Entrepreneurship without Romance

3279740532_d4105eb4fa_oJames Buchanan’s work on the economics of public choice has been called “politics without romance,” because it looks beneath the glossy exterior of government and reveals the underlying reality of political behavior. Unfortunately, the “romantic” view of politics is shared by supporters of all types of political power, who seem to don rose-colored hazmat suits in order to promote their particular candidates, parties, or ideologies. As I’ve mentioned elsewhere, from the perspective of economics, politics looks less like romance and more like an abusive marriage.

Entrepreneurship also attracts a kind of mistaken romanticism, although in a different way than politics. A couple of weeks ago, Isaac Morehouse wrote an insightful post on the Praxis blog warning that we should take care to avoid glamorizing creativity too much. His point is that creative success, especially in entrepreneurship, can derive from relatively straightforward decision making. Creativity is often simply an attempt to solve a problem while avoiding harm to oneself, as opposed to the flashy, dramatic, and heroic struggle against the odds we sometimes imagine it to be.

In other words, we often place undue emphasis on the personal magnetism and economic “heroism” of entrepreneurs. Yet despite being the “driving force of the market,” entrepreneurship is often quite mundane. Taking a romantic view can be misleading if we end up thinking in terms of only the most dramatic cases of disruptive innovation or personal entrepreneurial charisma (or lack thereof!), and less on the pervasive and vital role of entrepreneurial calculation and judgment.

The blame for excessively romantic views of the entrepreneur can probably be placed on Schumpeter. His theory remains the most well-known in economics, despite the many criticisms that have been leveled against it, and his approach lends itself easily to exaggeration. For him, entrepreneurs are economic revolutionaries, and their success is closely linked to their personalities, which are placed at the forefront of the analysis (especially via Schumpeter’s lavish prose). The notion of creative destruction, for instance, sets the stage for the entrepreneur-as-epic-hero, and glosses over Schumpeter’s more technical exposition of entrepreneurship, which in some ways is a rather boring exercise in equilibrium theory.

Similar ideas were also suggested by Wieser, who strongly influenced Schumpeter. In his book Social Economics, Wieser describes entrepreneurs as “Great personalities… bold technical innovators, organizers with a keen knowledge of human nature, far-sighted bankers, reckless speculators, the world-conquering directors of the trusts” (1927, p. 327). There are some entrepreneurs who fit this description, and, in a way, it’s natural for economists and teachers to focus on the most obvious examples of revolutionary economic change. Nevertheless, we shouldn’t lose sight of the myriad forms of entrepreneurship that drive the economy, many of which only become visible when we stop thinking of entrepreneurs as personalities and instead focus on the entrepreneurial function. We are surrounded by innumerable forms of entrepreneurship, yet because they are mundane we tend to take them for granted.

Contrast the Schumpeterian view with the alertness theory of Israel Kirzner. If Schumpeter is overly dramatic, perhaps Kirzner is not dramatic enough. By using the lure of pure profit opportunities as a fundamental explanation of why entrepreneurship happens, Kirzner actually removes the acting entrepreneur from the economic picture. His approach downplays practical entrepreneurial decision-making, instead focusing on the equilibrating tendencies of spontaneous alertness. But many of the concrete actions and judgments that we associate with entrepreneurship are absent from this view of the economic process. While I don’t wish to downplay Professor Kirzner’s many contributions, I do believe some objections are to the alertness theory are worth seriously considering.

Alertness is truly an example of “entrepreneurship without romance,” but in a sense it’s missing an entrepreneur of any kind at all. That is, Kirzner’s theory has been criticized on the grounds that alertness is just a kind of good luck. If this is true, then there isn’t much to be said about the distinct traits of entrepreneurs. To be sure, Kirzner has clearly stated that explaining the characteristics of successful entrepreneurs was never his goal. Nevertheless, it’s important to know how the character of the entrepreneur relates to his or her ability to use judgment and economic calculation, and how these factors come together in the entrepreneurial market process.

The key is to find a middle ground between the Schumpeterian and Kirznerian views, one that captures any necessary fundamentals of the entrepreneur’s character, while never losing sight of the particular economic actions involved in entrepreneurship. One economist who maintained this balance was Mises (another, I would argue, is Frank Fetter). For those interested, I highly recommend Joe Salerno’s illuminating paper on the entrepreneur in the Austrian tradition, “The Entrepreneur: Real and Imagined.”

Mises stressed the leadership role of entrepreneurs, although not really in the sense of personal magnetism. Instead, he focused on the ability to take control of the factors of production, combining them in original ways in order to satisfy the needs of consumers. Successful entrepreneurs have better foresight than other members of society, and are more willing to bear the uncertainties of the market; in this sense they are pioneers. For Mises, the entrepreneur’s incentive is monetary profit, a more realistic motivation than that of Schumpeter’s entrepreneur, who is driven by a ceaseless urge to create for the sake of creating, or Kirzner’s, who is attracted to profit without looking for it.

In my opinion, it is vital to stress the real-world relevance of entrepreneurial theory. This means avoiding too much emphasis on (a) on contingent personal characteristics and (2) abstract or mechanical problems (such as whether entrepreneurship is equilibrating or disequilibrating). If we avoid these pitfalls, we can find common ground that explains both the economic meaning of entrepreneurship and what entrepreneurs actually do.

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