Economic Theories of Entrepreneurship

The economic theory of entrepreneurship firmly

states that the economy and entrepreneurial activity
are intertwined, with entrepreneurs needing
prosperous conditions to be able to thrive.

The economic theory of entrepreneurship is a theory

that explores the relationship between economic
conditions and entrepreneurial activity. It states that
when an economy is doing well, there are more
opportunities for businesses to succeed, while a poor-
performing economy limits the opportunities for
businesses.
 PROPONENTS

In J.R. Harris and G.F Papanek’s view-

The inner drive of a man is associated with economic gains, which drive him into economic
activities. Therefore, they regard econo­mic gains as a pre-condition for the supply of
entrepreneurs.

In the words of Kirzner-

A typical entrepreneur is the arbitras, the person who discovers opportunities, the person
who discovers opportunities at low prices and sells the same at high prices because of
intertemporary and inter- partial demand
 Economic Theories of Entrepreneurship
1. Theory of Functional Behaviour
Mark Christopher Casson’s theories of entrepreneurship offer an integrated view of how the
business firm works and functions. His research delves into the functional behavior of
entrepreneurs and identifies qualities necessary for their success.

Entrepreneurs build companies that identify and keep track of sources of volatility, sharing
this data with the key decision makers in their company.

These businesses are situated at places where a lot of information flows through, such as
nodes on an informational network.

To adapt to an unpredictable world full of instability and varied access to knowledge, the
classical economic theory is modified by taking into account how different people may
interpret their industry differently because they have differing levels of insight.
Economic Theories of Entrepreneurship
2. Theory of Economic Incentives
Economic incentives offer an advantage to those who take risks and innovate. Economic
incentives can be monetary or non-monetary such as the right to earn creative benefits,
recognition of efforts, or even tax exemptions.

A Link between economic gains and the inner urge: Economic incentives are often linked to
personal desires and motivations.

Economic gain: Economic gain provides the motivation to overcome challenges present in
the entrepreneurial venture by creating an environment where people are provided with the
right resources to excel in their respective industries. The economic gain from an
entrepreneurial venture also creates a sense of economic security and a path for further
development.
 Economic Theories of Entrepreneurship

3. Theory of Adjustment of Price

M. Kirzner posits that the primary responsibility of entrepreneurs is to adjust prices in
markets accordingly. For both the buyer and seller, higher or lower prices present
opportunities for profit.;

The entrepreneur has to be constantly aware of the fluctuations in market

conditions and use this knowledge to adjust prices, when necessary.
Adjusting the prices of commodities based on demand and supply helps
entrepreneurs to earn a profit.
 Economic Theories of Entrepreneurship
4. Theory of X-Efficiency
Harvey Leibenstein’s Gap Filling Theory, or X-efficiency Theory as it is commonly known, has
become a highly acclaimed concept. Leibenstein proposes that entrepreneurial activities are
determined by X-efficiency, which indicates how inefficient resources within the company are
utilized.

X-efficiency theory states that the entrepreneur needs to be keenly aware of their
organization’s X-efficiency and take measures to increase or maintain it. This includes the
common tasks of an entrepreneur, such as starting new businesses, juggling multiple roles
and responsibilities, plugging up gaps in resources or knowledge, completing inputs for a
project’s success, and making sure that productivity is at its peak.
 Economic Theories of Entrepreneurship
5. Theory of Innovation
Joseph Schumpeter is the mastermind behind this revolutionary theory which holds that
entrepreneurs are instrumental in driving economic growth. Schumpeter’s definition of
entrepreneurship is that it involves the creative art of transforming and combining elements in
new ways.

An entrepreneur, he claims, must possess creativity, innovation abilities, and foresight to

identify business opportunities for development. In short – a successful entrepreneur needs
to be imaginative with their vision!
 Theory of Innovation
The Schumpeterian theory of entrepreneurship is characterized by the following features:

 The distinction between invention and innovation: Schumpeter proposed that invention is the
creation of something totally new, while innovation refers to the process of utilizing the
invention.

 Emphasis on entrepreneurial function: Schumpeter argued that entrepreneurs have an important

role to play in the process of innovation, as they are the people who recognize potential
opportunities and make decisions based on them.

 Presentation of disequilibrium situation through entrepreneurial activity: According to

Schumpeter, entrepreneurial activities are characterized by a certain degree of instability or
disequilibrium. This is due to the fact that entrepreneurs are constantly looking for new ways to
create something which can be sold at a profit.
Economic Theories of Entrepreneurship

6. Theory of Harvard School

Harvard University’s research revealed that entrepreneurship is the intentional effort to start,
manage, and grow a profit-making enterprise with economic goods or services in spite of any
conflicting internal and external pressures.

Internal and external forces profoundly shape an individual’s capacity to engage in

entrepreneurial endeavors. Internal triggers include the motivation, skills, knowledge,
confidence, and resources of a person; whereas external pressures refer to economical,
social-cultural, and political-legal dynamics that can foster or impede entrepreneurship
within any given society.
According to this theory, there are two primary forms of
entrepreneurial activities:

• The ability to organize and combine resources for the

purpose of creating successful businesses is an
essential entrepreneurial skill
• Decision-making processes are significantly impacted
by the environment and its responsiveness. Additionally,
these functions extend to other activities mentioned
previously.
Economic Theories of Entrepreneurship
7. Theory of High Achievement

David McClelland’s theory has been developed over time to help us better understand
the motivation.

He expressed that entrepreneurship can be defined by the presence of two primary

characteristics revolutionizing the status quo with innovative solutions and navigating
challenging and unpredictable scenarios with decision-making.

He emphasized that those with a strong drive to succeed are the most likely individuals
to become entrepreneurs. These people strive for success and do not let external
factors, such as money or incentives, sway them. To them, profit is an indication of
competence and achievement.
 Theory of High Achievement

According to McClelland, individuals have a trio of needs

that must be fulfilled at any moment such as-

• Achieving success through one’s own hard work and dedication is known as the Need
for Achievement
• The urge to control and influence others is a powerful one
• Developing and preserving friendly relationships with others is an essential need
 Economic Theories of Entrepreneurship
8. Theory of Profit
Knight, Frank H. developed this theory which emphasizes that entrepreneurs are a specialized
group of people who endure risk and manage uncertainty.

This concept is unique in its ability to guarantee a predetermined amount of profit, while also
addressing the underlying socioeconomic and psychological factors that can create uncertainty
or risk. It then employs consolidation techniques to ensure any associated business risks are
minimized.

In essence, the Economic Theory of Entrepreneurship relies on a combination of analytical

knowledge and intuition to make informed decisions. It encourages entrepreneurs to use their
experience and insight to navigate the challenging and unpredictable world of business.
 Economic Theories of Entrepreneurship
9. Theory of Market Equilibrium
Hayek argues that the Neo-classical economics model relies heavily on the assumption of market
equilibrium, thereby eliminating any role for entrepreneurs from its analysis.

The fluctuating nature of bank credit creates a gap between the natural and market rate of interest.
This hypothesis suggests that there is no need for extra details to alter our decision-making
process.

Hayek argues that the Neo-classical economics model relies heavily on the assumption of market
equilibrium, thereby eliminating any role for entrepreneurs from its analysis.

The fluctuating nature of bank credit creates a gap between the natural and market rate of interest.
This hypothesis suggests that there is no need for extra details to alter our decision-making
process.
 RICHARD CANTILLON(1755)
Irish economist

Richard Cantillon, (born 17th century, Ballyheige, County Kerry, Ire.—died May 14,
1734, London), Irish economist and financier who wrote one of the earliest treatises on
modern economics.

Cantillon was an Irishman of Norman origins and Jacobite connections who spent much
of his life in France. He took over the bankrupt banking business of an uncle of the same
name in Paris and made a fortune from the collapse of John Law’s Mississippi Scheme (a
colonial development project whose profits could not match the expectations stirred up by
speculators). He operated as a financier in a number of centres, including Amsterdam,
where his transactions were on a large scale.
 RICHARD CANTILLON
Cantillon was murdered by a dismissed cook who then robbed and set fire to
his house. Cantillon’s fame rests entirely on the one work which survived the
blaze, his Essai sur la nature du commerce en général, written about 1730–
34 and published by the Marquis de Mirabeau in 1755. Its treatment of
population influenced Mirabeau and Adam Smith and, through the latter,
Malthus. It contained a theory of relative wages which was used by Smith;
the famous Tableau économique of the Physiocrats was probably inspired by
the Essai, and the treatment of the theory of money was of pioneering
importance. The Essai also contains his theories of wages, prices, and
interest, the workings of currency circulation, the role of precious metals in
the international economy, and other subjects.