Economists have only a very misty view of entrepreneurship, even though it’s the force that drives economic growth. Not only can they not measure its impact, they can’t even define it.
Peter Klein is one of the exceptions among economists, however. That may be because he started out from a business perspective, studying corporate governance and organizational economics and M&A. Now he’s a Professor Of Entrepreneurship at Baylor and a Fellow of The Baugh Center For Entrepreneurship and Free Enterprise. Sounds like he is focused on the right things.
In a 2016 essay entitled My Contributions To Entrepreneurship Theory, Prof Klein does a remarkable thing. He destroys all existing theories of entrepreneurship and what entrepreneurs do, and suggests a new one.
Firstly, let’s get straight what we’re talking about when we use the term entrepreneur. It does not refer to self-employed persons, small business owners, or high-tech start-up innovators (although all three might act entrepreneurially). In economics, entrepreneurship is a function dealing with how best to allocate resources and how to create value for consumers and customers. Who does this? Not the government, not giant corporate bureaucracies, and certainly not professors of economics. Entrepreneurs do it. If we leave them alone in this activity, we will realize the highest economic growth and the best economic outcomes for everyone.
For one group of economists, entrepreneurship is “alertness” to opportunities that exist in the marketplace. An alert entrepreneur observes the opportunity and makes the appropriate trades to capitalize on it, buying undervalued resources low, and rearranging them to sell high. It’s entrepreneurship as mere arbitrage.
We see the same view expressed in corporate marketing: conduct research to ask consumers what they want and then make it for them. As Steve Jobs famously grumped, how could they possibly know?
Professor Klein challenges the “opportunity” view of entrepreneurship head-on. What if the opportunity does not “exist”? What if the entrepreneur’s contribution is to create it?
In this construct, the entrepreneur assesses the current state of the marketplace with a unique individual perspective. He or she then imagines a future state that could be an improvement for the consumer – a better service, a faster delivery, a lower price, a new experience. The entrepreneur then makes a decision – an act of will as Carl Menger phrased it – to acquire, own, control, deploy, and redeploy resources in the service of that improvement for the consumer.
The key element of this act of will, says Professor Klein, is uncertainty. The entrepreneur does not know in advance whether the action will be successful But they do have an expectation that they, as individuals, have the wherewithal and the capacity to bring their imagined future state to reality. In his words, they act under conditions of uncertainty. They create new firms, new products, new services, and new markets under conditions of uncertainty – something that people without entrepreneurial grit would not tackle. Alertness is hardly enough.
Action is the unit of analysis for entrepreneurship. The subjective attitude to undertake an act of will with a high degree of uncertainty about the outcome is the variable that determines whether some of us will be entrepreneurs and some will not. Some entrepreneurs make a profit because their bet turns out to be right, and some make a loss. And, in fact, the data suggest that most people who exhibit the entrepreneurial attitude continue to keep trying in the face of such losses and often eventually succeed.
Entrepreneurs are the reason why the rest of us enjoy economic growth, improved services, better products, and more comfortable lifestyles. They bring us not only the ideas for driverless cars, but also pizza delivered to our doors because that’s more convenient for us than going to the restaurant. They might fly a Tesla to Mars, but also invent an apple that doesn’t turn brown, because consumers think brown apples are yukky.
None of these opportunities “existed”. Entrepreneurs created them. Consumers are grateful. Economists are confused. Except for Professor Klein.