Entrepreneurship and the Discovery of Economic Theory

0:00I do teach entrepreneurship at the school, which Peter Klein brings up, whether or not it can be taught by a professor. I think another question is whether or not it can be learned. However, in the literature they do distinguish between the art and science of entrepreneurship, and we usually don't question whether or not management or doctors or lawyers, physicians, whether that can be taught, but for some reason entrepreneurship is questioned. But if you distinguish between the art and science, I think it's a lot easier to think that The Science of Entrepreneurship, and I won't go into that, but actually can be taught. My co-author here is Mark Thornton, whom you probably know from the Mises Institute, and he's a real scholar in this area, so he'll be available for questions as well after this.

0:48Now our topic is on how entrepreneurship theory created economics, and we're really going Going back to the first economist and entrepreneur, millionaire that developed a full theory of economics and entrepreneurship, which is Richard Cantillon. Just by a show of hands, how many of you have heard of Richard Cantillon? Okay, we're in a good crowd here. How many of you have actually read Cantillon? Okay, great. For those that haven't, I highly recommend it. It pays really well, pays off really well. It's quite rewarding, I mean, in the book here, here in the bookstore. Now many people, many economists, of course, were the exception maybe, think that economics, as Rothbard wrote, would spring from the brow of Zeus, Zeus being Adam Smith, right?

1:42And he has a quote on this in his History of Economic Thought, he says, Because the honor of being called the father of modern economics belongs then not to its usual recipient Adam Smith, but to a Gallicized Irish merchant, banker and adventurer who wrote the first treatise on economics more than four decades before the publication of The Wealth of Nations. Cantillon is quoted in Adam Smith's book which is quite unique in that way. So looking at some of Cantillon's contributions of the entire essay, he goes into spatial economics which has to do with geography and area, population theory, things like that. He does talk about business cycle and he's quite Austrian in his formulation of the business cycle.

2:32In terms of methodology, he's also quite Austrian. He uses individualism, a subjectivist approach, and he creates these abstractions and theoretical Looking at the book here, it's basically three parts. I'm just going to give you a quick overview here. So you can see part one. I'm not going to go through all of these, but kind of see what he talks about. And here he develops his theory of the entrepreneur pretty much from the beginning. Then he goes into more barter, money, market prices, and then he has a section at the end on foreign trade, Foreign Trade, International Monetary Relations and on this I wanted to read a quote by Jevons and he says, this third part especially is almost beyond praise and shows that Richard Cantillon had a sound and pretty complete comprehension of many questions about which pamphleteers are still wrangling and blundering and perplexing themselves and other people.

3:32Rothbard has a I have a lecture on this, which is on the Mises.org, which talks about the Whig Theory of History and how some people believe that between science and time, there's sort of a positive relationship, and this, of course, is not the case, that we see from mainstream economics. That not only do they not learn from Cantillon, but they've actually taken backward steps. Jevons goes on to say, The Assai is more than a mere essay or even collection of disconnected essays like those of Hume. It is a systematic and connected treatise, going over in a concise manner nearly the whole field of economics with the exception of taxation.

4:19Possibly a good thing, right? It is thus more than any other book I know, the first treatise on economics. Sir William Petty's Political Arithmetic and his Treatise of Taxes and Contributions Cantillan's are wonderful books in their way, and at their time, but compared with Cantillan's essay, they are mere collections of casual hints. There were earlier English works of great merit such as those of von Locke, Childman, etc., but these were either occasional essays and pamphlets or else fragmentary treatises. Cantillan's essay is more emphatically than any other single work, the cradle of political economy. Now I want to go into the actors in Cantillon's economy, in the market. We've got landowners, and these are basically the people that create demand, so whatever their desires, whims, wishes, the fashion trends of the day, they're created by these landowners.

5:16It's not so important that it's actually the landowners or the property owners, but that demand is created. And then you've got wage laborers, which are basically just distinguished by whether or The Central Actor is the entrepreneur, simply distinguished as being on unfixed income. The entrepreneur responds to the demand created by the landowners that conduct all production, circulation and even exchange. This goes into the discussion that Stuart kind of brought up here, risk and uncertainty.

6:04Cantillon has quite a bit to say about this. Now the entrepreneur, one of our arguments in the papers, the entrepreneur is very pervasive throughout the treaties. He talks about the farmer entrepreneur sort of taking the, getting the material or the product from the land, from the land owner. So farming that and then selling that to a manufacturer who is also an entrepreneur based on the unfixed income. Of course the entrepreneur, the farmer entrepreneur doesn't know the future selling price which creates uncertainty. So uncertainty is because of the presence of time. Now Mises has said that uncertainty is inherent in human action, right?

6:51It burdens every actor, so all of us have to deal with time and make decisions based on our perception of the future, based on judgment and what not. However, what distinguishes this is the entrepreneur is trying to forecast the future selling price, right? Hopefully above his or her cost of production. So the manufacturer entrepreneur then sells to the middleman entrepreneur who's going to bear the cost of transporting the goods. And then, you know, on down the line until the product is exchanged with the consumer. So from production to consumption, again, the manufacturer entrepreneur has to sell the product. They're selling at an uncertain future price based on their certain cost, which again is just uncertainty all the way through because of the presence of time.

7:40Because of that, there's a profit or a loss, okay, which is a risk. What's the risk? I don't know if I'm characterizing you correctly, but if we had to choose between subjective or objective, I think that might be the wrong question. I'm not saying that's what you were saying, but it's a dichotomous question, and I think there's a danger in that. Subjective risk, if we wanted to call it that, might be, are they going to be able to, what do they want to eat? Pizza or salad or what not, but objective risk, are they going to eat at all? That's pretty objective, right? Because you're risking death. Same with bankruptcy, you know. Subjective risk might be how much profit they want to make versus objective risk, whether or not they make it at all.

8:31So more measurable. Anyway, compare this with Schumpeter's entrepreneur, probably the most well known entrepreneur, theory of the entrepreneur. and we can compare it to a violin, okay, so he's got what he calls, Schumpeter has what he calls the circular flow of economic life, everything's pretty much in equilibrium, and kind of like the violin strings are not resonating, so they're flat, right, and then along comes the entrepreneur, which acts as the, I believe that's called a bow or whatever, and strums it, right, and everything starts to vibrate and kind of get out of whack, but then it all starts to settle back down again, so the entrepreneur comes along, disrupts the Shimpeter departed from his teacher, Boehm-Bawerk, who associated the entrepreneur with the capitalist.

9:28So they were one and the same. The entrepreneur had to bear risk because he was the capital owner. Shimpeter said that even though the entrepreneur may risk his reputation, much less any financial Capital because Schumpeter distinguished between the two. The direct responsibility of failure never falls on him. So it's quite different from Cantillon's. In addition, we could talk about Schumpeter's creative destroyer, creative destruction that he talks about. So if we imagine Victoria and England, there's the horse and buggy, right? And everything's just fine again in the circuit flow of economic life. Along comes the entrepreneur, creates A car, right? Distorts everything just like the violin to mix metaphors here. What is important about this is Schumpeter's entrepreneurs only acting as an entrepreneur in creating the new good or the new source of supply or the new market. So Henry Ford, once he stopped doing this, right, and production just kind of continued, but once he had invented the The word entrepreneur over a hundred and ten times in the treatise. He considers tailors

10:58Butchers, entrepreneurs, artists or painters, all because of uncertainty, they're all on unfixed incomes, bakers, restauranteurs, or however you pronounce that, people that own their own restaurant or retail stores, carpenters, shoemakers, butchers, physicians, right? He even considers beggars and robbers entrepreneurs because of uncertainty, unfixed income. So our argument in the paper is basically Cantillon uses his theory of entrepreneurship and he creates these theoretical constructs which he uses to construct economic theory. Okay, so without the theory of entrepreneurship, all of his theoretical constructs pretty much fall apart.

11:45One of these, just to go into this, and there's more examples in the paper, has to do with spatial economics and location theory. So Cantillon talks about market towns where buyers and sellers come together, there's exchange and there's various advantages to having a market town where all exchange takes place. Outside of that, there's a village. Entrepreneurs locate around the village to reduce transportation costs and to travel to the market town. Cantillon says, In the village there must be enough blacksmiths and wagon makers for the tools, plows and carts that are needed, especially when the village is far from the town. The size of a village is naturally proportioned to the number of inhabitants the land requires for daily work and to the artisans who find enough employment there by serving the farmers and Labor. Finally, there's the city, which is where the landowners locate. So if enough princes and nobles and lords come together, they form a city. Okay, just to conclude here.

12:57So one key takeaway, entrepreneurship is pervasive, right? There's no restriction really on the entrepreneur other than being on an unfixed income, which implies uncertainty, which leads and Extricably to Risk being Bankruptcy or Starvation or even talks about risk in the form of an opportunity cost of what you could earn other than going into business on your own type of thing. So these theoretical constructs are based on the entrepreneur, the entrepreneur is central. Entrepreneurial actions, entrepreneurial plans, they take place spatially and temporally. So one of the implications of course is in mainstream economics the entrepreneur is pretty much removed from the models or if it is the entrepreneurial function is given a measurable degree of risk and that risk is equally distributed among all entrepreneurs in the model.

13:54So we argue that it will become much more exciting and relevant to both entrepreneurship and economics if the entrepreneur is fundamental and central as the actor that coordinates Production, Circulation, Exchange of Goods. Thank you very much.