A Decision Theory Model for Entrepreneurial Acts

Article excerpt

Entrepreneurship is becoming a focal point in much of the popular press as well as in academia. New journals are appearing to deal with questions of entrepreneurship. But the vast majority of these journals deal with managerial or psychological aspects of entrepreneurship. Economic theory has yet to make a concerted effort at explaining entrepreneurship, either its role in economic development or its determinants. There are of course some very important individual efforts such as that of Casson (1982) and that of Suarez-Villa (1989), but the profession does not appear to have taken much of an interest in these questions.

An often repeated phrase among economists discussing entrepreneurship is that "there is no economic theory of entrepreneurship." (See, for example, Casson, 1982; Rosen, 1986; Shapiro, 1986; Kilby, 1971.) But the entrepreneur is central to economic development in the view of Schumpeter (1934) and in the writings of many economic historians. For example, Cole (1968-69, p. 9) writes:

The essential basic (economic) unit is, of course, the entrepreneur or entrepreneurial group seeking to 'initiate, maintain, and aggrandize' a business institution aimed at the achievement of monetary or other gains in an economy or business world that gives an appreciable amount of freedom to such actors. Too often entrepreneurship is viewed merely as a psychological capacity like musical or poetical talent.

A complete economic theory of entrepreneurship is a vast and complex task which only Casson has attempted with much success. The initial act of defining the term "entrepreneurship" is itself a difficult task.

Much in the literature examining entrepreneurship appears to be guided by the presumption that, like crime, entrepreneurial acts represent deviant social behavior. Entrepreneurial acts are often presumed to be linked to the entrepreneur's unique motivation and unique personal, familial, and psychological traits (see, for example, McClelland, 1969, or Hagen, 1962). Such a view limits both explanations and predictions of entrepreneurial acts as well as policies to encourage such acts. Rather than relying on hypotheses addressing unique personal characteristics and social conditions or the preference for risk, it is possible to examine the extent to which economic motives are important in the decision to become an entrepreneur.

The definition of an entrepreneurial act used here derives from the Austrian view suggested by Schumpeter (1971, p. 57):

The carrying out of new combinations we call 'enterprise'; the individual whose function it is to carry them out we call 'entrepreneurs'. . . . But whatever the type, everyone is an entrepreneur only when he actually 'carries out new combinations' and loses that character as soon as he has built up his business, when he settles down to running it as other people run their businesses.

Following Schumpeter we define the entrepreneurial act as the act of carrying out new combinations. Such an act may include any of the following and may be performed by individuals, business firms, groups, or even communities (Schumpeter, 1934, p. 77):

1. making up for market deficiencies (input or output)

2. connecting different markets

3. creation or expansion of firms

4. creation, expansion, or modification of markets.

Thus there is a continuum of entrepreneurial acts from the creation of an imitative firm to the production of a new product or use of a new technology or new organizational form.

The model of entrepreneurial acts used here is applied to the start-up of a new firm (also referred to as a business birth), but such a model can easily be generalized to any other entrepreneurial act. This model must also be recognized as a partial model only. We are here looking at the "economic" (in the traditional sense of the word) rationale for entrepreneurship but remain fully cognizant that there are sociological, cultural, and psychological factors that are important. …