The economic meaning of entrepreneurship
Entrepreneurial Economics
Of all the major economists of our time, only Joseph Schumpeter turned his attention to the entrepreneur and his impact on the economy.
In principle, every economist understands the importance of an entrepreneur and his activities. For economists, however, production is a kind of meta-economic phenomenon, something that has a serious impact on the economy and shapes it, while being outside of it. Economists have a similar position on technology. In other words, they cannot provide any explanation for why entrepreneurship emerged at the end of the 19th century and still exists today, and why it is limited to one country or one culture. Indeed, the phenomena that explain the effectiveness of entrepreneurship, perhaps, in their essence, are not economic phenomena. The reasons, most likely, lie in the change in value orientations, perceptions and opinions, as well as demographic and institutional changes and, possibly, changes in education.
Without a doubt, the emergence of the entrepreneurial economy was not only an economic and technological event, but also a cultural and psychological one. In any case, whatever the reasons, the results go beyond purely economic ones.
The driving force behind these profound shifts in attitudes, values, and above all in behavior is technology and it is called management. The emergence of the entrepreneurial economy in America was made possible by new areas of application of management principles:
- New enterprises (both commercial and non-commercial), while most of the specialists were convinced that management is applicable only to existing enterprises.
- Small enterprises, while most specialists were absolutely sure a few years ago that management is the lot of only large enterprises.
- Non-profit institutions (in the field of health care, education, etc.), while most specialists are still unable to separate the word “business” (“commerce”) from the word “management”.
- Activities that simply do not fit into the concept of “enterprise”, for example, maintaining local food outlets.
- And (most importantly) systematized innovation activity, i.e. search and use of new opportunities to satisfy the desires and needs of a person.
The time has come to carry out such activities in the field of entrepreneurship and innovation that were carried out in the field of management in general about 30 years ago, i.e. develop principles, practice and discipline.
Systematic entrepreneurship
Entrepreneurship is usually understood as the opening by a person of his own, new small business. However, not every new small business is entrepreneurial or is entrepreneurship. It can be assumed that all small businesses have a lot in common. However, to be entrepreneurial, an enterprise must have special properties in addition to being small and new. In reality, entrepreneurs are a minority in the new business world. They are characterized by the fact that they try to create something new and different from the existing one, change and transform value attitudes. Businesses do not have to be new or small to become entrepreneurial. The principles of entrepreneurship are widely practiced in large and even older enterprises. It is not size and growth that makes companies entrepreneurial, but their specific characteristics. Finally, entrepreneurship is not thus confined to economic institutions. It can be assumed that all small businesses have a lot in common. However, to be entrepreneurial, an enterprise must have special properties in addition to being small and new. In reality, entrepreneurs are a minority in the new business world. They are characterized by the fact that they try to create something new and different from the existing one, change and transform value attitudes. Businesses do not have to be new or small to become entrepreneurial. The principles of entrepreneurship are widely practiced in large and even older enterprises. It is not size and growth that makes companies entrepreneurial, but their specific characteristics. Finally, entrepreneurship is not thus confined to economic institutions.
While in English-speaking countries entrepreneurship is identified with new small business, in Germany it is associated with power and property, which adds to the confusion. German Unternehmer is a literal translation of Say’s term “entrepreneur”, which means a person who owns and manages a business, a business (in English translation – this is an owner-manager, ie “owner-manager”). This term serves mainly to distinguish between the concept of “boss”, who owns the business, and “professional manager” (manager) and “employee”.
But the first attempts to create a systematic entrepreneurship were not aimed at acquiring property. Entrepreneurs are also not capitalists in the literal sense of the word, although, of course, they need capital for their economic (and non-economic) activities. Nor are they investors. They, of course, take risks, but no more than any other person engaged in economic activity. The essence of economic activity is the placement of available resources under future results, which is associated with uncertainty and risk. Further, an entrepreneur is not an employer. However, he can be (quite often) an employee or self-employed, i.e. self-employed.
Entrepreneurship, therefore, is something specific, inherent in both a particular person and an institution. For entrepreneurship, personality is not so important. We can only say with certainty that people who need certainty are unlikely to become good entrepreneurs. Anyone who is up to the task of making decisions has the potential to become an entrepreneur and behave in an entrepreneurial way. Thus, it turns out that entrepreneurship is more of a behavioral rather than a personality trait. Entrepreneurship is based on concept and theory rather than intuition.
Any entrepreneurial activity is based on theory, even if the conductors of this activity are unaware of it. Entrepreneurship is based on economic and social theories, according to which change is completely normal and natural. In addition, based on this theory, the main task of society and especially the economy is seen in obtaining something different, different from the previous one, and not in improving the existing one. In fact, new ideas are precisely the semantic basis of the term “entrepreneur”, introduced by Say 200 years ago. This concept contained both a manifesto and a declaration of departure from the usual ideas: the entrepreneur rocks and disorganizes. As Schumpeter aptly put it, the entrepreneurial task is “creative destruction.”
As you know, Say was a follower of Adam Smith. At the same time, his personal contribution to economic thought, namely the development of the concept of an entrepreneur and entrepreneurship, lies outside the sphere of classical economics and is not comparable with the latter. Classical economics optimizes what already exists. Economic theory is mainly engaged in this to this day, it is enough to recall the Caseyans, Freudmanians and supporters of the “economic proposal.” Traditional economic theory focuses on making the most of the available resources and on achieving equilibrium. Remaining outside the zone of its coverage, the entrepreneur is, as it were, sent by it into the vague sphere of “external forces” along with climate and weather, government and politics, epidemics and war, and even technology. The economist of the traditional plan, no matter what school and “isms” he belongs to, will certainly not deny the presence of these external forces and their significance. All of them, however, are not part of his world, are not taken into account in his models, formulations and forecasts.
The first major economist to turn to Say’s ideas was Schumpeter. In his book Theory of Economic Dynamics (1911), he abandoned traditional economics. Schumpeter argued that the “norm” of a healthy economy, the main reality of economic theory and practice, is not equilibrium or optimization, but dynamic disequilibrium caused by the activity of an innovator – an entrepreneur.
Say was primarily interested in economics. According to his definition, however, only resources are classified as economic. The purpose for which these resources are intended does not have to be what is traditionally considered economic. Education is not usually considered an economic category; of course, economic criteria are hardly appropriate for determining the “return” to education. However, education resources are definitely economic. In fact, they correspond to resources that are used for very specific economic purposes. In reality, the resources for all types of social activities of people are the same. These are: economic resources: capital (ie resources withdrawn from current use and allocated for future results); material or physical resources (land, seedlings, copper, classroom, hospital bed, etc.); labor, management and time. Consequently, production in no way can be limited to the economic sphere, despite the fact that it is in it that originates. It correlates with all types of human activity, except for those that can be attributed not to social, but to existential. In addition, we now know that regardless of the area of application, the meaning of entrepreneurship remains the same. Both an entrepreneur in the field of education and an entrepreneur in the field of health care in terms of the tasks to be solved, the tools used and the difficulties encountered, differ little from an entrepreneur in commercial and production activities.
Entrepreneurs consider change to be normal and even beneficial. As a rule, they themselves do not generate these changes, but (and this is the most important thing) they seek them out, react to them and use them as a source of success.
Entrepreneurship is considered to carry enormous risks. Indeed, in such a clearly defined area of innovation as high technology, for example, the production of microcomputers or biogenetics, the degree of risk is very high, and the chances of success or simply survival are quite low.
Why does this happen? By definition, entrepreneurs shift resources from areas of low productivity and profits to areas of higher productivity. Of course, there is always a risk of failure. However, even with a moderate level of success, the returns are more than enough to offset any degree of risk. Thus, entrepreneurship is associated with less risk than optimization. There is nothing more risky to optimize resources in areas where innovations can be more beneficially applied and where favorable conditions for them already exist. In theory, entrepreneurship is the least, not the most risky, direction in economic policy.
There are many entrepreneurial organizations whose average level is so high that it completely disproves the general belief in the high riskiness of entrepreneurship and innovation. Even in high tech, entrepreneurship and innovation policy may not be all that risky. This, of course, does not mean that the activities of such entrepreneurial companies are insured against any troubles, surprises or accidents.
There are a number of entrepreneurs who have been so successful in starting new ventures that their experience leads even the most die-hard skeptics to believe that they can operate at low risk.
Entrepreneurship can be risky because so many so-called entrepreneurs lack competence.
Entrepreneurship should be systematized and manageable, and most importantly, be based on purposeful innovation policy. The challenge for entrepreneurs is to learn how to implement innovative solutions in a systematic manner.
Successful entrepreneurs will not wait for a “burst of inspiration” to dawn on them with a “brilliant idea” – they just roll up their sleeves and get to work. These entrepreneurs are not looking for “great discoveries,” innovations that could “turn the industry around,” help create a “multi-billion dollar business,” or help “get rich overnight.” Entrepreneurs who start a business with the goal of expanding as much and as quickly as possible are doomed to fail. They are guided by the wrong principles. An innovation that at first seems promising in terms of its practical application may turn out to be a completely unrealizable result of technical virtuosity. At the same time, innovations that are very modest in their intellectual execution, for example, the opening of a McDonald’s restaurant chain, can result in a gigantic, highly profitable business. These observations remain true for innovation in non-profit and non-manufacturing areas.
Successful entrepreneurs, whatever their personal motivations – money, power, curiosity, or desire to become famous – strive to create utility and invest accordingly. Of course, these entrepreneurs are looking far. They are not satisfied with just improving or modifying what already exists. They try to create new and different values and usefulness, to turn “material” into “resource”, or to clothe existing resources in a new and more productive form.
Entrepreneurship practice
Entrepreneurship is neither a science nor an art. This is a concrete activity, practice. Of course, it has its own knowledge base. As in any other kind of practical activity, knowledge in entrepreneurship is a means to an end. All that constitutes knowledge in practice is largely determined by the results achieved or, in other words, by the practice itself; should be based on the results of generalization of many years of experience.
