2.1 Entrepreneurship
and economic theory
As economies have developed over time, so economic
theory has developed as well to try to explain changing circumstances. In the
19th century and the beginning of the 20th century Classical theory held
the balance of power in economic circles, but it began to lose it at the time
of the Great Depression of the 1930s. Classical theory had difficulty in
explaining why the depression kept getting worse, and an economist called John
Maynard Keynes began to develop alternative ideas.
This marked the birth of Keynesian economics
and most post-war governments managed the economy using Keynesian policies up
until the beginning of the 1970s. Then Keynesian theory ran into trouble as
unemployment and inflation began to rise together - a phenomenon known as stagflation
. At this point another economist
stepped in - Milton
Friedman. He was known as a Monetarist, and along with a number of
other Monetarist economists at Chicago University did a lot of work trying to
explain what caused inflation.
. At this point another economist
stepped in - Milton
Friedman. He was known as a Monetarist, and along with a number of
other Monetarist economists at Chicago University did a lot of work trying to
explain what caused inflation.
However, the Conservative government of the 1980s
gradually became disillusioned with Monetarism and then returned to a modern
variation of classical economic management - Neo-Classical economics.
Like Classical economics, it stresses the role of free markets in delivering
the best possible level of economic growth.
Classical Theory - Introduction
The term 'Classical' refers to work done by a group of
economists in the 18th and 19th centuries. Much of this work was developing
theories about the way markets and market economies work. Much of this work has
subsequently been updated by modern economists and they are generally termed
neo-classical economists, the word neo meaning 'new'.
Classical
economists were not renowned for being a happy, optimistic bunch of economists
(in terms of their economic thinking!).They believed that the government should
not intervene to try to correct this as it would only make things worse and so
the only way to encourage growth was to allow free trade and free markets. This
approach is known as a 'laissez-faire' approach.
Essentially this approach places total reliance on markets, and anything that
prevent markets clearing properly should be done away with.
.
Essentially this approach places total reliance on markets, and anything that
prevent markets clearing properly should be done away with.
Much
of Adam
Smith's early work was on this theme, and he introduced the notion of an invisible
hand
that guided economic activity and led to the optimum equilibrium. Many people
see him as the founding father of modern economics.
that guided economic activity and led to the optimum equilibrium. Many people
see him as the founding father of modern economics.|
Classical
theories revolved mainly around the role of markets in the economy. If
markets worked freely and nothing prevented their rapid clearing then the
economy would prosper. Any imperfections in the market that prevented this
process should be dealt with by government. The main roles of government are
therefore to ensure the free workings of markets using 'supply-side
policies'
and to ensure a balanced budget.
It was believed that'Supply
creates its own demand.'
This
once again provides a justification for the Classical view that the economy
will tend to full employment. This is because, any increase in output of
goods and services (supply) will lead to an increase in
expenditure to buy those goods and services (demand). There
will not be any shortage of demand and there will always be jobs for all
workers - full employment. Supply-side policies as we have
said are ones that reduce market imperfections. They may include:
·
Improving education & training to
make the work-force more occupationally mobile
·
Reducing the level of benefits to
increase the incentive for people to work
·
Reducing taxation to encourage
enterprise and encourage hard work
·
Reducing the power of trade unions to
allow wages to be more flexible
·
Getting rid of any capital controls
·
Removing unnecessary regulations
Keynesians - Introduction
Keynesian economists are, not surprisingly, so named
because they are advocates of the work of John Maynard Keynes (if only all
economics was that easy!). Much of his work took place at the time of the
Great Depression in the 1930s.
Keynes didn't
agree with the Classical
economists!! In fact the easiest way to look at Keynesian theory is to
see the arguments he gave for Classical theory being wrong. In essence Keynes
argued that markets would not automatically lead to full-employment
equilibrium
,
but in fact the economy could settle in equilibrium at any level of
unemployment. This meant that Classical policies of non-intervention would
not work. The economy would need prodding if it was to head in the right direction,
and this meant active intervention by the government to manage the level of
demand.
Keynesians -
Policies
The
other sections about Keynesians show that they believe that the economy can
settle at any equilibrium. This means that they recommend that the government
gets actively involved in the economy to manage the level of demand. You will
then be stunned to learn that these policies are known as demand-management
policies
.
Demand
management means adjusting the level of demand to try to ensure that the
economy arrives at full employment equilibrium. If there is a shortfall in
demand, such as in a recession (a deflationary gap
),
then the government will need to reflate
the economy. If there is an excess of demand, such as in a boom, then the
government will need to deflate
the economy.
Demand
management policies might include:
Monetarists - Introduction
Monetarists are a group of economists so named
because of their preoccupation with money and its effects. The most
famous Monetarist is Milton Friedman who developed much of the Monetarist
theory we learn.
Monetarism is very closely allied with the classical
school of thought. It is essentially an extension of classical theory which
was developed in the 1960s and 1970s to try to explain a new economic
phenomenon - stagflation
.
Stagflation was an expression coined to try to explain two simultaneous
economic problems - stagnation
and inflation. It
could perhaps have been called 'inflanation' but that sounds more like a
medical problem than an economic one.
Much of the Monetarists' work revolved around the
role of expectations in determining inflation, and a key part of their theory
was the development of the expectations-augmented Phillips Curve
.
For more details on this and other areas of monetarism, try the links below
or at the foot of the page or in the side panel.
Monetarists - Beliefs
In their work Monetarists draw a lot on Classical
economics. They re-evaluated the Quantity Theory of Money
and argued that increases in the money supply would cause inflation. This
view was backed up by a substantial body of empirical evidence. They would
therefore argue that to reduce inflation, the growth in the money supply
needs to be controlled.
Monetarists vary in their precise beliefs on
expectations. Some believe that expectations adjust so quickly that any
policy change will immediately be taken into account by people, and there
will therefore be no short-term adjustment. This school of Monetarism is
known as 'rational expectations'. More moderate Monetarists accept that there
may be an adjustment period, and so policy changes may have temporary or
short-term effects on the level of output.
Perhaps one of the best known quotes from Friedman's
work is that:
"Inflation is always and everywhere a monetary
phenomenon"
This quote is perhaps the best indication of the
reason why Monetarists are called Monetarists!
Monetarists -
Theories
Much
of the Monetarists' theory is a development of earlier Classical
theoretical work. Their main contribution is in updating many of these ideas
to fit them into a more modern context
Monetarists -
Policies
Since
the work of Monetarists is mainly limited to their view of inflation, their
policy recommendations are pretty much on inflation only as well. They tend
to believe that if you control inflation as the main priority, then this will
create stability and the economy will be able to grow at its optimum rate.
The
key policy is therefore control of the money supply to control inflation. The
government should certainly not intervene to try to reduce unemployment as
the economy will automatically tend to the natural rate of unemployment
.
The only way to change the natural rate is through the use of supply-side
policies.
All
of this makes Monetarists' policy recommendations pretty similar to those of
the classical
economists. Supply-side policies as we have said are ones that reduce market
imperfections. They may include:
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2.2 Entrepreneurship
and sociological theory
While
psychological modes try to explain behaviour in term of qualities within an individual, sociological theories
suggest that entrepreneur behaviour is
a function of the individuals interaction with society. That is,
entrepreneurs are ‘made’ by
society.
v The social marginality
model
This model s based on two premises.
(i)
The meaning of any
economic action, starting a business inclusive, is the satisfaction of wants.
(ii)
It is society that shapes
the desires we observe. Our
choices are therefore fenced by social habits and conventions.
Based
on the sociological theory individuals
who perceive a strong level congruency between their personal attributers and
the role they hold in society, will be motivated to change or reconstruct their
social reality. This can take a variety of forms. Some people may
reconstruct their reality by joining political parties, religious
organizations, charities, etc. others may change careers. Self employment
offers another area to take refuge.
v Inter –generational
inheritance of enterprise culture via role modelling.
This theory holds that entrepreneur practice is
largely inherited. A person who grows up around a family that runs a business is likely to benefit from the skills,
accumulated experiences, and
connections of the existing firm.
v Small firms as role
models
There has been a notion that those who from small
business are likely to have
previously worked in small firms and to have used them as a role model.
v The socio development
model
As per the views of Gibb and Ritchie
(1981) entrepreneurs cab be wholly understood by looking at the situations they
encounter and social groups to which they relate.
It critiques models which attempt to explain behaviour solely in terms of in-born
characteristics on grounds that they ignore environmental influences. This model assumes that individuals change throughout their life,
and that it is the transactions with
specific social contexts and reference groups that shape the person.
2.3 Entrepreneurship
and psychological theory
v Need for Achievement - Individuals with high need for achievement
were more likely to choose entrepreneurial careers that others.
Need for
Achievement is the desire to do well fro the sake of an inner
feeling of personal accomplishment.
v Locus of control - the
extent to which people believe that they control their own destinies. People with an internal locus of
control are those individuals who believe themselves to be in control of their
destinies. People with an external locus of control sense that, fate, in the
form of events outside their control or powerful people, has a dominating
influence over their lives (“learned helplessness”). Individuals with a strong internal locus of control are, according
to this mode more likely to engage in
entrepreneurship.
v Psychodynamic Model
The Psychodynamic model poses entrepreneurial behaviour as an outcome of a family background
often filled with images of endured hardships. Such experiences may
leave the adult troubled by a burdensome psychological in heritance centered
around problems of self-esteem,
insecurity and lack of confidence and with repressed aggressive wishes
towards personal control. The entrepreneurs thus becomes a deviant, drifting
from job to job unable to “fit in” and develops a non-conformist stand. The refusal to accept authority structure and social norms results
into inability to work smoothly with
others which in turn leads to the setting up of an independent
economic unit as an act of “innovative
rebelliousness”
v Other psychological models
Other personality traits
that are posited as being related to entrepreneurship include need for independence the need to be
your own boss; to have escaped from the hierarchical regimes of the large
organization, self confidence, need for fame, recognition, status, and power;
and values. These have however received very little attention.
2.4 Different
views of entrepreneurship
The concept of entrepreneurship
cannot be fully understood without his contributions, being probably the first
scholar to develop its theories. He gave two theories, sometimes called Mark I
and Mark II. In the first one, the early one, Schumpeter argued that the
innovation and technological change of a nation comes from the entrepreneurs,
or wild spirits. He coined the word Unternehmergeist, German for entrepreneur-spirit.
He believed that these individuals are the ones who make things work in the
economy of the country. In Mark II, developed later as professor at Harvard,
he asserted that the actors that drive innovation and the economy are big
companies which have the resources and capital to invest in research and
development. Both arguments might be complementary today.
Peter
Ferdinand Drucker (November 19,
1909–November 11,
2005) was a writer,
management consultant, and self-described “social ecologist.”[1]
Widely considered to be the father of “modern management,” his 39 books and
countless scholarly and popular articles explored how humans are organized
across all sectors of society—in business, government and the nonprofit world.[2]
His writings have predicted many of the major developments of the late
twentieth century, including privatization and decentralization; the rise of
Japan to economic world power; the decisive importance of marketing; and the
emergence of the information society with its necessity of lifelong learning.[3]
In 1959, Drucker coined the term “knowledge worker.”[4]
Among his early influences was the Austrian
economist Joseph Schumpeter, a friend of his father’s,
who impressed upon Drucker the importance of innovation and entrepreneurship.[6]
Drucker also was influenced, in a much different way, by John Maynard Keynes, whom he heard lecture in
1934 in Cambridge. “I suddenly realized that Keynes and all the brilliant
economic students in the room were interested in the behavior of commodities,”
Drucker wrote, “while I was interested in the behavior of people.”[7]
Basic ideas
Several ideas run through
most of Drucker's writings:
Decentralization and
simplification. Drucker discounted the command and control model and asserted
that companies work best when they are decentralized. According to Drucker,
corporations tend to produce too many products, hire employees they don't need
(when a better solution would be outsourcing),
and expand into economic sectors that they should avoid. A profound skepticism of macroeconomic
theory. Drucker contended that economists of all schools fail to explain
significant aspects of modern economies. Respect of the worker.
Drucker believed that employees are assets and not liabilities. He taught that
knowledge workers are the essential ingredients of the modern economy. A belief in what he called
"the sickness of government." Drucker made nonpartisan claims that
government is often unable or unwilling to provide new services that people
need or want, though he believed that this condition is not inherent to
democracy. The need for "planned
abandonment." Businesses and governments have a natural human tendency to
cling to "yesterday's successes" rather than seeing when they are no
longer useful. A belief that, taking
action without thinking is the cause of every failure.[18]
The need for community. Early in his career,
Drucker predicted the "end of economic man" and advocated the
creation of a "plant community" where individuals' social needs could
be met. He later acknowledged that the plant community never materialized, and
by the 1980s, suggested that volunteering in the non-profit sector was the key
to fostering a healthy society where people found a sense of belonging and
civic pride. The need to manage business
by balancing a variety of needs and goals, rather than subordinating an
institution to a single value.[19][20]
This concept of management by objectives forms the keynote
of his 1954 landmark "The Practice of Management".[21]
A company's primary
responsibility is to serve its customers. Profit is not the primary goal, but
rather an essential condition for the company's continued existence.[22]
Mclelland’s
View
Maclelland
identified three needs which he said motivated all behaviour, either singly or
in
combination.
The three needs are
·
NPOW, the need for power. This
includes power over others as well as power over
ones
self and ones circumstances. Maclelland felt that the need for power drove
many
managers. It is important to understand that he did not see this need as
negative,
but as merely a fact; he recognized that power, especially over ones self,
could
be used begninly in an employment situation. Problems could arise if the need
was
thwarted, or if it was not carefully channelled by those in charge.
·
NACH, the need for
achievement. Discussions of this need often focus on sports
figures,
whose need for achievement can be seen as a driving force in their
performance.
However, Maclelland points out that others experience a similar need
for
achievement, and that, as motivators and managers, it is up to us to identify
those
individuals
with this need, and formulate objectives for them to achieve
·
NAFF, the need for affection.
Everyone wants to be liked, and Maclelland, along with
Maslow,
has identified this as one of the important motivators for people. Affection,
as
Maclelland discusses it, can be experienced through any kind of positive
feedback
which
we receive. In workplace situations, a better way of expressing this need
would
be a need for recognition.
Maclelland's
"bottom line" was that, as management, we need to identify which of
the three
needs
motivated individual employees and then direct that need to the service of the
organization.
References and external articles
- William J. Baumol, Litan, R. E., Schramm, C.
J. (2007) Good Capitalism, Bad Capitalism, Yale University Press
- Bird, B.
(1992)"The Roman God Mercury: An Entrepreneurial Archetype", Journal
of Management Enquiry, vol 1, no 3, September, 1992.
- Busenitz,
L. and Barney, J. (1997) "Differences between entrepreneurs and
managers in large organizations", Journal of Business Venturing,
vol 12, 1997.
- Richard Cantillon, Essai sur la Nature du
Commerce in Général. 1759 [1]
- Casson, M.
(1982) The Entrepreneur: An Economic Theory Reprint. 1991.
- Casson, M.
(2003) The Entrepreneur: An Economic Theory, second edition",
Edward Elgar Publishing 2003.
- Cole, A.
(1959) Business Enterprise in its Social Setting, Harvard
University Press, Boston, 1959.
- Collins,
J. and Moore, D. (1970) The Organization Makers,
Appleton-Century-Crofts, New York, 1970.
- Peter
Drucker, (1970) "Entrepreneurship in Business Enterprise", Journal
of Business Policy, vol 1, 1970.
- Folsom
Jr., Burton W. (1987) The Myth of the Robber Barons, Young America.
- Gold,
Steven K (2005) "Entrepreneur's Notebook" Learning Ventures
Press, 2005.
- Hebert,
R.F. and Link, A.N. (1988) The Entrepreneur: Mainstream Views and Radical
Critiques. New York: Praeger, 2nd edition.
- Knight, K.
(1967) "A descriptive model of the intra-firm innovation
process", Journal of Business of the University of Chicago,
vol 40, 1967.
- Israel
Kirzner, (1997) 'Entrepreneurial Discovery and the Competitive Market
Process: An Austrian Approach', Journal of Economic Literature 35: 60-85
- Lumpkin,
GT and Dess, GG (1996) 'Clarifying the Entrepreneurial Orientation
Construct and Linking it to Performance', Academy of Management Review
21(1): 135-172
- McClelland,
D. The Achieving Society, Van Nostrand, Princeton NJ, 1961.
- Pinchot,
G. (1985) Intrapreneuring, Harper and Row, New York, 1985.
- Joseph Schumpeter, (1950) Capitalism,
Socialism, and Democracy, 3rd edition, Harper and Row, New York, 1950.
- Shane S.,
(2003) A general theory of entrepreneurship : the
individual-opportunity nexus in New Horizons in Entrepreneurship
series, Edward Elgar Publishing.
- Shane, S
and Venkataraman, S (2000), 'The Promise of Entrepreneurship as a Field of
Research', Academy of Management Review 25(1): 217-226
- Stevenson,
HH and Jarillo, JC (1990) 'A Paradigm of Entrepreneurship: Entrepreneurial
Management', Strategic Management Journal 11: 17-27
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