How Entrepreneurs Make an Economy Grow

Peter G. Klein Mises Institute and

University of Missouri

November 2013

What is entrepreneurship?

Entrepreneurship is more than small business

► Common usage: entrepreneurship as an outcome or phenomenon

An occupation (self-employment) A type of firm or industry (new firms, small firms, high-growth firms)

► Alternative perspective: entrepreneurship as a way of thinking or acting Creativity, boldness, imagination Alertness to opportunities (Israel Kirzner) Innovation (Joseph Schumpeter) Judgment under uncertainty (Frank Knight,

Ludwig von Mises, Peter Klein)

“[I]t is impossible to eliminate the entrepreneur from the picture of a market economy. The various complementary factors of production cannot come together spontaneously. They need to be combined by the purposive efforts of men aiming at certain ends and motivated by the urge to improve their state of satisfaction. In eliminating the entrepreneur one eliminates the driving force of the whole market system.”

Mises: “The term entrepreneur as used by [economic] theory means: acting man exclusively seen from the aspect of the uncertainty inherent in every action.”

Institutions, entrepreneurship, and growth

► Theories of economic growth Neoclassical economics: emphasis on capital accumulation and

technical know-how New growth theory: role of knowledge, endogenous learning, and

increasing returns New institutional economics: focus on rule of law, stable property

rights, uniform commercial practices, social networks

► OK, “good” institutions create opportunities for investment, learning, economic growth.

► But are these opportunities automatically recognized and exploited?

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Entrepreneurship and growth

► Entrepreneurship as judgment, responsibility, initiative (decision-making under uncertainty) The “driving force” of the market economy (Mises) Hard to manipulate: main policy implication is provide secure property rights and free markets, then get out of the way

► Note on self-employment and small firms Thought to be correlated with “sustainable” economic

development Evidence is unclear, however (e.g., microcredit and

microenterprise) Some people don’t want to be entrepreneurs!

Lessons for policy

► Don’t be a central planner. Creating the next Silicon Valley Picking technology winners Deciding how many people should be self-employed, and how

many should be employees of large enterprise

► Foster an environment that allows people to choose occupations and business activities, and encourages entrepreneurs to exercise good judgment. Financial- and labor-market freedom Sound money: don’t create asset bubbles. Don’t stimulate, don’t bail out failing enterprises. Protect private property, the rule of law, free and open competition.