The Roles of the Entrepreneur

Successful entrepreneurs are usually modeled as combinations of innovators (with creative and innovative flair) and managers (with strong general management skills, business know-how, and sufficient contacts). Over the years, economists have, however, described more roles of entrepreneurs. The following is a summary of the economists' interesting discourse that, aspiring entrepreneurs may, hopefully, find useful.

Entrepreneur as risk-taker

Richard Cantillon (1680-1734) suggested that an entrepreneur is someone who has the foresight and willingness to assume risk and take the requisite action to make a profit (or loss). Cantillon’s entrepreneur is forward-looking, risk-taking, alert though need not be innovative in the strict sense.

Two different kinds of risk were distinguished by Frank Knight (1885-1972): one is capable of being measured (i.e., objective probability that an event will happen) and shifted from the entrepreneur to another party by insurance; the other is un-measurable (i.e., no objective measure of probability of gain or loss), e.g., the inability to predict consumer demand. According to Knight, the entrepreneur takes the latter risk: “true” uncertainty found in situations, which do not repeat themselves with sufficient conformity to make possible a computation of probability (what we nowadays term as "unknown and unknowable").

Entrepreneur as business manager

Frank Knight established a boundary between management and entrepreneurship. He sees entrepreneurs in the strict sense as producers; while the great mass of population furnish them with productive services, placing their persons and property at the disposal of entrepreneurs who guarantee to them a fixed remuneration. Entrepreneurial profit depends on whether an entrepreneur can make productive services yield more than the price fixed upon them by those who furnish productive services think they can make them yield. Therefore, its magnitude is based on a margin of error in calculation by entrepreneurs and non-entrepreneurs who do not force the entrepreneurs to pay as much for productive services as they could be forced to pay. It is this margin of error in judgment that constitutes true uncertainty that is borne by the true entrepreneur and which results in his profit. In Knight’s view, the function of manager thus does not itself imply entrepreneurship.

Entrepreneur as exceptional leader

Hans Karl Emil von Mangoldt (1824-1868) developed the notion that entrepreneurial profit is the rent of ability. He divided entrepreneurial income into three parts: (1) a premium on uninsured risks; (2) entrepreneur interest and wages, including only payments for special forms of capital or productive effort that did not admit of exploitation by anyone other than the owner; and (3) entrepreneurial rents or payments for differential abilities or assets not held by anyone else. The first part is a return on risk taking; the second part from capital use and production effort, and the third part from ability or asset specificity. Alfred Marshall (1842-1924) carried forward Mangoldt’s notion of rent-of-ability by adding the element of leadership to “entrepreneurial” responsibilities. Marshall’s entrepreneurs “must be a natural leader of men who can choose assistants wisely but also exercise a general control over everything and preserve order and unity in the main plan of business. In fulfilling this organizational function, the entrepreneur must always be “on the lookout for methods that promise to be more effective in proportion to their cost than methods currently in use”. Marshall noted that not everyone had the innate ability to perform this entrepreneurial role as these abilities are so great that very few persons can exhibit all of them in a very high degree. Accordingly, he termed the entrepreneurial rents specifically as a “quasi-rent”, which is a return for exceptional natural abilities, which are not made by human effort, and enable the entrepreneur to obtain a surplus income over what ordinary persons could expect for similar exertions following similar investments of capital and labour in their education and start in life.

Entrepreneur as perceiver/restorer

John Bates Clark (1847-1938) noted that as static conditions change over time: population grow, wants change, and improved production technologies are discovered and implemented, the mobility of capital and labour is necessary to restore new equilibrium. He sees the entrepreneur as the human agent responsible for the coordination that restores the economy to an equilibrium position. For Israel Kirzner (1930- ), knowledge is never complete or perfect in a dynamic economy; markets are constantly in states of disequilibrium and it is disequilibrium that bars the return to equilibrium. Kirzner focused on the “discovery process” by which entrepreneurs discover error and new profitable opportunities, and thus move the market toward equilibrium. Therefore, the role of the entrepreneur is to achieve the kind of adjustment necessary to move economic markets toward the equilibrium state. According to Kirzner, the essence of entrepreneurship consists of the alertness to profit opportunities. By stressing alertness, Kirzner emphasizes the quality of perception, perceiving an opportunity that is a sure thing.

Entrepreneur as innovator

Joseph Schumpeter (1883-1950), Austrian-born professor, is famous for focusing on the entrepreneur as the central figure in advancing the wealth of nations and creating dynamic disequilibrium in the global economy. In the process of “creative destruction” (of the market system), entrepreneurs plays a central role by constantly assimilating knowledge not yet in current use and setting up new production forms and functions to produce and market new products. He pointed out that knowledge underlying the innovation need not be newly discovered and may be existing knowledge that has never been utilized in production. Therefore, the entrepreneur need not be an inventor and vice versa. He is the one who turns an invention into commercial exploitation. For Schumpeter, successful innovation requires an act of will, not of intellect. It therefore depends on economic leadership and not mere intelligence. He felt that such a hazardous activity would not be undertaken by ordinary economic agents but only by entrepreneurs with the vision, drive and commitment to survive the uncertainty and turbulence involved. When he succeeds, the entrepreneur will realize exceptional (be it temporary monopoly) profits and he may be able to fundamentally change existing or introduce new market and industry structures. Therefore, Schumpeter’s theory of “creative destruction” has sometimes also been known as “heroic entrepreneurship”.

While Schumpeter emphasizes technological innovation and improvement, Ludwig von Mises (1881-1973) declared that changes in consumer demand may require adjustments, which have no reference at all to technological innovations and improvements. He thought that the business of the entrepreneur is not merely to experiment with new technological methods, but to select those, which are best, fit to supply the public in the cheapest way with the things they are asking for most urgently. Whether a new technological procedure is or is not fit for this purpose is provisionally decided by the entrepreneur and finally decided by the conduct of the buying public. For Mises, the activities of the entrepreneur consist in making decisions and while decisions regarding innovation and technological improvement come under his purview, such decisions alone do not constitute an exhaustive set. This echoed the viewpoint of American economist, F.W.Taussig (1859-1940) that although innovation is one of the activities performed by the entrepreneur, it is not the only one, and perhaps not even the most important one.

Peter Drucker (1909-2005) notes that entrepreneurship can be defined as changing the yield of resources (seen in supply or production terms) or as changing the value and satisfaction obtained from resources by the consumer (defined in demand terms) and innovation to be the specific instrument of entrepreneurship. Like Taussig and Mises, Drucker asserts that innovation does not have to be technical and are often social as well. He argued that management (as ‘a useful knowledge’) is an innovation of the 20th century as it has made possible the emergence of the entrepreneurial economy in America and converted modern society into something brand new: a society of organizations. He therefore prescribed a systematic form of entrepreneurship management, based on systematic innovation: “Systematic innovation consists in the purposeful and organized search for changes and in the systematic analysis of the opportunities such changes might offer for economic or social innovations”.