The following is a brief set of reference concepts for the further study of entrepreneurship and creativity. It has been developed for students in a course on Doing Business in Mexico —doing business abroad is after all a variation on entrepreneurship.
First the following material presents a brief series of ideas on creativity. In the second part there is a summary of the ideas of four economists on the role of the entrepreneur. The student is asked to read those ideas, make a summary of their main thoughts and make a comparison.
In a very simple and straightforward manner, creativity is the ability of creation, that is the causing of a new thing to exist. A thing that did not exist before now does. That thing can be anything; maybe a concept like Marginal Utility that helps to explain previously unexplained phenomena.
It could also be a product, like Champaign, wine that is fermented in a special way. A new advertising campaign is certainly an act of creation.
But things may be created if they are looked at in a different way. Creativity is also the bringing of these new perspectives. There are many ways for a creative mind to apply its talents.
- Creating a new product for which the entrepreneur has anticipated future sales.
- Improving a product, that is adding or modifying something that makes the product better according to certain criteria like consumers needs.
- Painting, writing, sculpting.
- Improving a process for manufacturing something, maybe baking a cake at home or producing a better computer application to avoid popup ads.
- Using the same product to satisfy a different need.
- Inventing new concepts or constructs that help to better explain certain phenomena, like defining an entrepreneur as a solver of market dis-equilibrium…or as a smasher of equilibrium in the economy.
- Developing a new statistical formula.
- Interpreting information in a different way.
- And yes, doing business abroad.
Creativity is a most welcomed attribute of a business plan analysis, especially when explaining the product or service to be marketed in terms of its competitive advantages. But remember that creativity is also badly needed when analyzing data. Data remains as data until someone interprets it, then it becomes information with meaning.
The entrepreneur has a vital role in the economy of any society. Several economists have dealt with this topic. Look at the common denominators in the ideas from these authors and try to determine the essence of the entrepreneurial action. You are encouraged to look for other sources of information on the role of the entrepreneur.
Carl Menger (1840-1921)
In his landmark opus, Principles of Economics of 1913 he clearly states that the entrepreneur is one of the necessary elements for the production of goods, as necessary as labor, a machine or any other capital good. Some of his ideas are the following.
- One of the activities of the entrepreneur is to obtain information regarding the economic milieu.
- The second function is to perform the economic calculation, that is the necessary computations to be made to verify that the production process is efficient.
- The next activity to be performed by the entrepreneur is an act of will. He/she assigns productions goods to a specific production process.
- The entrepreneur supervises the implementation of the production process.
- Consequently, the entrepreneurial action is an essential part of a production process. Just like a production process needs, for example, labor services, it also needs the entrepreneurial intervention.
For more information on Carl Menger, go to http://www.mises.org/mengerbio.asp. The source for the above information is Carl Menger, Principles of Economics, Libertarian Press, 1994, ISBN 0-910884-27-7, p. 160.
Joseph A. Schumpeter (1883-1950)
In his classic book, Capitalism, Socialism and Democracy, chapter VII The Process of Creative Destruction is perhaps the best remembered. Some of the main ideas in the chapter refer to competition. The intervention of the entrepreneur can be clearly seen here as an innovator that improves structures and renders obsolescent the old ones.
- He says that the basic drive that feeds the engine of an economy comes from the new products developed in the market, from new production systems, from better distribution processes, from novel forms of industrial organization that the capitalist enterprises creates.
- These changes have a deep impact on the economy and they come form within in a non-stopping flow that destroys the old structure and creates a new one. This may be called Creative Destruction and it is part of the nature of capitalism.
- That is why it does not make sense to judge the state of an economy at one fixed point in time without seeing the dynamics of the way it moves. In other words, it is a mistake to think that the issue is how capitalism manages the economic structure. What should be looked at is how it creates and destroys parts of that structure.
- The traditional view is to look at price competition, but that type of competition hardly matters. We should leave out the textbook approach and look at the kind of competition that really counts: competition from the new commodity, from the novel technology, from the newly discovered source of supply, from the new organization arrangements.
-That type of competition has a decisive impact on costs, qualities and has effects on the very foundation of enterprises.
The source for this information is Joseph A. Schumpeter, Capitalism, Socialism and Democracy, Harper Torchbooks, 1975, ISBN 0-06-133008-6, pp. 81-86. For more information in Schumpeter please read a fascinating book on Economics, The Making of Modern Economics, by Mark Skousen, M.E. Sharp, 2001, ISBN 0-7656-0479-5, pp 417 and ff.
Ludwig von Mises
In the milestone book, Human Action, Mises deals with the idea of entrepreneurship many times. This is no surprise since all his concepts are based on the central idea of the Austrian School that places human action as the center of Economics.
- There is in the social system of the market economy no other means of acquiring wealth and of preserving it than successful service to consumers (p. 226).- In any real and living economy every actor is always an entrepreneur and a speculator… (p.252).
- Let us try to think the imaginary construction of a pure entrepreneur to its ultimate logical consequences. The entrepreneur does not own any capital…(it) is lent to him by the capitalists in the form of money loans. If he succeeds, the net profit is his. If he fails, the loss must fall upon the capitalists who have lent him the funds. A capitalist is always also virtually an entrepreneur and a speculator (p.253).- Entrepreneur means acting man in regard to the changes occurring in the data of the market (p.254).- The driving force of the market, the element tending toward unceasing innovation and improvement is provided by the restlessness of the promoter and his eagerness to make profits as large as possible (p.255).- An enterprising man discovers the discrepancy between the prices of the complementary factors of production and the future prices of the products as he anticipates them, and tries to take advantage of this discrepancy for his own advantage (p.711).- Like every acting man, the entrepreneur is always a speculator. He deals with the uncertain conditions of the future. His success or failure depends on the correctness of his anticipation of uncertain events. The only source form which an entrepreneur’s profits stem is his ability to anticipate better than other people the future demand of consumers (p.290)
- The specific entrepreneurial function consists in determining the employment of the factors of production. The entrepreneur is the man who dedicates them to special purposes. In doing so he is driven solely by the selfish interest in making profits and in acquiring wealth. But he cannot evade the law of the market. His profit depends on the approval of his conduct by the consumers (pp.290-291).
- In drafting their plan the entrepreneurs look first at the prices of the immediate past, which are mistakenly called present prices. Of course the entrepreneurs never make these prices enter into their calculation without paying regard to anticipated changes. The prices of the immediate past are for them only the starting point of deliberations leading to the determination of future prices. The prices of the past do not influence the determination of future prices. It is, on the contrary, the anticipation of future prices of the products that determines the state of prices of the complementary factors of production (p.336).
Ludwig von Mises, Human Action, a treatise on Economics, third revised edition, Contemporary Books, 1966, ISBN 0-8092-9743-4. For more information on Mises, go to http://www.mises.org/mises.asp
Israel M. Kirzner
It is also worthwhile looking al Kirzner’s ideas on the subject. Information on the author can be seen at http://www.econ.nyu.edu/user/kirzner/, from where this is reproduced:
“The dynamic market adjustment processes articulated in Kirzner’s books, particularly Competition and Entrepreneurship, provide the disequilibrium foundations of economic analysis. Whereas traditional models of competitive equilibrium are not capable of providing an explanation of how the system would move to the equilibrium in the first place, Kirzner’s entrepreneurial theory of the market process attempts to do precisely that. By focusing on the entrepreneur’s correction of errors through arbitrage and speculation, Kirzner constructs a theory of how economies could move toward equilibrium. He shows how the often-condemned activities of arbitrage and speculation are actually beneficial to ordinary consumers.”
In brief, if Schumpeter sees the entrepreneur as a dis-equilibrator that alters existing structures of the economy, then Kirzner thinks the opposite. The entrepreneur is the equilibrium-producing agent who corrects the existing maladjustments.
Also, you may go to http://www.gunning.cafeprogressive.com/subjecti/workpape/kirz_ent.htm, from where the following has been taken:
“In short, the pure entrepreneur first subconsciously discovers what he regards as an opportunity to earn money by buying and selling (or by buying factors, producing a good, and selling it). Then he finances his venture by borrowing money from a capitalist . The entrepreneur uses the funds for his entrepreneurial venture, then he pays back the capitalist, including ‘interest’ and keeps the ‘pure entrepreneurial profit’… Learning in a market, according to Kirzner, consists of a transformation of a non-means into a means — at least to the individual who experiences it. Imagine that an individual subconsciously learns that his previous subconscious hunch enabled him to gain in a market. Later, he experiences a similar choice situation. At the later time, his knowledge, not his hunch, would enable him to make a correct choice. Looking at events in retrospect, the individual can be said to have discovered that he possesses a means of satisfying his wants of which he was previously unaware. At the time that the hunch is discovered, it gets transformed into a factor of production — knowledge. Thus alertness, subconscious learning, and entrepreneurship are ‘discovery processes’”.
Some readers may react against the explicitly stated profit motive of the entrepreneur saying that he is only an egotistical being who wants to exploit others. Although somewhat common, this is a rather simplistic interpretation of a much more complex notion.
Having a profit is an indication of the good use of resources —something that amounts to a moral responsability on the part of the entrepreneur. And gaining a profit is always a means for a person to do whatever he likes —and what he does with those funds is certainly a moral issue.
And of course, the profits gained assume behaving according to the law and under an objective moral code when the exchange of goods takes place.
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