Demographics and Entrepreneurship blog series: The connection between entrepreneurship and prosperity
As part of the blog series summarizing the Fraser Institute’s Demographics and Entrepreneurship essays, this post summarizes the theoretical and empirical connection between entrepreneurship and economic prosperity.
The entrepreneur played a prominent role in the work of the classical economists, particularly in the French tradition. (Indeed the very term entrepreneur is obviously French, and is credited to Richard Cantillon’s 1755 Essai sur la Nature du Commerce en Général.) The entrepreneur was the one responsible for risk-taking by hiring the other factors of production (labour, land and capital) to make products and services to sell to consumers.
Yet in a perverse twist of history, the growing mathematical formalism of economic theory gradually extinguished the entrepreneur from standard models by the early 20th century. Economists were expert at computing the various equilibrium positions in hypothetical economies, but they didn’t focus on how the system became equilibrated.
Two major exceptions to this rule were the economists Joseph Schumpeter and Israel Kirzner. Schumpeter famously extolled the “creative destruction” of entrepreneurship, in which the bold innovator would disrupt existing commercial patterns to bring new products or even industries into existence.
For his part, Kirzner emphasized the coordinating aspect of entrepreneurship, in which the alert individual would spot “mispricings” and thereby nudge the market back toward equilibrium. Kirzner stressed that this arbitrage behaviour wasn’t limited to the mere purchase and resale of an asset, but also involved the entrepreneur noticing when certain factors of production were priced too low, compared to the revenue they could fetch if combined to make a desired good or service.
In my essay in the Demographics and Entrepreneurship book, I adopt the entrepreneurial framework proposed in a 2007 book by William Baumol, Robert Litan and Carl Schramm, where they argue that:
[I]t takes a mix of innovative firms and established larger enterprises to make an economy really tick. A small set of entrepreneurs may come up with the “next big things,” but few if any of them would be brought to market unless the new products, services, or methods of production were refined to the point where they could be sold in the marketplace at prices such that large numbers of people or firms could buy them. (Baumol, Litan, and Schramm 2007, ix)
The empirical literature on the economic contributions of entrepreneurship is consistent with their hypothesis. In short, it seems that both the Schumpeterian and Kirznerian roles of the entrepreneur are important for an economy to maintain dynamic-yet-balanced growth.
The literature survey in my chapter focuses on the possible benefits of entrepreneurship in the categories of (1) economic growth, (2) innovation, (3) job-creation and unemployment, and (4) regional development. There are of course nuances in academic research, and part of the difficulty in this realm is coming up with quantitative measures of “entrepreneurship” to assess its relation to other variables of interest.
Even so, I draw on dozens of studies and survey articles to argue that the commonsense view is perfectly correct: entrepreneurship matters for economic prosperity. Although policymakers cannot “create entrepreneurs,” they can shape the institutional landscape to provide incentives for innovations and imitation that raise living standards and promote labour market efficiency.
To be sure, the general importance of entrepreneurship leaves open the question of what Canadian policymakers might do specifically in the face of demographic change. Those topics are studied in further essays in Fraser’s new book.