2 Defining entrepreneurship.

Throughout history many scholars have studied the role of the entrepreneur. A review of the most important contributions within this literature is presented in this section. We focus on contributions within (or related to) economics, leaving out definitions from the fields of, e.g., sociology and psychology, but including both general and more model-oriented definitions. We do not intend to provide a detailed account of every definition of entrepreneurship, but try to distil the main elements of the most important contributions in order to identify common features and differences in the literature. (1) As we shall argue, many of these can be illustrated in terms of how the different ideas of entrepreneurship (would) fit into a standard neo-classical model, which today constitutes a common yardstick for economists.

The starting point of our review is the contributions by Cantillon, Say, and Marshall. We then move on to discuss the more recent theories of entrepreneurship. Among these, we concentrate on Schumpeter, Knight, Kirzner, and Schultz, but we also include some more recent contributions by Shane, Venkataraman, and Casson. These theories are then compared to the definition and modeling of entrepreneurs in more formal mathematical (and neo-classical) economic models.

2.1 Early Definitions

According to van Praag (1999), Richard Cantillon was the fist economist to acknowledge the entrepreneur as a key economic factor in his posthumous "Essai sur la nature du commerce en general" first published in 1755 (Cantillon, 1959).

Cantillon saw the entrepreneur as responsible for all exchange and circulation in the economy. As opposed to wage workers and land owners who both receive a certain/fixed income or rent, the entrepreneur earns an uncertain profit from the difference between a known buying price and an uncertain selling price (Hebert and Link, 1988). Cantillon's entrepreneur is an arbitrageur, an individual that equilibrates supply and demand in the economy, and in this function bears risk or uncertainty.

Later, Jean-Baptiste Say (1767-1832) provided a different interpretation of the entrepreneurial task (Say, 2001). Say saw the entrepreneur as the main agent of production in the economy. Rather than emphasising the risk-bearing role of the entrepreneur, Say stressed that the entrepreneur's "... principle quality is to have good judgment." (Hebert and Link, 1988, p. 38). Say regarded the entrepreneur as a manager of a firm; an input in the production process. The entrepreneur acts in the static world of equilibrium, where he assesses the most favorable economic opportunities. The payoff to the entrepreneur is not profits arising from risk-bearing but instead a wage accruing to a scarce type of labor. Say highlighted, in that way, that the role of the entrepreneur is separated from that of the capitalist.

In his "Principles of Economics," the early neo-classical economist, Alfred Marshall, also devoted attention to the entrepreneur. In addition to the risk bearing and management aspects emphasized by Cantillon and Say, Marshall introduced an innovating function of the entrepreneur by emphasizing that the entrepreneur continuously seeks opportunities to minimize costs (Marshall, 1964). (2)

One way to illustrate the differences between the theories is to try to interpret how they would ft into a standard neo-classical model. Say's entrepreneur is probably most easily incorporated into a neo-classical framework, as he enters the production function directly as a scarce production factor. Although Say's entrepreneur can be associated with an optimizing role as manager, he is not (necessarily) the owner of capital or the firm. In Cantillon's theory, the entrepreneur is not a production factor as such, but an agent that takes on risk and thereby equilibrates supply and demand in the economy. In a neo-classical framework, this function resembles that of the optimizing residual claimant, e.g., the business owner who rents labor and capital from workers and land owners in a world of uncertain demand or production--although this may not fully capture Cantillon's idea of an entrepreneur. Marshall's entrepreneur moves the production possibility frontier (or the cost curve) and can thus be seen as something more than an optimizing business owner or input factor. On the other hand, it is unclear whether Marshall's entrepreneur functions as the residual claimant.

In sum, although it may be difficulty to pin down the exact role of the entrepreneur in these early theories since none of them developed a comprehensive theory of entrepreneurship but instead were mainly concerned with the distribution of income, they pointed to a number of different roles for the entrepreneur, including those of an input factor, an optimizing agent, and an innovator. These differences are further developed in later theories where the entrepreneur took center stage with a role critical for the functioning of the economy.

2.2 Schumpeter and Knight

Joseph Schumpeter presented most of his ideas on entrepreneurship in his book The Theory of Economic Development published in 1911 (Schumpeter, 1949). Schumpeter opposed the existing views of the entrepreneur as a risk bearer and a manager of a company. Instead, Schumpeter argued that an entrepreneur is an innovator--an individual who carries out one of the following five tasks (3): (1) the creation of a new good or a new quality; (2) the creation of a new method of production; (3) the opening of a new market; (4) the capture of a new source of supply; or (5) the creation of a new organization or industry (Schumpeter, 1949, p. 66). The entrepreneurial task is thus to identify new combinations and react to these by exercising the leadership to profit from them. The entrepreneur is not (necessarily) the one who invents new combinations but the one who identifies how these new combinations can be applied in production (Schumpeter, 1949). This line of reasoning implies that a business owner is considered an entrepreneur only if he is tarrying out new combinations."

An illustration of the role of the Schumpeterian entrepreneur versus that of a manager can be given in terms of the production function. Where the manager combines the input factors in the production function to achieve the highest technical efficiency, the entrepreneur shifts the production function outward by his innovations. Hence, the entrepreneur moves the economic system out of the static equilibrium by creating new products or production methods thereby rendering others obsolete. This is the process of "creative destruction" which Schumpeter saw as the driving force behind economic development (Schumpeter, 1949).

The other main theory of entrepreneurship in the early 20th century was developed by Frank Knight in his Risk, Uncertainty and Profit, fist published in 1921 (Knight, 1971). An important contribution of Knight was to recognize the distinction between risk and uncertainty. The latter is uninsurable since it relates to unique events, e.g., a shift in consumer taste. According to Knight, the main function of the entrepreneur is to assume the uncertainty related to these events, thereby shielding all other stakeholders against it. I.e., the entrepreneur exercises judgment over these unique situations, the uncertainty in the economy, and functions as an insurance agent.

Knight elaborated his theory in the paper Profits and Entrepreneurial Functions from 1942 (Knight, 1942). Here Knight explicitly argues that entrepreneurs are owners of companies, i.e., residual claimants, and thus receive profits. In order to earn a positive profit, the entrepreneur carries out three tasks (Knight, 1942): (1) he initiates useful changes or innovations; (2) he adapts to changes in the economic environment; and (3) he assumes the consequences of uncertainty related to the company. Hence, in this later contribution, Knight explains how the uncertainty, which was so important in his 1921 contribution, arises. The argument is that the entrepreneur creates the uncertainty himself, by innovating, or that uncertainty arises as factors exogenous to the company. In both cases, the principle role of the entrepreneur is to assume the consequences of the uncertainty. While the fist task mentioned above resembles those of Schumpeter's entrepreneur and can be interpreted as an attempt to encompass this theory, uncertainty bearing remains the identifying feature of the Knightian entrepreneur.

It can be argued that the Knightian theory of entrepreneurship is a refinement of the theory by Cantillon (Hebert and Link, 1988). The latter also argued that entrepreneurship is closely connected to risk/uncertainty but did not recognize the important distinction between the two. However, the Cantillonian entrepreneur is also an arbitrageur who ensures that the economy is in equilibrium--a function which is not entrusted with the Knightian entrepreneur. This equilibrating role of the entrepreneur is instead emphasized by the later theories of Kirzner and Schultz (see below).