Economics without entrepreneurs

Entrepreneurs are said to be the backbone of a market economy, and for good reason. They use their precious savings to acquire scarce resources, which they then transform into various consumer goods according to the market demand. If their judgment about demand turns out to be right, they earn profits; if it’s wrong, they suffer losses. Of course, entrepreneurs engage in the risky business of foreseeing demand only to earn personal profits. But they also end up helping society in two crucial ways.

One, in their search for better returns, entrepreneurs look to introduce technology that can help minimise costs. This can not only improve their personal returns, but also increases the overall productivity of the economy. Two, again in the search for profits, entrepreneurs look to identify and satisfy untapped consumer demand. Being the first to satisfy a new consumer demand can lead to superior returns for an entrepreneur with the foresight. At the same time, such foresight also benefits society by bringing to life several consumer goods that were once unimaginable. Yet, for all these praises sung about entrepreneurs, mainstream economics textbooks largely remain silent about them.

False assumptions

“Economics Doctoral Programs Still Elide Entrepreneurship”, a 2017 paper by Dan Johansson and Arvid Malm, provides evidence that even advanced economics courses still remain agnostic about entrepreneurs. The paper provides a survey of readings prescribed to doctoral students in 2014-15 to conclude that most of them don’t care to even theoretically define an ‘entrepreneur’, let alone explore his economic function. Firms are virtually assumed to be on autopilot, maximising revenues and minimising costs, without any guidance. In fact, economic models assume an economy where resources have been allocated seamlessly according to consumer demand.

Not surprisingly, economists don’t even think about possible errors in entrepreneurial judgment and its implications for the wider economy. How accurate are entrepreneurs generally in their foresight of demand? How do they gauge the likely demand for a product? What, if any, role do past prices play in their investment decision? Clearly, economists are a long way from combating these vital questions.

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