Restless capitalism and the economizing entrepreneur

Abstract

This paper explains why capitalistic economies are restless by focusing on the role and the activities by entrepreneurs. The linkage between the entrepreneur and the economy is that as knowledge is a scarce resource, entrepreneurs must economize knowledge to reduce uncertainty if they are to undertake entrepreneurial action. Fortunately, ways of lowering uncertainty are important sources of opportunities for entrepreneurs. However, the exploitation of such sources may in turn increase uncertainty in the economy. Thus, entrepreneurial action reduces and regenerates uncertainty and complexity over time across different dimensions in the economic system. The paper argues that these processes are core mechanisms of economic development, creating interdependencies between the entrepreneur and the economic system.

Keywords:

• capitalism
• entrepreneurs
• knowledge
• uncertainty

Notes

1. Traditionally, theories of entrepreneurship come in one of two forms (McMullen and Shepherd 2006). The first type of literature deals with entrepreneurs from the perspective of the individual or the individual actor, such as a start-up firms or companies. This literature focuses on how entrepreneurs act and analyses differences in the performance and behavior of entrepreneurs (Shane and Venkataraman 2000; Sarasvathi 2001). The literature also analyses which the actor is and how the entrepreneur act, but does not elaborate upon the issue if there is entrepreneurial action or how these processes affect the economic system (McMullen and Shepherd 2006). The second type analyses entrepreneurship at the system level in order to analyze and explain the economic system and economic progress. The growth of the economy is argued to explicitly depend on the behavior and ‘health’ of entrepreneurs as evidenced by entrepreneurial action.

2. The notion of ‘entrepreneur’ has sat uneasily – or been ignored – by most of the economics literature. Still, entrepreneurship can be understood through the concepts of increasing returns and of improving the choice sets to alleviate the problem of scarcity. From an evolutionary economics perspective, novelty through invention, innovation, new firm start-up, etc., must continue to be introduced into the system, as the basis for competition through market selection and other processes. Without innovation, the system stagnates. Knowledge affects entrepreneurs because knowledge is a scarce resource. This means that knowledge always plays a significant part in economic progress in general and for entrepreneurs in particular. Many scholars have stressed that economic progress is dependent and shaped by the availability and nature of knowledge (Hayek 1937, 1945/1948; Knight [1921] 1940; Langlois 1999, 2001; Loasby 2000). For example, Adam Smith argued that the engine of economic progress is the (increasing) division of labor in that specialization may lead to advances in knowledge. In this way, the progressive division of labor can be viewed as a means to reduce complexity to simplicity (Young 1928). Carl Menger argued that Smith had reversed the causality in that the growth of knowledge is the foundation for the division of labor and consequently the fundamental cause of economic progress (Loasby 1999b; Menger 2007). Mokyr (2002) argues that the development of different types of knowledge in relation to industrial production is the key for understanding economic change. To advance knowledge, specialization is needed but this specialization means that knowledge growth is dispersed among different actors. At the same time, dispersed growth of knowledge in itself is a source of business opportunities that may create new forms of specialization.

3. Compare Gödel's incompleteness theorem.

4. These aspects of uncertainty reduction and uncertainty bearing are of course instrumental parts of the Youngian progressive division of labor (Young 1928).

5. Loasby (2000) lists four additional factors: (a) the insufficiency of induction, (b) exogenous change, (c) the interdependence of human initiatives and (d) conflicting ideas and purposes.

6. We are grateful to an anonymous reviewer for pointing this out.

7. Entrepreneurial action is often denoted opportunity exploitation in the recent entrepreneurship literature. This stands in contrast to opportunity recognition or identification which consists of the mental acts of discovering or recognizing an opportunity.

8. However, some find that this is a too simplistic view as two types of entrepreneurs can be argued to exist (Cheah 1990). In addition to the Schumpeterian entrepreneur, there is the Austrian or Kirznerian entrepreneur where the entrepreneurial action increases knowledge and thus reduces uncertainty (Kirzner 1973). The extent to which this dichotomy is useful is beyond the scope of this paper. However, for our purposes, the characterization of one entrepreneur as Schumpeterian and the other as Austrian is overly simplistic in that the entrepreneurial actions of any real-world entrepreneur may be both Schumpeterian and Austrian/Kirznerian. So even if some entrepreneurial actions may reduce more uncertainty than it creates, uncertainty is never fully eliminated.

9. The entrepreneurship literature discusses means–ends relations but tend not to elaborate the structure of changing means–ends relations.

10. At the same time we need to be aware that this is not a simple combinatorial view in that knowledge neatly can be combined, for different problems, some knowledge may thus reside on different levels of knowledge as knowledge cannot be combined instantly in any manner. Instead, just like physical production, these combinations unfold over time.

11. Thus, the important question whether it is the entrepreneur or someone else who creates the opportunity. Accordingly, the debates on whether all opportunities are discovered and ‘objective’ or created and ‘subjective’ are not very fruitful (Buenstorf 2007).

12. Knight changes the number and his formulation throughout his book (1940). The number seems to be lie between three and six. It should be noted that the differences among different ways of reducing uncertainty may not be entirely clear. For this section, we focus on five mechanisms but we will draw on another conceptualization consisting of three elements as it is more readily identifiable with entrepreneurial processes in Section 6.