When we hear the word entrepreneur, we often imagine someone with a cavalier personality who conquers a market. Henry Ford embodied this ideal with the creation of the assembly line. In more recent years, we can think about Mark Zuckerberg and the creation of Facebook. While we cannot deny these men are entrepreneurs, economists often mean something different when we talk about entrepreneurship.
We can conceptualize the entrepreneur on two fronts:
1) The entrepreneur acts to create value
2) The entrepreneur bears risk by competing in the market
These two principles underlie the human condition. Men and women act in a world that is inherently uncertain; they act in a manner that they believe will create the most value given the options available to them, their own abilities, beliefs concerning their present and future, and so forth. In acting, they can only manage resources over which they have control. Control is achieved either through direct ownership or by persuading the current owner of property to allow the actor in question to control or influence the use of that property. Often ownership and persuasion operate in tandem.
Consider that Steve Jobs and Steve Wozniak sold their own assets to generate capital to create the Apple I. They also persuaded others to invest in the company. To acquire the last bit of capital needed to create the Apple I, Jobs had to persuade the manager of Cramer Electronics to sell about $10,000 worth of parts on thirty-day credit!
When people say, “think entrepreneurially,” they often mean: think in a manner that is creative and that finds value where it would otherwise go unnoticed. A child who opens a lemonade stand on a busy street corner thinks entrepreneurially. A woman who contracts as an Uber driver immediately after she drops her children off at school is thinking entrepreneurially. However, creativity does not represent entrepreneurship in whole. Without access to lemons, a table, and a street corner, the dreams of the young entrepreneur may not be realized. Without access to her vehicle and a system that coordinates the expectations of drivers and potential passengers, the woman in our example would not be able to create value in this way. Our ability to create value is dependent upon the resources we are able to access.
The idea that resource control is necessary for entrepreneurship is nothing new in economics. In his Principles of Economics, Carl Menger notes that for the potential usefulness, or value, of an object to be realized requires “command of the thing sufficient to direct it to the satisfaction of the need.” He elaborates:
Things that can be placed in causal connection with the satisfaction of human needs we term useful things. If, however, we both recognize this causal connection, and have the power actually to direct the useful things to the satisfaction of our needs, we call them goods. (52)
When he wrote, Carl Menger did not use the word entrepreneur. Rather, he recognized that humans act in a manner that will create value.
While he did not invent the term, Frank Knight provides the textbook description of entrepreneurship. He identified that entrepreneurs exercise judgment in coordinating resources. This judgment includes predictions concerning the future, but also the ability to coordinate resources in a manner that aligns with the future in a way that creates value. Someone could have perfect foresight but be completely unable to coordinate resources due to a lack of ownership, a general lack of influence over the world, or a lack of confidence in his or her ability to execute plans using these resources.
How do we reconcile this definition of entrepreneurship with the ideal more commonly represented in the popular press? One means is to understand that different functions of entrepreneurship can be off-loaded.
For example, an entrepreneur might own resources but allow others to influence their decisions concerning how those resources should be used. In the market, a person who often receives the title of entrepreneur has actually been granted the privilege to coordinate resources by owners of capital. The owners of capital are acting as entrepreneurs by temporarily deferring control of the resources. Founders of a startup act as entrepreneurs in the sense that they have been granted control of resources with the expectation that they will create value. Their exercise of entrepreneurship is dependent upon their maintaining control over resources.
As Peter Klein shared during his visit to NDSU last year, Steve Jobs’s father was the ultimate entrepreneur when he allowed his son and Steve Wozniak to use his garage.
Meet the Author
James Caton is a fellow at the Center for the Study of Public Choice and Private Enterprise (PCPE) and an assistant professor in the NDSU Department of Agribusiness and Applied Economics. Read his bio.