Entrepreneurship, as a commonly accepted concept, is something that has been widely known about for generations, after first being introduced by Richard Cantillon in 1730. However, when we start to analyse the concept in more detail, we find there are many different definitions of entrepreneurship and what it means to be an entrepreneur. During this essay, we will review the differences in the Economic schools of thought centred around entrepreneurship and also how entrepreneurship has contributed to economic development. In addition, by looking at influential figures, we’ll discuss whether innovation is central to entrepreneurship and review how they fit into different schools of thought.
It is widely thought that the term entrepreneur was first introduced and used by Jean-Baptiste Say in 1803, however in his book Essai sur la Nature du Commerce en Général (‘Essay on the Nature of Trade in General’) in 1755, Richard Cantillon was the first person to introduce this term.
Within the text, Cantillon writes that there is a clear split within society of those who are fixed-income earners working for others on some form of salary and those who are not. The latter, called entrepreneurs were said to “bear the risk of fixed costs of production and uncertain selling prices” (Rothbard, 2006, p. 351) implying that unlike those who work for others, entrepreneurs are greater financial risk takers and are likely to be owners of, or investors in, businesses. In addition, contrasting to later theories of entrepreneurship, which will be discussed later, Cantillon suggested that entrepreneurs brought equilibrium by being able to correctly predict different consumer preferences.
This suggests that to have entrepreneurship one must be willing to take a financial risk in order to gain profit. There are many examples of this, with investment being seen as a risk to take with a start-up company. For example, in its first conception, in 2004, Peter Thiel invested over $500,000 into Facebook. This was seen as a huge financial risk due to the relatively new industry that Facebook was entering. In 2012, he sold the remaining 20 million, out of 44 million shares, cashing out just over $1 billion (Cowley, 2012).
Jean Baptiste Say, a French school of thought economist, built upon the work of Cantillon. He described entrepreneurship in the following way. “The entrepreneur shifts economic resources out of an area of lower productivity and into an area of higher productivity and greater yield” (Extra, 2009). He argues that merely creating a better supply does not guarantee an increased demand level – especially if you bring things to the market that no one values.
Say looked at different characteristics of an entrepreneur, and most notably wrote that administration and resource coordination were key skills for entrepreneurs and that they use sound judgement to “buy materials, collect labourers and find consumers” (Robert F. Hébert, 1888, p. 38). The French school of thought suggests that management and resource acquisition take priority over innovation.
With its factor of production management and coordination, Amazon is the front-runner in the e-commerce industry and shows how Say’s theory of entrepreneurship works in practice. With an intense management structure and high productivity with regards to its allocation of goods and service, Amazon is the fourth most valuable public company in the world (Encyclopedia, 2017). This suggests that using resources efficiently and intelligently is central to entrepreneurial success.
Joseph Alois Schumpeter (1934), classed as the German-Austrian school of thought, went against existing views surrounding entrepreneurship as being a risk-bearer and a manager of a company – instead choosing to describe an entrepreneur as someone who tried to destroy commonality within a market, by introducing a game-changing product or service to an industry – characterised by Radical Innovation. Schumpeter derived this idea from Marxist thought suggesting that it was the innovative entry by entrepreneurs that caused and sustained economic growth, acting as a disruptive force, even if that meant extinguishing the value of already established firms. The suggested idea of radical innovation in a market causes cycles of “creative destruction” (Schumpeter, 1994, p. 83), within his earlier theory branded an entrepreneur as an innovator who is able to “act with confidence beyond the range of familiar beacons” (Schumpeter, 1994, p. 132). In short, this suggests that entrepreneurs are way-makers who drive the economy forward, they push passed familiarity. In order to go beyond the status quo, one may suggest that innovation is an essential driver of economic growth.
This form of innovation can benefit the original status quo, for example when steam-powered ships were first introduced to the market, sailing ships developed more in the next 50 years than they had in the previous 300 years. This concept could also be categorised as non-acceptance and emphasises that many markets fight back trying to stop radical innovation from destroying normality. However, the market will eventually adapt, causing the new improvements in the market to take over.
One example of a piece of radical innovation was the Apple iPod in 2001. It was a product that changed the face of the portable music industry allowing millions of consumers access to the ever-growing music scene (with over 420 million sales between 2006 and 2014 alone (Statista, 2014)). Steve Jobs was hailed as being one of the greatest modern-day entrepreneurs, with his ruthlessness and immense clarity about what he sought to achieve.
Israel Kirzner (1973) offered a slightly different view of innovation in entrepreneurship – suggesting that an entrepreneur is someone who discovers previously unnoticed profit opportunities, rather than someone who purely innovates. They stay within the market until the level of competition experienced reduces the profit opportunity. This idea contrasts with other Economist’s views suggesting that it is the ability to see a gap in the market and execute a vision in order to maximise profit. In addition, he also stated that alertness was fundamental to entrepreneurship, allowing an individual to react to market changes quickly. Within the market, however, there is asymmetric information, therefore, the level of knowledge an individual has will dictate the “detection and exploitation of opportunities” (Lechner, 2016).
Amazon can also be described as entrepreneurship through innovation as, without the idea for an e-commerce site, Amazon would not have been created. However, without the production management and coordination, it would not have been as successful. Therefore, innovation was the initial entrepreneurial step, but, resource management has ensured its long-term success.
One of the greatest entrepreneurs of the 21st Century is Elon Musk – founder of SpaceX and Tesla, Inc. Tesla, Inc has a large vision of changing the whole automobile industry with the introduction of electric cars, a radical worldwide change. Elon started with a small start-up company and recognised that in order to change the way that people drive, there needed to be incremental innovation steps – which he highlighted during the Model 3 unveiling conference in 2016.
Elon, during a TED talk interview, stated that he believed that “when introducing a new technology there needs to be three major versions before it can become a mass market product” (Talks, 2013). Firstly, to introduce the world to the electric car, Tesla produced a high cost low volume car, in their second stage two midrange and mid volume cars were brought to market, these incremental steps were designed to slowly introduce a new element to the industry – a luxury electric car, as well as raising funds and capital for their final step. The final stage is to introduce a low-cost high-volume car, the Tesla Model 3. What this shows is that one of the main concepts that are fundamental to entrepreneurship is a vision, not only a vision but a plan to carry out that vision (Tesla, 2016).
Whilst innovation, whether radical or incremental, is part of this vision and helps to build substance, it is the awareness to understand the market or industry and see the opportunities that present themselves that are fundamental to entrepreneurship. Of course, what Tesla is creating is innovative, what is more impressive is how they are bringing it to market. Anyone can have or be given a good idea; however, it takes a clinical implementation of a structured plan to bring those ideas to market.
Many Economic theories highlight that entrepreneurship has many different traits and characteristics, one central idea is innovation, can be split into two forms: radical and incremental.
In his introduction to the book Capitalism, Socialism and Democracy by Joseph Schumpeter Richard Swedberg, a Swedish Sociologist states that Schumpeter “argued that economic life always starts with the actions of a forceful individual and leads to the rest of the economy” (Schumpeter, 1994, p. xi), suggesting that there is a knock-on effect to the rest of the economy due to Radical Innovation. Interestingly, there are other Economists who agree with Schumpeter’s idea; Cheah (1990), suggested that Radical Innovation can lead on to Incremental Innovation, the innovation discussed early by Kirzner. The abolishment of the status quo enables other, arguably lesser, Innovation to occur in incremental steps. Even though the new ventures threaten “continued viability of existing products/processes” (Paul Westhead, 2013), it stimulates the introduction of new entrepreneurs of a range of new processes and developments complementary to the original endeavour.
Mark Casson, a British economist and academic, drew on different theories regarding entrepreneurship, including those of Joseph Schumpeter’s theory of innovation and Israel Kirzner’s theory of opportunity-seeking, in order to develop a theory that fitted alongside neo-classical ideas. His theory is very similar to that of Richard Cantillon and states that entrepreneurship is the pursuit of risky innovative projects that may contribute to the economy – efficiency and growth. How successful these ventures are, will depend on drive of the entrepreneur and their perceived future rewards such as salaries or profits. Contrastingly to Schumpeter’s views, Casson sees entrepreneurs as risk bearers in the economy. This mainstream School of Thought is one that is arguably most fits with the modern-day definition of an entrepreneur. The Oxford English dictionary describes entrepreneurship as the “The activity of setting up a business or businesses, taking on financial risks in the hope of profit” (Dictionaries, 2017). Those entrepreneurs who are confident in the judgement being made will commit their own funds – or use the funds of another – being optimistic of being rewarded.
If one only used the Oxford English’s Definition of an entrepreneur then one could argue that innovation is not necessary to be classed as an entrepreneur as long as an individual is taking a financial risk, such as spending money to start up a business.
However, taking into account the various schools of thought if an individual is only investing money in someone else’s innovative idea and not contributing in any other way to the business they cannot be classed as a true entrepreneur, although they are taking a financial or opportunity risk – as they are foregoing the benefit of using their investment somewhere else.
Using Cantillon’s theory allows anyone who invests in a company to classed as an entrepreneur, whilst more recent theories place more emphasis on the role of innovation rather than purely financial risk. It is possible to take financial risk without being an entrepreneur however it is not possible to innovate without being classed as an entrepreneur.
The various schools of thought all suggest that an entrepreneur is someone who develops something new, different or deemed more valuable than a competitor or is providing something that others deem superior. Both of these suggestions are a form of Innovation thus it must be stated that Innovation is central to successful entrepreneurship.
To conclude, based on the analysis of different Economic Theories and by looking at the traits of successful entrepreneurs, it must be concluded that Innovation is a central aspect of entrepreneurship, the two terms are links as it is the implementation of entrepreneurial behaviour that allows innovation to take place. Whilst, it is clear that one does not need to innovate in order to be classed fit into the definition of an entrepreneur, it must be noted that it doesn’t guarantee success. A key theme throughout the theories looked at is Casson’s idea of “reward”; combining this with Schumpeter and Kirzner’s ideas on Innovation it may be concluded that successful innovation, whether it be incremental or radical, that leads to reward is the key theme to entrepreneurship.