Entrepreneurship Summary
Link to the lectures: https://web.microsoftstream.com/group/46a66cc3-14c9-4701-84e6-
db049a891a58?view=videos%20
Week 1
Foss et al. Chapter 2: Austrian Economics
Austrian economics focusses on realistic explanations of the causal relationships between
economic phenomena. In other words, it seeks to understand value, prices, and other
economic facts as they exist in the world, rather than how they might behave under highly
abstract or unrealistic conditions. They also look at uncertainties and errors in human
behaviour.
Some of the big ideas from Austrian economics are the following:
Methodological individualism: Collectives such firms, groups, divisions, etc. can ultimately
only be understood in terms of individual action and interaction.
Subjectivism: “value” is not something inherent or objective that exists within a good, but
describes a relation between a valuing person and an object being valued. Tastes and
preferences differ both between individuals and for the same person over time, and the basic
architecture of choice includes many subjective elements. The ultimate test of entrepreneurial
success lies with consumers, whose decisions to buy and not to buy determine profits and
losses.
Tacit and Dispersed Knowledge: not only is knowledge dispersed across the multitude of
individuals that make up the division of labour, it is also “tacit” (understood without
expressly stated) and “subjectively held.” Thus, the knowledge that matters for economic
decisions is mostly idiosyncratic (different per individual). Because of this, individuals
typically interpret “the same” information differently.
Uncertainty: important is to know the distinction between risk and uncertainty. Risk can be
represented by chances (think repeated actions, insurance) uncertainty cannot be calculated in
a chance. They represent the “unknown unknowns” of the economic world. In fact, we argue
that they pose a special problem that requires a particular type of talent to solve, namely,
entrepreneurial judgment.
Heterogeneous capital: A realistic picture of the economic process presupposes a notion of
capital heterogeneity.
In sum, Austrian economics strives for a realistic analysis of economic and social relations,
beginning with the basic facts of human choice and ultimately building to an explanation of
aggregate economic activity and complex social institutions.
,Chapter 3: the theory of Entrepreneurship
There is no ‘one’ view on the entrepreneur, there are several research streams, we distinguish
between occupational, structural, and functional theories.
Occupational theories define entrepreneurship as self-employment and treat the individual as the
unit of analysis. They describe the characteristics of individuals who start their own businesses and
explain the choice between employment and self-employment.
Structural approaches treat the firm or industry as the unit of analysis, defining the “entrepreneurial
firm” as a new or small firm or a particularly innovative firm. Various literatures on industry
dynamics, firm growth, clusters, and networks have in mind a structural concept of
entrepreneurship.
Functional theories view entrepreneurship as a series of actions, or as a process, rather than an
outcome like launching a start-up company. For example, alertness to opportunities, the ability to
adapt to change, charismatic leadership, and judgment.
Austrian contributions to entrepreneurship theory
This section states a lot of views of what an entrepreneur does and is. I included some but not
all the this section.
Entrepreneurs must make decisions about how best to allocate heterogeneous capital goods
among competing uses. If they do this successfully, they earn profits and increase the value
of their capital, and if not, they earn losses and must eventually surrender their decision-
making authority to competitors. A key point is that entrepreneurship generates a unique type
of income, namely, profit or loss, which is different from the wages, interest, and rent that
accrue to other economic actors.
Only the exercise of good judgment, a kind of developed decision-making skill, can safely
overcome uncertainty. Fetter thus explains entrepreneurial success and failure as the result of
specific choices entrepreneurs make.
The “more the causes of success in general are studied, the larger is found the element of
choice, the smaller that of luck”.
Bearing uncertainty.
Entrepreneurs may govern their own enterprises, but they are ultimately beholden to
consumers, whose decisions make them rich or poor. Successful entrepreneurs earn profits,
which signal that they are using scarce resources effectively to satisfy demand. Unsuccessful
entrepreneurs earn losses, which symbolize a failure to properly anticipate consumer wants.
The profit and loss system thus functions as a selection mechanism that rewards those
entrepreneurs who excel at improving the welfare of their customers.
Prices and economic (entrepreneurial) calculation coordinate action across time and space
and systematically improve human welfare by allocating resources to their most urgent needs.
Kirzner argues that entrepreneurship is best thought of as alertness to previously-unnoticed
profit opportunities.
,“alert” individuals can earn a profit by exploiting knowledge to bring supply and demand into
harmony and by closing pockets of market ignorance, entrepreneurship always stimulates a
tendency toward equilibrium.
The study of entrepreneurship is seen as centring around three research questions, namely
why, when, and how (1) entrepreneurial opportunities arise, (2) certain individuals and firms
and not others discover and exploit opportunities, and (3) different modes of action are used
to exploit those opportunities.
Tutorial note: Austrian approach vs neoclassical
Subjective
No equilibrium
Importance of knowledge
3 kinds of entrepreneurs:
- Schumpeterian
- Managerial business owner
- intrapreneur
The judgement-based approach
The exact mechanisms of judgment, the behavioural and cognitive processes by which
entrepreneurs form their beliefs about future conditions, are a black box. Thus, the essence of
entrepreneurship is being different – being different because one has a different perception of
the situation.” In particular, the judgment-based approach begins with the subjective values
and knowledge of individual entrepreneurs.
The government and institutions also influence entrepreneurial activity. Different rules
support and incentivize different types of judgment, not all of which are beneficial for society
at large. Depending on the prevailing institutional setup, entrepreneurship can be
“productive” in the sense of promoting consumer welfare and wealth-creation, or it can be
channeled into “unproductive” or “destructive” activities such as rent-seeking and organized
crime.
Although there are different strands of Austrian thinking on the subject, throughout this
Element we emphasize the importance of viewing entrepreneurship as judgmental decision-
making. This perspective has deep roots in the Austrian tradition, which also stresses the
notion of economic calculation – entrepreneurial judgments are usually made in the context
of market exchange and money prices, which entrepreneurs use to guide their decisions about
how best to use scarce, heterogeneous capital goods.
, Elert et al (2019) Why Entrepreneurship?
The main idea from where Elert et al. continue in their book is the following:
“In a stagnant economy, people no longer see the opportunities for improvement and turn to
strong leaders who blame outsiders and promise to make things right.”
Solution:
In a truly entrepreneurial Europe in which all are empowered to participate, their simplistic
recipes will lose much of their appeal. Reforms enabling smart, inclusive, and sustainable
growth across the entire EU could, therefore, offer a way out of the present, perilous (full of
danger) situation.
The entrepreneur is the key to innovation and growth.
Schumpeterian entrepreneurship: the kind of entrepreneurship that introduces new
products and technologies and serves as a conduit of knowledge to generate innovation and
growth.
The entrepreneurial process, where success and reward follow taking risks, working hard and
competing on a level playing field, is perceived as both open and just. Thus, entrepreneurship
not only holds the key to the future economic welfare of Europe, but is also a major
ingredient in creating “the good life” for its citizens, which should be the ultimate goal of
policymaking.
How, then, is the EU to become a more entrepreneurial society?
3 starting points:
Entrepreneurs are both incentivized and constrained by society’s rules of the
game: its institutions.
Institutions are path-dependent and complementary; this means that introducing
US-style institutions or any other one-size-fits-all reform strategy across Europe is
destined to fail.
Entrepreneurship contributes to prosperity by challenging the status quo in an
open market economy. Entrepreneurship thrives when open institutions create open
societies where vested interests and incumbents can be challenged on a level playing
field, enabling fair competition, and new ventures fail or succeed based on the value
they provide to their customers and society at large.
Replicative entrepreneurs play a crucial role during the stage of economic development that follows
innovation, when a more general adoption and diffusion of new knowledge occurs. The mere
possibility of being challenged by new entrants, forces incumbent firms to invest continuously in
innovation. So, it is clear that (most) entrepreneurs better society. Therefore, we now turn to outline
the ecosystem on which entrepreneurs depend to be able to innovate successfully.
Link to the lectures: https://web.microsoftstream.com/group/46a66cc3-14c9-4701-84e6-
db049a891a58?view=videos%20
Week 1
Foss et al. Chapter 2: Austrian Economics
Austrian economics focusses on realistic explanations of the causal relationships between
economic phenomena. In other words, it seeks to understand value, prices, and other
economic facts as they exist in the world, rather than how they might behave under highly
abstract or unrealistic conditions. They also look at uncertainties and errors in human
behaviour.
Some of the big ideas from Austrian economics are the following:
Methodological individualism: Collectives such firms, groups, divisions, etc. can ultimately
only be understood in terms of individual action and interaction.
Subjectivism: “value” is not something inherent or objective that exists within a good, but
describes a relation between a valuing person and an object being valued. Tastes and
preferences differ both between individuals and for the same person over time, and the basic
architecture of choice includes many subjective elements. The ultimate test of entrepreneurial
success lies with consumers, whose decisions to buy and not to buy determine profits and
losses.
Tacit and Dispersed Knowledge: not only is knowledge dispersed across the multitude of
individuals that make up the division of labour, it is also “tacit” (understood without
expressly stated) and “subjectively held.” Thus, the knowledge that matters for economic
decisions is mostly idiosyncratic (different per individual). Because of this, individuals
typically interpret “the same” information differently.
Uncertainty: important is to know the distinction between risk and uncertainty. Risk can be
represented by chances (think repeated actions, insurance) uncertainty cannot be calculated in
a chance. They represent the “unknown unknowns” of the economic world. In fact, we argue
that they pose a special problem that requires a particular type of talent to solve, namely,
entrepreneurial judgment.
Heterogeneous capital: A realistic picture of the economic process presupposes a notion of
capital heterogeneity.
In sum, Austrian economics strives for a realistic analysis of economic and social relations,
beginning with the basic facts of human choice and ultimately building to an explanation of
aggregate economic activity and complex social institutions.
,Chapter 3: the theory of Entrepreneurship
There is no ‘one’ view on the entrepreneur, there are several research streams, we distinguish
between occupational, structural, and functional theories.
Occupational theories define entrepreneurship as self-employment and treat the individual as the
unit of analysis. They describe the characteristics of individuals who start their own businesses and
explain the choice between employment and self-employment.
Structural approaches treat the firm or industry as the unit of analysis, defining the “entrepreneurial
firm” as a new or small firm or a particularly innovative firm. Various literatures on industry
dynamics, firm growth, clusters, and networks have in mind a structural concept of
entrepreneurship.
Functional theories view entrepreneurship as a series of actions, or as a process, rather than an
outcome like launching a start-up company. For example, alertness to opportunities, the ability to
adapt to change, charismatic leadership, and judgment.
Austrian contributions to entrepreneurship theory
This section states a lot of views of what an entrepreneur does and is. I included some but not
all the this section.
Entrepreneurs must make decisions about how best to allocate heterogeneous capital goods
among competing uses. If they do this successfully, they earn profits and increase the value
of their capital, and if not, they earn losses and must eventually surrender their decision-
making authority to competitors. A key point is that entrepreneurship generates a unique type
of income, namely, profit or loss, which is different from the wages, interest, and rent that
accrue to other economic actors.
Only the exercise of good judgment, a kind of developed decision-making skill, can safely
overcome uncertainty. Fetter thus explains entrepreneurial success and failure as the result of
specific choices entrepreneurs make.
The “more the causes of success in general are studied, the larger is found the element of
choice, the smaller that of luck”.
Bearing uncertainty.
Entrepreneurs may govern their own enterprises, but they are ultimately beholden to
consumers, whose decisions make them rich or poor. Successful entrepreneurs earn profits,
which signal that they are using scarce resources effectively to satisfy demand. Unsuccessful
entrepreneurs earn losses, which symbolize a failure to properly anticipate consumer wants.
The profit and loss system thus functions as a selection mechanism that rewards those
entrepreneurs who excel at improving the welfare of their customers.
Prices and economic (entrepreneurial) calculation coordinate action across time and space
and systematically improve human welfare by allocating resources to their most urgent needs.
Kirzner argues that entrepreneurship is best thought of as alertness to previously-unnoticed
profit opportunities.
,“alert” individuals can earn a profit by exploiting knowledge to bring supply and demand into
harmony and by closing pockets of market ignorance, entrepreneurship always stimulates a
tendency toward equilibrium.
The study of entrepreneurship is seen as centring around three research questions, namely
why, when, and how (1) entrepreneurial opportunities arise, (2) certain individuals and firms
and not others discover and exploit opportunities, and (3) different modes of action are used
to exploit those opportunities.
Tutorial note: Austrian approach vs neoclassical
Subjective
No equilibrium
Importance of knowledge
3 kinds of entrepreneurs:
- Schumpeterian
- Managerial business owner
- intrapreneur
The judgement-based approach
The exact mechanisms of judgment, the behavioural and cognitive processes by which
entrepreneurs form their beliefs about future conditions, are a black box. Thus, the essence of
entrepreneurship is being different – being different because one has a different perception of
the situation.” In particular, the judgment-based approach begins with the subjective values
and knowledge of individual entrepreneurs.
The government and institutions also influence entrepreneurial activity. Different rules
support and incentivize different types of judgment, not all of which are beneficial for society
at large. Depending on the prevailing institutional setup, entrepreneurship can be
“productive” in the sense of promoting consumer welfare and wealth-creation, or it can be
channeled into “unproductive” or “destructive” activities such as rent-seeking and organized
crime.
Although there are different strands of Austrian thinking on the subject, throughout this
Element we emphasize the importance of viewing entrepreneurship as judgmental decision-
making. This perspective has deep roots in the Austrian tradition, which also stresses the
notion of economic calculation – entrepreneurial judgments are usually made in the context
of market exchange and money prices, which entrepreneurs use to guide their decisions about
how best to use scarce, heterogeneous capital goods.
, Elert et al (2019) Why Entrepreneurship?
The main idea from where Elert et al. continue in their book is the following:
“In a stagnant economy, people no longer see the opportunities for improvement and turn to
strong leaders who blame outsiders and promise to make things right.”
Solution:
In a truly entrepreneurial Europe in which all are empowered to participate, their simplistic
recipes will lose much of their appeal. Reforms enabling smart, inclusive, and sustainable
growth across the entire EU could, therefore, offer a way out of the present, perilous (full of
danger) situation.
The entrepreneur is the key to innovation and growth.
Schumpeterian entrepreneurship: the kind of entrepreneurship that introduces new
products and technologies and serves as a conduit of knowledge to generate innovation and
growth.
The entrepreneurial process, where success and reward follow taking risks, working hard and
competing on a level playing field, is perceived as both open and just. Thus, entrepreneurship
not only holds the key to the future economic welfare of Europe, but is also a major
ingredient in creating “the good life” for its citizens, which should be the ultimate goal of
policymaking.
How, then, is the EU to become a more entrepreneurial society?
3 starting points:
Entrepreneurs are both incentivized and constrained by society’s rules of the
game: its institutions.
Institutions are path-dependent and complementary; this means that introducing
US-style institutions or any other one-size-fits-all reform strategy across Europe is
destined to fail.
Entrepreneurship contributes to prosperity by challenging the status quo in an
open market economy. Entrepreneurship thrives when open institutions create open
societies where vested interests and incumbents can be challenged on a level playing
field, enabling fair competition, and new ventures fail or succeed based on the value
they provide to their customers and society at large.
Replicative entrepreneurs play a crucial role during the stage of economic development that follows
innovation, when a more general adoption and diffusion of new knowledge occurs. The mere
possibility of being challenged by new entrants, forces incumbent firms to invest continuously in
innovation. So, it is clear that (most) entrepreneurs better society. Therefore, we now turn to outline
the ecosystem on which entrepreneurs depend to be able to innovate successfully.
