A Simple Model of Entrepreneurship for Principles of Economics Courses

Abstract

The critical roles of entrepreneurs in creating, operating, and destroying markets, as well as their importance in driving long-term economic growth are still generally either absent from principles of economics texts or relegated to later chapters. The primary difficulties in explaining entrepreneurship at the principles level are the lack of a universally accepted definition, a plausible explanation of the demand for entrepreneurship, and a diagram that summarizes the impact of entrepreneurship on market equilibrium and growth—a definition, a story, and a picture. This article discusses how the notion of the stationary state associated with Schumpeter (1911/1983), Knight (1921/1971), and Weber (1930/2002) can provide a framework for integrating the entrepreneur into the early part of principles of economics courses.

Keywords:

• entrepreneurship
• Kirzner
• principles of economics
• Schumpeter
• stationary state

JEL codes:

• A22
• D01
• O30

Acknowledgments

The author thanks the Martindale Center for the Study of Private Enterprise and the Baker Institute for Entrepreneurship for their financial support. Also, the author benefited from the comments of Anthony O’Brien, Nicholas Balabkins, four anonymous referees, conference participants at the 2012 and 2011 Eastern Economic Association and 2011 Western Economic Association conferences, as well as two decades of Lehigh principles of economics students. A longer version of this article, appropriate as a handout in a principles course, is available at the author's online faculty profile at Lehigh University.

Notes

1. Inventions and innovations are closely related but distinct. Following Schumpeter (1911/ 1983), first, there is an idea; second, an invention that is an idea made manifest; and finally, an innovation that is an invention actually used to create value. Of course, an invention or other advance in knowledge may wait a long time, possibly hundreds or thousands of years, before an entrepreneur actually uses the invention for a successful innovation.

2. See Audretsch, Keilbach, and Lehmann (2006), chap. 3, for a detailed discussion of the spillover theory of entrepreneurship.

3. See, for example, Parker (2009), chaps. 15, 16, and 17; and Baumol, Litan, and Schramm (2007), chap. 8.