The Entrepreneur in Economics

Topics: Entrepreneurship, Economics, Joseph Schumpeter Pages: 5 (1583 words) Published: May 17, 2005
Current economic research denies the innate characteristics of the entrepreneur. Rather than attributing economic growth and innovation to personality traits, economists would rather advocate a form of economic determinism: if an aggressive personality dominated an industry, economists try to explain the characteristics of the industry that made aggression a successful strategy. Economic models are contrived to remove the personality from the entrepreneur, to make all entrepreneurial decisions predestined, given enough time. However, to deny Bill Gates's or Steve Jobs's role in economic history is equivalent to denying Hitler's role in creating a Nazi Germany or Castro's role in creating a Communist Cuba. Claiming that history or economics is deterministic is silly. Entrepreneurs are people who make decisions; their decisions need not fall out of dry economic models, just as no literary model could predict the words of Shakespeare and no historical model could predict the future. However, we must be systematic in our approach to identifying entrepreneurial characteristics and not fatuously assert that entrepreneurs drive economic change. Instead, we must link specific entrepreneurial tasks to specific entrepreneurial traits with the goal of understanding how these traits crucially affect the evolution of a business from a startup to Fortune 500 company. This paper will explore current economic views of the entrepreneur and assert that there are common entrepreneurial traits that affect both the decision to become an entrepreneur and the level of entrepreneurial success.

We must first debunk the idea, advocated by Knight and Mises, of the entrepreneur as risk-bearer (Peter Swoboda, 1984). Aside from making every stock market participant an entrepreneur, this definition simply does not describe actual entrepreneurs and must be discredited. In Amar Bhide's 1989 study of Inc. 500 companies, where an Inc. 500 company grows its sales on average by 170 percent per year from 1983 – 1988, Bhide found that they have a low scale for profitable operation, in most cases less than $10,000. With low fixed costs and a small profitable scale, the risk of failure is minimized and the expected distribution of profits is skewed.Further negating the risk faced by the entrepreneur, the founders were predominantly college-educated middle class men with low opportunity costs (see charts below). By starting a company with a small scale of profitable operation, they faced a "heads I win, tails I don't lose much" scenario. If they failed, they could place the attempt on their resume. Entrepreneurs are not betting the family fortune or making their years spent earning an MBA worthless; instead, we find that an Inc. 500 founder is just about as likely to have only a high school education as to hold an MBA and as likely to be very poor as very affluent. The entrepreneur need not be less risk averse than the average human being. As Jeff Bezos famously noted, it would have been far riskier for him to not have started than to have started it. If Bezos had spent 12 years at medical school studying neurosurgery or had to give up a $3 million a year position at his father's company, he would not have faced an incentive structure that would have made founding a company the least risky option.What is noteworthy is just how wrong Knight and Mises are with their conception of entrepreneur as risk-bearer. Not only is the entrepreneur not necessarily a risk-bearer, he is more akin to an arbitrageur with his "heads I win, tails I don't lose much" incentive structure. Inc. 500 entrepreneurs tend to serve niche markets with high market turbulence, which lead to many arbitrage opportunities in so far as the founder can satisfy the wants of an uncertain market. The arbitrage is not riskless, but it is nearly so. For the author, himself an entrepreneur with $300K annual revenue and a business that serves a niche market with high uncertainty, the...

Cited: ))

Bhide, Amar V. The Origin and Evolution of New Business. New York: Oxford, 2000.
Swoboda, Peter. "Schumpeter 's Entrepreneur in Modern Economic Theory." From Seidl,
Christian, ed. Lectures on Schumpeterian Economics. Berlin: Springer-Verlag, 1984: 17-29.
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