Reading: Lesson 5: Entrepreneurship Defined

Description:

Entrepreneurship can be thought of as both an activity and as a way of thinking.

Entrepreneurship as an activity refers to someone who starts, organizes, manages, and assumes the risks of a business or enterprise. An entrepreneur is an agent of change. Entrepreneurship is the process of discovering new ways of using resources to meet a need.

Entrepreneurship as a way of thinking emphasizes innovation, drive, and creativity. Entrepreneurship is judgmental decision-making under uncertainty. Entrepreneurship is alertness to identifying and discovering an unmet need and then acting to satisfy that need.

In this lesson, students will read an article by Russell S. Sobel that explains entrepreneurship and introduces different ways that economists have thought about the topic. Students will then watch a video that compares and contrasts three major concepts of entrepreneurship according to a few influential economists.

 

Time Required:

45 min

 

Required Materials:

Internet connection, writing instrument 

 

Prerequisites:

None

 

1.5.A – Read the following article about entrepreneurship and answer the questions below [15 min]:

Article: Entrepreneurship by Russell S. Sobel (econlib.org)

“Russell S. Sobel is a professor of economics and James Clark Coffman Distinguished Chair in Entrepreneurial Studies at West Virginia University where he was founding director of the Entrepreneurship Center. In this article, Professor Sobel explains entrepreneurship and introduces what notable economists have thought about the topic.”

Discussion Questions:

1.  Contrast the role of the entrepreneur as described by economists Jean-Baptiste Say, Joseph Schumpeter, and Israel Kirzner according to Professor Sobel.

1. Jean-Baptiste Say stressed the role of the entrepreneur in creating value by moving resources out of less productive areas and into more productive ones.
2. Joseph Schumpeter stressed the role of the entrepreneur as an innovator who implements change in an economy by introducing new goods or new methods of production. He emphasized the beneficial process of creative destruction, in which the introduction of new products results in the obsolescence or failure of others.
3. Israel Kirzner focused on entrepreneurship as a process of discovery. Kirzner’s entrepreneur is a person who discovers previously unnoticed profit opportunities. The entrepreneur’s discovery initiates a process in which these newly discovered profit opportunities are then acted on in the marketplace until market competition eliminates the profit opportunity.

 

2.  Is business failure important? Why or why not?

1. “A vibrant, growing economy depends on the efficiency of the process by which new ideas are quickly discovered, acted on, and labeled as successes or failures.”
2. “Just as important as identifying successes is making sure that failures are quickly extinguished, freeing poorly used resources to go elsewhere. This is the positive side of business failure.”

3.  According to the article, which public policy best foster entrepreneurship?

1. The policy of Economic Freedom best fosters entrepreneurship.
2. Improved “Rules of the Game” include:

• Lower and less complex taxes and regulations
• More secure property rights
• Unbiased Judicial system

 

4.  What is the Economic Freedom Index? What is the relationship between economic freedom and entrepreneurship?

1. The Economic Freedom Index is a measure of pro-market institutions such as respect for property rights, rule of law, and low levels of corruption.

• The annual report, Economic Freedom of the World, uses 42 distinct pieces of data to measure economic freedom in 141 nations.

1. Economic freedom produces economic growth because economic freedom fosters entrepreneurial activity.
2. There is a direct relationship between freedom and entrepreneurship. Greater economic freedom tends to promote more entrepreneurship.

 

Teacher Tip: This video is somewhat advanced and a bit technical. Some parts may be difficult to understand, but encourage students to focus on understanding the general difference between the ways economists think about entrepreneurship.

1.5.B – Watch the following video and complete the table below as you learn about the similarities and differences between these three economists. After watching the video, answer the questions that follow [30 min]:

Video: (Center for Ethics and Entrepreneurship, 17:46 min)

“Dr. Alexei Marcoux (Loyola University Chicago) compares and contrasts three major conceptions of entrepreneurship from economists Joseph Schumpeter, Frank Knight, and Israel Kirzner.”

 

	Joseph Schumpeter	Frank Knight	Israel Kirzner
The entrepreneurial act is…	innovative and creative	bearing uncertainty	perceiving opportunity
Entrepreneurial acts occur relatively…	infrequently	frequently	frequently
The entrepreneur’s effect on the market is…	a disruptive force that upsets the equilibrium	equilibrating	harmonizing, tends toward equilibrium
In the large corporations, the entrepreneur is most like…	anyone who innovates	the shareholders	marketing

 

Discussion Questions: Dr. Alexei Marcoux on Defining Entrepreneurship

1.  How does Schumpeter describe an entrepreneurial act? What does he mean by creative destruction?

1. According to Schumpeter, the entrepreneur is someone who brings a new product, process, or way of doing business to the market. The entrepreneur’s essential contribution is a novel contribution and serves as a disrupter of the status quo. Creative destruction occurs when new products or process replace old ones. One classic example of creative destruction is the automobile industry replacing the horse and buggy industry.
2. In terms of Classical and Neoclassical models, the entrepreneur upsets the existing equilibrium of the market.

 

2.  How does Knight make the distinction between risk and uncertainty? What does it mean that the entrepreneur bears the uncertainties of the enterprise?

1. Risk - we know the full range of possible outcomes and can put reasonable probabilities to the occurrence of each.
2. Uncertainty – we find ourselves in a situation in which the full range of outcomes are unknown or the reasonable probabilities cannot be put to each possible outcome.
3. The entrepreneur bears the uncertainties of profits and losses instead of receiving a steady paycheck like one of the firm’s employees.
4. Knight sees entrepreneurship as judgmental decision-making about the use of resources under uncertain conditions.

3.  Explain Kirzner’s view of the entrepreneur and describe the role of entrepreneurial action in bringing about greater harmony in the market.

1. For Kirzner, an entrepreneur is someone who perceives an opportunity and then acts on it. It is someone who sees the difference between what is and what could be.
2. According to Kirzner, disequilibrium is the natural state of the economy. Entrepreneurial opportunities only exist because disequilibrium exists in the market. In other words, there is a gap between what is being supplied and the wants and needs of people in the market. The entrepreneur is someone who perceives that gap. Kirzner sees the entrepreneur’s action as harmonizing the use of available resources with the wants and needs of people in the market. 

 

4.  According to Dr. Marcoux, what job functions in large corporations today would the entrepreneur be most like for Schumpeter, Knight, and Kirzner?

1. Schumpeter à Engineer
2. Knight à Shareholder
3. Kirzner à Marketing

5.  How do entrepreneurs create jobs and create new net wealth? Apply what we learned about entrepreneurship from economists Schumpeter, Knight, and Kirzner in 1.5.B - Dr. Alexei Marcoux on Defining Entrepreneurship.

1. According to Schumpeter, the entrepreneur is someone who brings a new product, process, or way of doing business to the market. The entrepreneur creates new jobs and wealth when they innovate.
2. According to Knight, the entrepreneur bears the uncertainties of profits and losses when they start and manage a business. It is the entrepreneur who starts businesses that employ people and create wealth.
3. c.      According to Kirzner, an entrepreneur is someone who perceives an opportunity and then acts on it. The entrepreneur finds new and better ways to satisfy what people want and need. He or she looks for more profitable opportunities in which goods, services, materials, and processes can be used. Alertness to opportunity is the first step to creating jobs and wealth.

Lesson Recap:

• Entrepreneurship has been a contested concept between notable economists throughout history.

ü  Jean-Baptiste Say stresses entrepreneurship as creating value by moving resources into more productive areas.

ü  Frank Knight focuses on the entrepreneur as bearing the uncertainties of the enterprise.

ü  Joseph Schumpeter identifies an entrepreneur as one who innovates new products or processes to replace old ones.

ü  Israel Kirzner sees entrepreneurship as discovering unnoticed opportunities to profit and acting on those opportunities. Kirzner sees the entrepreneur’s action as harmonizing the use of available resources with the wants and needs of people in the market.

 

• Entrepreneurship will flourish in an environment that has “well-defined and enforced property rights, low taxes and regulations, sound legal and monetary systems, proper contract enforcement, and limited government intervention.”

 

• Economic freedom produces economic growth because economic freedom fosters entrepreneurial activity.

 

• There is a direct relationship between freedom and entrepreneurship. Greater economic freedom tends to promote more entrepreneurship.

 

 

Additional Resources 

Article: Entrepreneurship by Mark Casson (econlib.org)

Mark Casson, a professor of economics at the University of Reading in England, discusses the concept of entrepreneurship through the lens of economic history.

 

Article: The Other Side of the Transaction by Jeffrey Tucker (Mises Institute)

“Entrepreneurs have a special capacity to discern the uncertain future but they possess no power to actually create that future….This crazy uncertainty of the future — a factor which we cannot overcome, no matter how much data we accumulate or how many fortune tellers we call upon — is a universal condition, always maddening and infuriating but completely unsolvable. How can a business employ hundreds, thousands, tens of thousands of people to produce goods long before they know with certainty that anyone will buy them? Why are there such people as entrepreneurs who are willing to take all this on?” 

 

Audio: The Other Side of the Transaction (Mises Institute, 7:51 min)

“The deal is there for the taking. It is up to us to decide if we want to take it….Entrepreneurs have a special capacity to discern the uncertain future, but they posses no power to actually create that future.”

 

Video: The Entrepreneur in Austrian Economics (UFM, 1:06:39 min)

“Peter Klein talks about the increasing interest entrepreneurial activities have had during the past years, and explains its relation with Austrian Economics by describing the many contributions made to entrepreneurship. After explaining the meaning and components of an entrepreneur, Klein points out the fundamental categories of action according to the Austrian School of Economics and mentions several names of people, within the Austrian tradition, who have dedicated time to teach about entrepreneurship, such as Israel Kirzner and Joseph Schumpeter, among others. He concludes discussing the role that governments play in entrepreneurial activities and how to prevent it from impeding progress.”