctly human. What distinguishes human action is the ability possessed by normal human beings to consciously choose means and ends. It is true that human beings have reflexes and instincts and that they often behave without considering means and ends. However, to the extent that they do this they fail to be distinctly human actors. It is also true that some human beings (the feeble-minded and the children, for example) do not qualify as distinctly human actors and that some animals appear to be able in some measure to choose their ends and means. Thus, the definition of the distinctly human actor is not based on biological or other directly observable properties. Rather it is based on our a priori belief that normal human beings possess specific characteristics that they can discover within themselves.
To focus attention on what I have called distinctly human action is not new. Professional economists have normally done this. Self-interest and the motivation to earn profit have typically been at the forefront of professional economics. Adam Smith, for example, assumed self interest. Traditionally, the issue about which most recognized economists have written is how to explain the objective facts they observe by referring to the ends and means of the individuals whose choices they hypothesize caused them or were effected by them. The only strange thing about the opening thesis of this paper is that I have made distinctly human action not only the focus of attention but also a necessary defining characteristics of economics. Without distinctly human action, there would be no economics and no economic ideas. This paper is only concerned with the work of professional economists that is relevant to the definition of economics as distinctly human action. This paper assumes that more adequate ideas have replaced less adequate ones in the history of economics as a science of distinctly human action.
Some professional historians of economics have adopted the stance of relativism. They claim that to make a judgment about the adequacy of an idea and about its progress is to overstep the bounds of a truly unbiased exploration of history. Contrary to this, the present paper assumes that the notion of the adequacy of an idea is not a spurious creation of a biased historian. It is a presumption that must be made if we are to regard economics as a science. There is, of course, room for disagreement over where various ideas rank on the scale of adequacy. But if we disagreed over whether there has been progress, we should have to abandon the notion that economics is science. The problem is to identify the ideas that demonstrate progress.
As indicated by the title, this paper is concerned with the role of the entrepreneur. I claim that the role of the entrepreneur is the key, one might say central, element in the science of economics, as I have defined it. It follows that by tracing the history of the idea of entrepreneur role, I will also partly trace the history of the science itself. In the following pages, I try to show how a more adequate conception of the role of the entrepreneur has replaced a less adequate one in the science of economics.
The method for isolating the entrepreneur from other characteristics of economic behavior seems to have not been identified until Ludwig von Mises's methodological writings. As a result, the early history is characterized by two developments, the significance of which could only be appreciated later. The first was the isolation of intersubjective uncertainty, or uncertainty about how others are likely to act. J. von Thunen and H. Mangoldt seem to have opened the window with their notion of uninsurable risk. But the main contributor in this realm was F. Knight with the idea that entrepreneurship requires judgment of judgment. In addition, Knight used the modern equilibrium method of isolating entrepreneurship from the passive factors of production discussed below.
The second development was the emergence of the subjective theory of value (price). This theory was an advancement on the separate theories of wages, rent, interest, and profit in classical economics. It contained two distinct elements. First, economists had to construct an integrated image of an economy containing all the cooperating factors of production. C. Menger, L. Walras, and W. Jevons each constructed images of this type. J. B. Clark later labeled such an image the "static equilibrium." Second, a single unifying principle of action had to be identified that would enable one to show that all of the classical "shares" were determined in the same way. The concepts of profit maximization and competition achieved this goal. Economists imagined that profit maximization and competition would establish the prices of each of the factors of production in the same way. The static equilibrium was imagined as a hypothetical state in which the prices of all the factors were established and in which there was no longer an opportunity for profit.
All three of the founders of marginalism based their model of equilibrium on the assumption that profit would be present if the factors of production were available at prices lower than the prices of the products that could be produced with them. Equilibrium meant the absence of such profits. As a result, it pointed the way, so to speak, toward the notion that equilibrium implies the absence of entrepreneurship. But the marginalists did not see equilibrium in this light.
Clark was apparently the first to use the static equilibrium model to try to isolate entrepreneurship. He was followed by J. Schumpeter and Knight. These authors did not appreciate the method they were using but each implicitly recognized that the static equilibrium was an essential part of elucidating entrepreneurship. Because they did not fully understand how to use the static equilibrium, their elucidations of the entrepreneur role were incomplete or deficient in some way.
Major developments also occurred outside of the equilibrium framework. At least two American writers shortly after the turn of the century were able to isolate distinctly human action without employing the static equilibrium framework. The first was F. Hawley. Focusing on the cooperative economic action of employing the classical factors of production in a profit-oriented enterprise (i.e., team production), Hawley identified profit as the essential income. In the absence of anticipated profit, there would be no wages, rent or interest. Associating the entrepreneur function with anticipated profit, he proceeded to elevate entrepreneurship from that of an often neglected factor of production to being the cause of all production and prices. Being associated with profit, the entrepreneur, in a functional sense, takes responsibility for changes in the market value of the property he controls and bears uncertainty regarding the eventual price at which the product of the cooperative endeavor is sold. Thus, Hawley's entrepreneur is both the cause of the market economy and the bearer of uncertainty regarding changes in the price of durable assets and regarding the selling price of a planned product. Hawley regarded the other classical factors of production as passive.
H. Davenport's contribution was twofold. He recognized that entrepreneurship is present in every normal human actor in a money-using economy and he made entrepreneurship inseparable from the appraisement of factors of production. By this means, he made his definition of the entrepreneur coincident with the use of knowledge in the market economy, thereby building on Menger' idea that knowledge is a necessary part of economic interaction in the market economy. Although Davenport isolated the entrepreneur role more clearly than other writers with the exception of Hawley, he shared with them the lack of appreciation for the fact that the isolation requires one to make a contrast with a system in which the role is absent.
Mises was the first to argue that the purpose of the equilibrium system, or evenly rotating economy, is to elucidate entrepreneurship. Kirzner followed Mises by showing how the pure entrepreneurial economy can be used to isolate what Mises had called homo agens.
4. The Role of the Entrepreneur
The role of the entrepreneur is associated exclusively with the pure market economy. We cannot directly observe a pure market economy. In this sense it is an imaginary construct. However, reason and experience reveal to us that it is imbedded in the capitalist system, or capitalism, which we can observe. We conceive of it by assuming that many of the characteristics of capitalism, as we know it, are absent.
The pure market economy refers to hypothetical conditions in which individuals have ownership rights to all the goods or services they produce or acquire in exchange. The individuals also have the right to exchange. No one uses force to interfere with these rights. Thus there are no trade barriers in the pure market economy. In addition, all wants are satisfied indirectly, as it were, by means of money. There is no self-production or barter. Also, there is specialization, which corresponds to the reason why individuals would choose to satisfy their wants only indirectly by using money. To avoid the complication of taxes, the hypothetical pure market economy contains no government, even though it is assumed that there are property rights. This obvious contradiction demonstrates that the image of the hypothetical pure market economy is merely a tool that we use to gain an understanding of one aspect of capitalism. Also, to avoid the complication of public goods, the image of the pure market economy assumes only private goods; no goods possess the jointness-in-consumption characteristic that we associate with public goods. Finally, for simplicity, we disregard fraud and deception, such as that involved in misleading advertising.
The image of the hypothetical pure market economy was invented (a) to represent the features of capitalism that economists have traditionally regarded as part of their subject matter and (b) for simplicity. Capitalism refers to a broader set of characteristics. It includes externalities such as pollution, congestion, personal injury and property crime, which are associated with yet-to-be-defined or costly-to-enforce private property rights; the special problems related to public goods; and the bargaining associated with the use of institutions to enforce contracts and property rights. It also includes taxes, self-production and barter, fraud and deception. It does not include pure political activity such as that involved by one group to obtain a transfer of wealth from another group. Nor does it include the use of collective action to appropriate or to help appropriate the wealth of peoples outside the jurisdiction of a nation. Capitalism is a broader and more vague notion than the market economy. Indeed it is precisely for this reason that economists have traditionally dealt with the narrower concept of the market economy. An economist who aims to evaluate economic policy in a real capitalist economy would have to supplement the theory of the market economy with a theory that includes the relevant factors that this simplistic definition omits.
The key concept in understanding the pure market economy is the role of the entrepreneur. We begin our understanding of the entrepreneur role by constructing an image of the pure entrepreneur. To do this we draw a sharp distinction between distinctly human economic interaction and the function-performing behavior of the consumer-saver, factor supplier, and hired manager. The latter roles are said to perform the routine functions that we derive from our definition of economic action. They behave automatically like robots, according to programs or algorithms. Kirzner uses the term "Robbinsian economizers" to describe them.(Kirzner 1967: 796-797; 1973: 32-3, see below)
The role of the pure entrepreneur is vastly different. It identifies the items or actions that are candidates for being factors of production. It proceeds to appraise them in anticipation of producing goods that consumers will buy. Then it sells or rents out its factors or it buys or leases the factors of others. If it acquires factors or uses its own factors, it proceeds to direct that they be used to produce specific goods for the purpose of sale. In performing these actions, the pure entrepreneur bears all of the intersubjective uncertainty. Thus the pure entrepreneur bears all of what are often referred to as consumer uncertainty, worker uncertainty, and the uncertainty connected with lending and ownership of property.
The actions that encompass the role of the pure entrepreneur can only be elucidated by making a contrast between (1) an image in which non-entrepreneurial routine functions of consumption, saving, factor-supplying, and production are performed by robots and (2) what we know from intuition and experience to be how distinctly human actors would proceed to perform these functions under the conditions of the pure market economy.(Gunning 1990: chapter 6; 1997a; 174-6) In the older economic literature, the first image was called the static equilibrium. In the more recent writings, it is called the evenly rotating economy.
The characteristics of the pure entrepreneur are derived by using intuition and experience to inform us about how distinctly human actors differ from the robot consumers, savers, factor-suppliers, and producers of the evenly rotating economy. We look first at the evenly rotating economy. Then we ask: how would consumption, saving, factor-supply, and production take place under the assumption that these robots are, in fact, distinctly human actors? Thus, we say that the characteristics of the pure entrepreneur are derived by means of a contrast between the evenly rotating economy and distinctly human action under the conditions of the pure market economy.
As a role, entrepreneurship is present in every market action, including a household's shopping and a janitor's cleaning. Everyone who makes a distinctly human decision to earn money or to use money with the aim of obtaining goods is acting in the role of the entrepreneur. However, in order to construct the simplest image of a market economy, we can imagine an economy consisting of distinctly human pure entrepreneurs and robot, economizing consumer-savers and factor suppliers. We can call such an image the "pure entrepreneurial economy." The pure entrepreneurial economy is useful in helping us gain a preliminary insight into competition, the relationship between the prices of goods and the prices of the factors of production, and consumer sovereignty. This simplification is of great help in dealing with the problems associated with money and capital.
5. Pre-Davenport Notions of Entrepreneurship
The concept of the role of the entrepreneur has slowly evolved over a century or so of economic writings. It represents the gradual advance in economists' knowledge of the methods they use to understand and describe economic interaction under the conditions specified in the definition of the market economy. One part of this advance is the identification of intersubjective uncertainty as a defining characteristic of economic phenomena. The first step in this identification seems to have been the recognition that business involves an element of risk that cannot be insured against and which is borne by the person who ultimately owns the right to the profit and the responsibility for a loss.
Suggestive Explorations of Business Risk
The concept of entrepreneur has apparently always been associated with business risk. Apparently, Richard Cantillon was the first to build an image in which the population was divided into two classes: the business risk bearers who receive uncertain incomes and the risk bearers who receive certain incomes.(Redlich 1991; 52) On the basis of secondary sources, it appears that J. von Thunen and H. Mangoldt, writing around the mid-19th century, were the first to add to this the idea that some business risk is uninsurable. They apparently attained this insight by first dividing the sales revenue into two classes: costs and profit. Next they divided costs into two parts: explicit and implicit. Implicit costs are the market prices of the self-owned factors that the businessperson decides not to sell or rent in markets. They defined profit as the excess of revenue over costs and identified one of the costs as being due to "risk." Obviously, some risk is insurable and, as a result, can be easily fitted into the explicit cost category. But other risk is uninsurable. It must be placed into the implicit cost category.
Uninsurability also implies the absence of knowledge of probabilities. If knowledge of probabilities is lacking, the reason may be that no one has yet acquired enough scientific knowledge. But scientific knowledge or technology is not the direct province of economics, defined as a science of distinctly human action. The kind of knowledge that is most important in this realm is knowledge of "business conditions." This includes knowledge of the demands of consumers, including their time preference, and the prospective actions of factor suppliers, lenders, and especially other business people. Some knowledge of this type is always lacking. But the interesting questions arise when different individuals have different knowledge and, most importantly, when they are differently willing to bet that their knowledge is superior. It is in considering these questions that the introduction of "business risk" is relevant to progress in the idea of the entrepreneur role.
Menger and Clark: The Concept of Equilibrium
One of the most important steps in the development of the role concept of the entrepreneur was the byproduct of the effort to resolve the contradictions in the classical theory of markets and prices. Several writers set out to invent a more satisfactory means of conceiving of the relationship among individuals under the conditions of the market economy. The most significant of these to the development of the entrepreneur role were Carl Menger and J. B. Clark.
Many historians of economic thought would trace the development of a unified theory of markets jointly to Jevons, Menger, and Walras. As W. Jaffe (1976) has observed, however, it seems that Menger's unified theory of price (Menger 1871: 49) was more in tune with the later trend to trace prices back to their roots in human action. Thus, we focus here on his contribution and do not discuss the others. Menger's contribution was threefold. First, he jettisoned from economic theory the separate theories of land rent, wages, and returns to capital that had been the mainstay of classical economics since Smith. He showed that in a market economy, each of these prices, to the extent that the factors can be quantified and are divisible, is determined mainly by the same principle of marginal revenue productivity. Second, he invented the idea of a hierarchy of orders of goods for the entire economy. He assumed goods of different orders in a structure of production, the goods of the lowest order (order 1) being consumers' goods and those of the highest order being factors of production, or producers' goods. The factors of production at one order, say order 4, were said to be used to produce a factor at the next lowest order 3. By this means, he set the stage for the well known theory of imputation and opportunity cost, which was later developed by F. Wieser. Third, he introduced subjectivism. By demanding that a good be defined in terms of wants and the knowledge needed to cause first order goods to be produced, he launched a two-pronged subjectivism, the full implications of which did not become evident until Hayek began to write about knowledge.(Hayek 1937 and 1945) Thus, Menger's subjective theory of value was a theory of how value depends on both utility and knowledge.
Clark followed Menger in developing the marginal productivity theory and he was apparently the first to use it to isolate the role of economic entrepreneur. Like Walras, he constructed a model of an economy in what he called "static equilibrium," where the sum of the payments to factors of production is exactly equal to the price of the product that the factors are used to produce. Unlike Menger, however, he reserved a special place for the entrepreneur. And unlike Walras, he did not regard the entrepreneur as a mechanism. To Clark, static equilibrium was an image of individuals behaving as robots according to the algorithms specified by the economist. Clark defined entrepreneurship in such a way that it was outside the static system. As Clark put it, entrepreneurship is a "dynamic," as opposed to a static, phenomenon. Clark saw the dynamic entrepreneur as (1) a coordinator of the factors of production in the satisfaction of consumer wants and (2) as an influence that makes improvements in the processes of production (Clark 1899b: 196).
Clark was mainly a pioneer. His concepts of the entrepreneur were not refined to the point where they could be associated with distinctly human action. This is particularly evident in his neglect of uncertainty. Knight (1921: 35) correctly criticized him for overlooking "the fundamental question of the difference between a change that is foreseen a reasonable time in advance and one that is unforeseen."(ibid.) More to the point, Clark neglected the unique knowledge of the businessperson which was so evident in the American pre-marginal productivity theory writings on entrepreneurship and which implicitly played a role in Menger's theory.
Hawley occupies an important niche in the subjectivist history of the entrepreneur. Perhaps the most salient feature of his writings was his dogged unwillingness to accept the static equilibrium framework proposed during the marginalist revolution. From one point of view, he appeared to be stuck in classical economics with its emphasis on the four separate factors of production with different functions. However, if we disregard this and focus on his definition of the entrepreneur, we can identify him as a founder of the new subjectivist concept of entrepreneurship. To see why this is so, we must focus on the function he attributed to entrepreneurship.
He derived his function from what he defined as the "class of economic actions." These consist exclusively of team production -- "combined actions entered into by each participant because he expects a share of the resulting benefit bearing a definite and prearranged relation to his contribution to its creation."(Hawley 1907: 56) The prearranged benefit that Hawley had in mind is money.(ibid.: 69; 77-9) In team production, there are four functions. The first two are land and capital, which are "acted upon and therefore passive." The second two are labor and entrepreneurship (which he labeled enterprise). These are "active and involve immediate personal sacrifice."(ibid.: 58) Although labor involves personal sacrifice, it bears no responsibility for the team outcome. In economic actions, "some individual, or group of individuals, theoretically and practically distinguishable, must assume the responsibility of the enterprise, and the direction of the undertaking inseparable from the responsibility...[By doing this, the individual or group of] risk-takers necessarily acquire the exclusive ownership of the product...[They go on to] reward those who contribute the use of land, the use of capital, and personal exertion, not with any share of the product itself, but with stipulated amount of purchasing power..."(ibid.: 62)
It is clear from this discussion that Hawley regarded entrepreneurship as essential in economic analysis. But he goes on to argue more than this. He asserts that entrepreneurship is the cause of all economic activity. He says:
[E]conomics is a moral science...wholly concerned with volitions...And as profit, in the wide sense of the term, is the only possible determinant of volition, [entrepreneurship] is the source of all economic activity...The environment therefore must be regarded, not as an original, but only as a disturbing cause, or rather as a condition....[I]n economic action...the function of [entrepreneurship] is assumed by a distinct class of individuals, and thus especially differentiated from the other productive functions.(ibid.: 94-5)
It "follows that profits are the cause of rent, interest, and wages...Land, capital, and labor are the servants of [entrepreneurship, although entrepreneurship] in its turn is the servant of the whole community"(ibid.: 96)
Should not the owners of land, labor, and capital also be considered a source of economic activity?
The answer seems to be that they should be treated wholly as means rather than causes were it not that the act of volition is always involved both in their creation and activity. While the [entrepreneur] is the only direct creator of purchasing power, the landlord, capitalist, and laborer are each voluntary creators of a condition essential to his activity."(ibid.: 112, italics added)
Thus, entrepreneurship "cannot be classed among the means of production, though it is a member of the wider class of sharers in the results of production."(ibid.: 149-50)
Hawley had a clear understanding of entrepreneurship as the manifestation of volition in the economic sphere of human action,(ibid.: 150-1) This makes him a predecessor of both Davenport and Mises. However, the requirement that production had to be a team effort for the volitional activity to be economic distinguishes him from them also. Indeed, one might argue that he was the true founder of the distinction between praxeology and economics (see below), although this would be important today only to followers of Mises.
The entrepreneurial aspect of Hawley's contribution is easy to overlook for three reasons. First, he did not distinguish uncertainty from risk. As a result, with respect to the concept of intersubjective uncertainty, he was overshadowed by Knight (1921). Second, he seemed to be averse to using the static equilibrium concept, perhaps because he associated it with Clark's notion of the entrepreneur as a coordinator. Clark (1892) had criticized Hawley's initial presentation of his theory (Hawley 1892) and, in spite of Hawley's subsequent restatements of the theory (Hawley 1893; 1900; 1901), Clark never withdrew the criticism to the author's knowledge. Third, Hawley seems to have made some bad choices of terms. On the one hand, he called his theory "the risk theory of profit," thereby leading post-Knightian scholars to tend to ignore him. On the other hand, he used the term "enterpriser" instead of "entrepreneur," presumably in order to distinguish the business entrepreneur from the function of the entrepreneur (enterpriser).
Clark's idea of an entrepreneur who exists only in a "dynamic" economy was developed much more fully by Schumpeter (1911). Schumpeter started with the static equilibrium in which entrepreneurship and profit are absent. Then he went on to describe the concept of the entrepreneur in relation to the equilibrium. He treated the entrepreneur as an innovator who, in response to the inventions he becomes aware of, disturbs the static equilibrium toward which an economy populated by robots would be tending. He thus developed Clark's second idea of the dynamic entrepreneur.
But Schumpeter's economy, like that of Walras, was an image of an anthill, or robot equilibrium. The difference is that it was led by "strong-willed men with vision."(Boehm, 1990, 225). This image fails to emphasize the facts that entrepreneurship (1) creates the market economy and (2) is a role that is played by everyone, not by a distinct class of people. Kirzner (1990) is correct to say that Schumpeter helped to keep alive the notion that economic equilibrium is not a condition of reality. Nevertheless, Schumpeter does not seem to have contributed to the concept of entrepreneurship as a role.
To further develop the concept of the role of the entrepreneur, someone had to integrate the Menger-Clark theory of markets with the notion that entrepreneurship is the driving force of the market economy. This task was undertaken by H. Davenport in his 1914 book.
In the general theory of price, Menger had taught that the price of a factor of production could be traced to the consumer's evaluation of the product. In this, he was similar to Jevons and to the early Walras. However, the distinguishing element of Menger's theory is not the structure but his methodological statements relating to subjectivism. Specifically, he wrote that for a thing to acquire "goods-character," there must be human knowledge of the causal connection between the want it can satisfy and the properties of the thing that render it capable of satisfying the want.(Menger 1981: 52) Unfortunately, he did not integrate this methodological statement with his unified theory by showing how the assumption of knowledge enables one to describe economic interaction in the market economy. Instead, he developed an image of an errorless economy.
Bohm Bawerk tried to fill this gap with his notion of the "synchronously reckoned money cost of the entrepreneur."(1894: 325, 363) This is the cost that competing entrepreneurs would cause to emerge in the market. However, Bohm's remarks about entrepreneurship were only suggestive. He did not develop the idea of entrepreneurship sufficiently to enable one to infer that he had in mind distinctly human action (which, of course, he probably did not have in mind). This task was taken up by another neglected American economist Herbert J. Davenport.
Davenport emphasized that in describing the "pecuniary society of business" from the economic point of view, we should treat all phenomena ultimately as they are viewed by some entrepreneur. Since the prices faced by any single entrepreneur are caused by the actions of other entrepreneurs, we can say that we look at all economic phenomena through the eyes and minds of entrepreneurs. The entire pricing process:
is captained by the entrepreneur, is guided and supervised by him, and worked out through him. It may, indeed, be entirely so worked out and guided, if only the concept of the entrepreneur be given its proper extension. All employers of labor or of instrumental goods for hire are entrepreneurs, no matter whether the prospective product is to be offered for sale or not. If it have no sale price, it is because it has a reservation price...The client of the lawyer or the patient of the doctor, the master in his hiring of his house servants or his valet, the employer of labor in the raising of garden products for the home table, are all bidders for factors of production and are entrepreneurs for this -- and for every other -- purpose of economic analysis.(1914: 139, emphasis added)
We see here that Davenport assigned the term entrepreneur to each actor who makes appraisals on his way to expressing his reservation demand for goods and factors of production. In this sense every actor is an entrepreneur.
When Davenport said that every actor is an entrepreneur for every purpose of economic analysis, he meant that to construct a proper theory of markets, one must begin with an image of each actor in the market economy as both a prospective consumer of goods and a prospective supplier of either factors of production or goods. Each person has a demand for goods, a reservation demand for the factors he owns, and money. He proceeds to participate in factor markets by renting out or selling some or all of his factors or by renting in or buying the factors of others. Before proceeding, however, he appraises his factors according to the personal satisfaction he may obtain by using them privately and the money he can earn either by exchanging them with others or by employing them himself in an enterprise. In this way Davenport was able to isolate the role of entrepreneurial knowledge in establishing market prices for the goods and factors.
Davenport did not go so far as to say that entrepreneurship is the distinctly human aspect of economic behavior. His writings were not so epistemological, or methodological. His analysis, however, is consistent with this view. Moreover, Davenport did not see that he was able to derive his concept of entrepreneurship only by making a contrast with the general static equilibrium. Thus, in his definition of profit as the reward to the "independent human factor in the quest for gain"(1914: 404), he did not see to that to isolate this reward from other incomes, he had to use the static equilibrium concept.
In Risk, Uncertainty and Profit, Knight followed a path similar to Schumpeter. He also started with the static equilibrium, or what he called perfect competition. However, whereas Schumpeter conceived of entrepreneurs as leaders among a world of robots, Knight saw them as judges of people. The entrepreneur in an enterprise tries to determine which people to hire and what orders to give them. She also tries to predict future demand conditions, which she recognizes depend upon the actions not only of the demanders but also of competitors. Thus, she must judge employees, consumers, and potential competitors. In a market economy, she translates her judgments into profitability calculations.
One might say that Knight's entrepreneur has a special kind of knowledge: knowledge about how people will act. By considering this kind of knowledge, we can fill in some of the blanks left by Menger's abstract notion that for a thing to be a good, someone must have knowledge of the causal relationship between the factors of production and the ultimate satisfaction of a want.
When the entrepreneur ultimately decides to hire factors and produce a product for eventual sale, she is in effect betting that her judgment about how others will act is more correct than the judgments of others, who are unwilling to bid as high as she. Through this "betting," the factors come to be controlled and allocated by those whose convictions about how others will act, in terms of their willingness to spend their money, are most positive (Knight 1921: 268-271). Such betting entails a special kind of risk that Knight called uncertainty.
The other kind of risk -- that associated with unpredictable natural events like storms and earthquakes -- is relatively easy to include in the theory of price. One only has to assume that everyone is risk averse, that there are advantages in risk pooling, and either that everyone knows the probabilities or that there is competition among insurers who have this knowledge. But the "risk" associated with judgments about how others will act is in a completely different class. In accordance with our earlier discussion, a more descriptive name for it than uncertainty is intersubjective uncertainty, since it is uncertainty that one subject has about another.
Knight discussed intersubjective uncertainty in relation to the static equilibrium (he called it perfect competition). The important feature of the static equilibrium was that it omitted intersubjective uncertainty. Thus, for Knight, the study of dynamics, was the study of how individuals deal with intersubjective uncertainty.(ibid.: chapter 5)
Let us look more fully at the characteristics of entrepreneurship. In the static equilibrium, we assume that prices already exist. When we depart from that imaginary construct, however, we recognize that they must be set. Thus, one of the characteristics of entrepreneurship is appraisement which leads to price-setting and exchange. As Knight, following Davenport and others, was quick to emphasize, entrepreneurs "capitalize" the factors of production by appraising them and setting prices in a way that reflects to some degree the stream of income that they expect the factors to yield.(ibid.: chapter 4) Second, decisions must be made about the production of goods. Entrepreneurs are producers and thus make decisions that result in the employment of resources and the production of goods. Third, entrepreneurs bear intersubjective uncertainty. As mentioned above, the entrepreneur who bets that her judgment is correct must pay off if she loses her bet. It follows that to be an entrepreneur, one must possess wealth. In the discussion below, we argue that these are the defining characteristics of entrepreneurship.
In describing the significance of intersubjective uncertainty in an economy, Knight stated
Uncertainty thus exerts a fourfold tendency to select men and specialize functions: (1) an adaptation of men to occupations on the basis of kind of knowledge and judgment; (2) a similar selection on the basis of degree of foresight, for some lines of activity call for this endowment in a very different degree from others; (3) a specialization within productive groups, the individuals with superior managerial ability (foresight and capacity of ruling others) being placed in control of the group and the others working under their direction; and (4) those with confidence in their judgment and disposition to "back it up" in action specialize in risk-taking.(1921: 270)
Knight could have proceeded to define entrepreneurship as the human actions that are aimed at dealing with intersubjective uncertainty that have the consequences described in this quotation. If he had done this, his definition of entrepreneurship would have been broad. It would have covered all the economic phenomena that the static equilibrium omits. However, Knight chose to define entrepreneurship more narrowly. He used the term entrepreneur to refer to the residual claimants in already-established business firms. By doing this, he failed to distinguish entrepreneurship as the distinctly human character of entrepreneurship. By distinguishing intersubjective uncertainty from risk, he made an advance on Hawley. And because he began his analysis with equilibrium, he occupies an important intermediate position between Menger-Clark and Mises. But in focusing only on producing entrepreneur, he was behind Davenport.
8. Mises on Entrepreneurship
Clark, Schumpeter and Knight had used the static equilibrium as a starting point for their theory of economic development and wealth. Each also sought in a fashion to elucidate entrepreneurship by contrasting the equilibrium with his conception of capitalist society or market economy. However, they did not investigate the more fundamental question of why they were using this method of contrast. Thus they had no way of providing an internal judgment of whether the method was appropriate and, consequently, whether their results were reasonable. They could make a pragmatic appeal and refer to the intuitive usefulness of their method, but they could not provide a logical justification for it. By describing the method clearly and by isolating the phenomena that it was most suitable for elucidating, Mises paved the way for making such a judgment and for clearly defining the role of the entrepreneur.
Before one can evaluate a method, one must first clearly state the goal he wants to achieve. In economics, the goal is to elucidate economic interaction under the conditions of the market economy. The study of the market economy is a relatively new phenomena that apparently did not begin in earnest until the 17th century. With this in mind, Mises began his treatise with the claim that economists had invented a totally new kind of knowledge, one that was unknown to the ancient Greeks. He asserted that this knowledge could be placed alongside logic, mathematics, psychology, physics and biology as a separate type. The knowledge he had in mind was knowledge about the "regularity in the sequence and interdependence of market phenomena."(Mises 1966: 1) This knowledge became accessible because the early economists were, without realizing it, concerned with tracing the logical implications of assuming that human beings are distinct in their capacity to "act."(ibid.: 3; 231) Action in this context means (1) felt uneasiness, (2) an image of a more satisfactory state, and (3) the expectation that purposeful behavior has the power to remove or at least to alleviate the felt uneasiness.(ibid.: 13-14) An individual who acts can be called homo agens (a distinctly human actor) as opposed to homo sapiens (a human being from the biological point of view). Economics as a special kind of knowledge consists of describing homo agens under the conditions specified in the definition of the market economy.(ibid.) In more familiar (but also more simplistic) terms it consists of assuming self interest in building images of economic interaction.
Distinctly human action and self interest also function in situations outside the market economy. It follows that economics must be a branch of a more general theory of action. Mises named the more general theory praxeology. The early economists did not realize that economics was a new kind of knowledge. This idea began to emerge, according to Mises, with the development of the subjective theory of value (i.e., of prices) in the latter half of the 19th century. Mises said that the subjective theory of value caused a change in focus that ultimately enables us to see that economics is concerned with distinctly human action and, therefore, a branch of praxeology (ibid.: 3).
Once we set our goal as the study of distinctly human action under the conditions of the market economy, the methodological problem becomes that of (a) defining action more precisely and (b) finding a way to construct images of action that are useful in helping us understand economic interaction under complex market economy conditions. The procedure identified by Mises was to define entrepreneurship as distinctly human action in the market economy and then to use what he called the method of imaginary constructions to elucidate entrepreneurship. This method involves making a contrast between (1) the static equilibrium referred to by Clark, Schumpeter and Knight and (2) an understanding of how normal human actors would act under the conditions specified in the definition of the market economy. The static equilibrium, or evenly rotating economy, is an image of an economy that lacks distinctly human action and, therefore, entrepreneurship (Gunning: 1997a). As Mises pointed out, the only problems for which this imaginary construction is appropriate and, indeed, indispensable are
the problem of the relation between the prices of products and those of the factors required for their production, and the implied problems of entrepreneurship and profit and loss. In In order to grasp the function of entrepreneurship and the meaning of profit and loss, we construct a system from which they are absent. This image is merely a tool for our thinking. It is not a description of a possible and realizable state of affairs.(ibid.: 248)
He goes on to point out that the evenly rotating economy is a rigid system peopled with "soulless unthinking automatons," as quoted above.
Clark had referred to distinctly human action under the conditions of the market economy as the dynamic aspects of the economy, Hawley spoke of it when he said that "every act of volition connotes and involves enterprise"(1907: 114), Davenport had described it when he said that everyone is an entrepreneur for the purpose of economic analysis, and Knight had it in mind when he wrote about the fourfold tendency in an economy due to intersubjective uncertainty to select men and specialize functions and also at times when he spoke of the producing entrepreneur.
Mises provided the epistemological foundation for the method. However, his use of the method was not as clear as that of one of his students, Israel Kirzner. I have argued that Kirzner's own conception of the entrepreneur is not Misesian and, in fact, distracts us from comprehending the true Misesian entrepreneur (described below). (Gunning, 1997a) Nevertheless, in setting the stage for his discussion of the entrepreneur, Kirzner was able to present, in the best way to date, the procedure that must be used to elucidate entrepreneurship.
Avoiding terms like "method of imaginary constructions," "evenly rotating economy," and "soulless, unthinking, automatons;" Kirzner described an image of a general equilibrium containing only what he called "Robbinsian economizers." He saw the image of the Robbinsian economizers as the antithesis of Mises's homo agens, or acting man as defined above. He went on to employ an analytical device that concentrates "all entrepreneurship into the role of the hypothetical pure entrepreneurs."(Kirzner 1973: 72) Conceiving of entrepreneurs by means of this device, "it becomes possible to speak of a market in which all other market participants are pure Robbinsian economizers, without any element of entrepreneurship whatsoever."(ibid.: 41) "We may in this way continue to envisage a market in which consumers and resource owners are strictly Robbinsian economizers, exclusively price-takers, and shift the entire burden of price changes and changes in methods of production and of output quality and quantity upon the pure entrepreneurs."(ibid.: 72) "The activity of these pure entrepreneurs can then explain how prices and input and output quantities and qualities change."(ibid.: 42) It is true that this image of Robbinsian economizers and pure entrepreneurs "fails as a satisfying explanation of the real world..." However, "it is analytically expedient to treat the human being as if he represented two entirely separate decision-makers, one a passive economizer, the other a pure entrepreneur."(ibid.: 43) Clearly this method isolates all the distinctly human action into the role of the pure entrepreneur. Note how Kirzner's method of isolating entrepreneurship by using the concepts of active and passive is similar to that of Hawley. The difference is that Kirzner had in mind a general equilibrium, while Hawley was thinking only of a single team production activity.
Two Notions of the Entrepreneur
Mises showed us the way to derive the role of the entrepreneur. In deriving this role, he said, economics has in view not particular men but a definite function which is inherent in every economic action by a normal human actor.(ibid.: 252-3) Regrettably, however, he proceeded to use what he called a narrower image of the entrepreneur throughout most of his discussion of markets. He called this image a promoting entrepreneur, or promoter. Promoters are distinguished by the fact that they are especially eager to profit, more venturesome, and quicker of eye than the crowd.(ibid.: 254-5). I have argued that this was a serious tactical error.(Gunning 1994: chapter 4 and 5) In any case, the discussion here will avoid the sections where he seems to have been referring to the promoter and focus on those where he seemed to be writing about the broader concept of the entrepreneur in economic theory.
The Essential Characteristics of Entrepreneurship
What are the essential characteristics of entrepreneurship? Mises did not try to identify these in any single place. As a result, the task of identifying them remains to be done. In previous work, I have shown that these can be derived from the concept of distinctly human and the assumption that the conditions of the market economy prevail.(Gunning 1990: chapter 4) The procedure amounts to first constructing an image of an isolated actor's production-consumption choice and then adapting that image to the conditions of the market economy. To make a production-consumption choice, the isolated actor would first have to identify factors of production and evaluate them in terms of the benefits he expects to obtain if he embarks on a particular plan of action. Having completed this task, he would have to make a definite decision to produce. Finally, in order to capture the fundamental assumption of the uncertainty of action, we say that he would have to bear the uncertainty connected with his action. If his evaluation is wrong or if circumstances change in a way that he did not predict, then his action may turn out to yield less benefits than he expected. He may even regret having made it. He must bear this uncertainty.
These activities of the isolated actor can be translated into three essential characteristics of entrepreneurship: appraisement (identifying and attaching a price valuation to a perceived factor of production), undertaking (making the decision to use factors to produce goods), and uncertainty-bearing. Mises himself identified these. Thus, I shall refer to Mises's discussion when describing them. However, he did not derive them from the definition of action. As a result, his discussion of them was not systematic.
Appraisement is a necessary characteristic of entrepreneurship because it embodies the idea of calculative action. Calculative action is action in which choices are made on the basis of benefits and costs expressed in cardinal numbers. Under the conditions of the market economy, all calculations are assumed to be of this type since they are made in terms of money. The distinctive human action involved in appraisement can be isolated by contrasting the appraising actor with a robot who operates according to a routine, like the Robbinsian economizer. The robot does not discover wants or factors of production and it does not construct images of the future actions of prospective consumers, factor suppliers, and other appraisers.
From the standpoint of an individual's entrepreneurship, the term "appraise" refers to identifying factors or goods and attaching price assessments to them. An individual may expect to use the factors or goods himself but be thinking about the alternative of renting them out or selling them. Or he may expect to rent them out or sell them with the alternative of using them himself.
As subjectivists, we must take the individual standpoint. At the same time, in order to understand the relationship between appraisement and markets for consumer goods in its simplest form, we must construct an image of pure entrepreneurs, or a pure entrepreneurial economy. In this image, we assign all of the appraisement to a "class" of pure entrepreneurs. The members of this class have the task of appraising all factors. Other participants in the pure entrepreneurial economy are robots, or Robbinsian maximizers. There are robot consumers who stand ready with their demands for goods to buy the mix that best satisfies their wants, given their income. There are robot factor suppliers, who stand ready to exchange their factors for the highest prices. There may even be robot producers, managers, bureaucrats and technicians. The important point is that, through appraisement, the pure entrepreneurs set the prices for the factors by bidding against each other for the factors as if at an auction. This simple image enables us to depict in simple form the ideas of competition, "consumer sovereignty," and the relationship between the consumers' goods prices and factor prices.
We must be careful in using the auction analogy of the pure entrepreneurial economy, however. Although it allows us to illuminate several characteristics of the market economy, there are at least two shortcomings. First, appraisement in the market economy not only consists of attaching monetary values to factors and goods. It also consists of identifying factors. This implies not only searching out means of satisfying wants but also searching out the wants themselves. When we think of an auction, we assume that the owner of the auctioned good has only one goal -- to receive the highest price. Every bidder knows this. But the goals of individuals as consumers in the market economy (i.e., their wants) are always changing and must continually be sought out. Because of this, the bidding analogy is incomplete. In the market economy, individuals as producing profit-seekers not only bid for the consumers' money, they try to determine the products that consumers are willing to buy. To do this, they may have to inform individual consumers of ways to satisfy their wants that were previously unknown to them. A similar statement can be made about determining the technical usefulness of a particular factor of production. Not only must an item be identified as being useful, its owner may have to be informed of its usefulness. Translated into a statement about the market economy, we can say that the identification of factors of production and the assessment of prices requires a relationship among producers-as entrepreneurs, consumers-as-entrepreneurs, and factor suppliers-as-entrepreneurs. When we use the device of the pure entrepreneurial economy, we tend to conceal some of the actual market interaction that lies behind appraisement.
Second, appraisement is never separate from decision-making and uncertainty-bearing (to be discussed below). Regarding decision-making, each factor must be combined with other factors before a production project can be completed. This means that the same bidding entrepreneur must be a bidder simultaneously at several auctions. Accordingly, his bids for the various factors are interdependent. The auction analogy suggests that the bidding for each factor is independent.
The interaction in the pure market economy is a consequence of human decision-making, or acts of will. The outcomes of entrepreneurial decision-making are the employment of factors, the goods that are produced, and the actual consumption of the goods at particular times. The difference between a decision and a behavior routine is the presumed act of will. Unlike the robot or Robbinsian economizer, a distinctly human actor can make a choice that would, to an outsider, seem against his interest. An example is intransigent bargaining.
The robots of the static equilibrium, or Robbinsian economizers, cannot be uncertain because they behave according to the algorithms of the modeler. Normal human actors in the pure market economy, however, would necessarily experience uncertainty because they could not exactly predict the actions of other normal human beings.
Why are individuals unable to fully predict the actions of others? Why is every action in the market economy a speculation? (Mises: 106, 252-3) The inability to predict others' actions exactly is due to (1) the complexity of the human mind that directs others' actions, (2) the independent will possessed by each person, and (3) the large number of different kinds people in the market economy. To predict how a single individual will act in a market situation is somewhat like trying to predict how a tennis or chess rival will react to a particular strategy. The difference is that in these games one does not usually have to predict the rival's wants. A cannot fully know the wants and knowledge of B and we assume that B may be more capable of predicting A's action than A is of predicting the B's action. Unless B behaves like a robot, A must be uncertain to some degree about B's behavior. The task of prediction in the market economy is infinitely more complex because of the large number of people and their interrelationships. Mises (ibid.: 252) made this point by saying that all action in the market economy is speculative.
As mentioned above, the economist is interested specifically in intersubjective uncertainty under the conditions specified in the definition of the pure market economy. To elucidate this, he creates the role of the entrepreneur. "The entrepreneur as uncertainty bearer is distinguished from the roles of the consumer-saver, the various factor-suppliers (ibid.: 252-3), and the roles of the manager, technician, and bureaucrat (ibid.: 303-11)
Regarding uncertainty-bearing, there is a kind of specialization that occurs among decision-makers, where some use what they believe is their superior knowledge of how to combine factors to produce profitable goods while others use what they believe is their superior knowledge of market conditions in general. The former are the primary operators of firms and earners of profit. The latter are the secondary owners and financiers. They also earn profit. But their profit comes from stock dividends and uncertainty-fattened interest rates.
The presence of uncertainty-bearing in all entrepreneurial actions provides a third reason why the auction analogy is incomplete. The auction analogy disregards uncertainty regarding the outcome after the auction for the factors of production is won and the winner proceeds to produce goods to satisfy wants.
The aim of this paper has been to trace the history of the progress of the idea of entrepreneurship as distinctly human action. Today, the term "entrepreneur" is often introduced in the classroom to give reasons why economic conditions are what they are, why they change, and why changes have certain effects. However, the Misesian idea of entrepreneurship as distinctly human action has not penetrated modern professional economics. Moreover, given the importance of this idea in the history of economics, the various contributors to it have occupied a relatively small portion of modern textbooks in that field. Hawley and Davenport have been completely excluded. Finally, although neo-Austrian economists have made the entrepreneur idea the centerpiece of their studies, even they have not appreciated the concept of the entrepreneur role described here. Instead, they have become preoccupied with notions such as the tendency toward equilibrium, the market process, and entrepreneurial alertness. One hopes that this paper will help to make up for these deficiencies.
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