Bob Wenzel has written several additional posts on our disagreement regarding entrepreneurship (here, here, and here). I’ve greatly enjoyed the discussion, and I thank Bob for the space he’s devoted to this topic. I hate to sound like a cranky old professor, but I’ve explained my position about as clearly as I can in two books and a series of published journal articles, and I’d like to suggest (politely) that interested parties turn to those for the rest of the story. The following in particular may be useful:
- Foss, Nicolai J., and Peter G. Klein, “Alertness, Action, and the Antecedents of Entrepreneurship,” Journal of Private Enterprise 25, no. 2 (Spring 2010): 145-164.
- Foss, Nicolai J., and Peter G. Klein, Entrepreneurial Alertness and Opportunity Discovery: Origins, Attributes, Critique,” in Hans Landström and Franz Lohrke, eds., The Historical Foundations of Entrepreneurship Research (Aldershot, U.K.: Edward Elgar, 2010), pp. 98-120.
- Klein, Peter G., “Opportunity Discovery, Entrepreneurial Action, and Economic Organization,” Strategic Entrepreneurship Journal 2, no. 3 (2008): 175-90.
- Klein, Peter G., “The Mundane Economics of the Austrian School,” Quarterly Journal of Austrian Economics 11, nos. 3-4 (2008): 165-87.
You can also find a bunch of videos of me talking about entrepreneurship. And if you don’t believe my argument, try Rothbard or Salerno, both of whom take the same basic position as me. (BTW I’m far too modest to point out that the Journal of Private Enterprise article won the journal’s annual Best Paper Award.)
In closing, I think the differences between Bob and me are partly semantic. It’s no wonder, because the words “entrepreneur” and “entrepreneurship” are used in so many different ways. In particular, economists use terms like “entrepreneur” and “capitalist” in particular ways, differently from the way business practitioners and lay people use those terms. For the economist, these are generalized economic functions, not personality traits or psychological profiles or descriptions of flesh-and-blood individuals. E.g., “worker” or “wage earner” is an abstract economic function, describing one who provides labor services in exchange for specified remuneration, and applying equally to a Walmart cashier and a Fortune 500 CEO. Of course, in everyday discourse, we don’t refer to Timothy Cook or Meg Whitman as wage slaves, though that’s exactly what they are, in their capacities as salaried employees of their companies. Likewise, those who put capital at risk have been known, since Cantillon in the 18th century, as “entrepreneurs,” even if they don’t look like Richard Branson or Steve Jobs. Entrepreneurship is simply that which generates profit and loss, and there is no profit and loss without resources at risk. (The economic function of the capitalist is to advance funds in the present, in exchange for repayment in the future, in return for interest; absent uncertainty, the capitalist function stands on its own, but under uncertainty, the capitalist is necessarily an entrepreneur.)
Of course, in the real world, some people are especially eager, bold, creative, alert, aggressive, shrewd, adventurous, and imaginative, and they play a hugely important role in the a market economy. We admire them, we study them, we write books about them. Young people want to be like them. That is all wonderful. But none of these traits is essential to the entrepreneurial function, which is to be the residual decision-maker about the use of resources under uncertainty.
Bob says that entrepreneurs can make money using other people’s money, and gives his own version of the $10 bill story. I had written:
The Knightian-Misesian entrepreneur thinks he sees a ten-dollar bill, but it is partly buried under a rock. To retrieve it, he must buy a five-dollar shovel. If it really is $10 then (ignoring the opportunity cost of his time), he has earned a $5 profit. Otherwise, he has earned a $5 loss. This is a better metaphor for real-world entrepreneurship than Kirzner’s idea of costless discovery.
As an entrepreneur, who spots the possible bill under a rock, instead of financing the bill digging venture with my own money (as you suggest), I may go to a capitalist and say, “Hey, I know where there might be a $10.00 bill under a rock, if you buy the shovel with your capital and use your labor to dig out the rock, if there is $10.00 under the rock, I’ll split the profit with you, $2.50 to each of us, plus you get the return of your capital.”
I am acting as a pure entrepreneur, with no exposure to risk.
This is simply relabeling. Bob calls the person who thinks he sees the cash (perhaps because he is more aware of his surroundings than other people), and who persuades somebody else to spring for a shovel, the entrepreneur. Fine, we can call him whatever we like, but this is arbitrary. What about the financier? In Bob’s version of the story, the financier is a completely passive player. But why should the financier believe the guy asking him for money? Why does the financier choose to advance the $5 to this guy, and not some other guy with an equally persuasive scheme? The financier has to choose what projects to invest in — a classic example of what Knight and Mises call judgment. (Think I’m exaggerating? Ask venture capitalists or business angels if they exercise judgment!)
Bob and I agree with Rothbard that ideas not backed by money are games. Bob wants to call the idea person the entrepreneur. OK, fine, but the Austrian tradition in economic theory calls the money person the entrepreneur. After all, the money person makes the final call on whether the project will be undertaken or not. In Ludwig Lachmann’s (1956) terminology: “We might . . . distinguish between the capitalist-entrepreneur and the manager-entrepreneur. The only significant difference between the two lies in that the specifying and modifying decisions of the manager presuppose and are consequent upon the decisions of the capitalist. If we like, we may say that the latter’s decisions are of a ‘higher order.’” In my example, the financier’s decision is of a “higher order” than the idea man’s decision, because the former decides whether the latter’s idea will be pursued or not.
Anyway, this is fascinating stuff, and I’m delighted to see it get so much attention in the pages of CB and EPJ.