A Synthesized Theory of Entrepreneurship

A Synthesized Theory of Entrepreneurship By Anastassios D. Karayiannis Associate Professor University of Piraeus Department of Economics 80, Karaoli & Dimitriou 18534, Piraeus, Greece email: adkar@unipi.gr tel. 2104142303 1 A Synthesized Theory of Entrepreneurship Anastassios D. Karayiannis Abstract In order to develop an entrepreneurial theory capable of holding true in an absolutist environment, there are basically two approaches: (a) researching the historical economic data; and (b) analyzing the economic views and ideas held throughout history. The present paper will follow the second approach and will endeavor to clarify that there exist some fundamental entrepreneurial motives, characteristics and functions that have remained the same, at least from the time of ancient Greece until the present epoch. On such grounds, an entrepreneurial theory may be developed with ingredients that are non-destructible with the passage of time and in terms of changing economic conditions, and thus may be used as a universally accepted model of entrepreneurship. JEL classification: B00, M13 Key words: Entrepreneurship, entrepreneurial motives, entrepreneurial characteristics, entrepreneurial functions 2 Introduction Since civilized humanity has existed for such a relatively brief period of historical time, there most probably exist certain elements of human personality, behavior and activities that have remained unchanged throughout that period. For example, the human behavior toward uncertainty (of any kind) and the human attitude toward power are behavioral feelings exhibiting what we may consider to be “permanent” traits. On the same grounds, it may be conjectured that there exist some elements of economic behavior and activities that have probably remained the same throughout history. Peter Kilby (1971) argues that we must “hunt the heffalump”, namely, we must attempt to discover specific and unchanged (in relation to time and place) entrepreneurial characteristics and functions. To do so, there are basically two approaches: (a) researching the historical economic data; and (b) analyzing the economic views and ideas held throughout history. The present paper will follow the second approach and will endeavor to clarify that there do indeed exist certain fundamental entrepreneurial motives, characteristics and functions that have remained the same throughout history, at least from the time of ancient Greece until the present epoch. Thus, an entrepreneurial theory may be developed with ingredients that are indestructible, not only with the passage of time, but in terms of changing economic conditions. The basis of the analysis will be three different epochs of economic activity during which scholars (mainly economists) examined and analyzed entrepreneurship. The first is the ancient Greek economy in which various scholars expressed ideas and perspectives regarding the concept of entrepreneurship. The second derives from the era of mature industrial capitalism (around the end of the 19th and beginning of the 20th centuries) during which the works of A.Marshall, T. Veblen and others pluralism of various theoretical and empirical entrepreneurship.[1] The analysis of this paper will be conducted on the following lines. The first section will present ideas regarding the various economic, psychological and social incentives of entrepreneurs. The second section will investigate the various fundamental entrepreneurial functions as developed by representative authors on entrepreneurship in the above-mentioned three different economic periods. The third section will specify the generally- accepted significant personal characteristics and abilities of the successful entrepreneur. provide us a rich background of relevant ideas. The third is the modern economic system within which exists a approaches providing an explanation of 3 I. Entrepreneurial motives From the era of the ancient economy until the present, the main materialistic motive of entrepreneurs that has been stressed is the profit and/or wealth stimulus. In the writings of Xenophon (Memorabilia, III,ix,4; see also Christesen, 2003), such a stimulus is well-recognized and emphasized accordingly. The profit/wealth incentive was included in economic analysis at least from Adam Smith’s Wealth of Nation (1776, p. 474) and has survived in the writings of economists until our own time. For example, the profit motive -considered to be a result of the self-interested behavior of entrepreneurs and regarded as an explanation of drastic economic activities- was recognized and emphasized by well-known economists who nonetheless followed quite different methodologies and streams of thought, such as the pre-classicals (e.g. see Steuart, 1767, pp. 173-4, 262), classicals (see e.g. Torrens, 1821, p. 216; Read, 1829, pp. 87-8; Senior, 1836, pp. 28, 190), neoclassicals (see Marshall, 1890, pp. 17-8), institutionalists (see Veblen, 1914, pp. 172-3), and moderns (see e.g. Keynes, 1926, pp. 283-4; Scitovsky, 1943, p. 356; Kirzner, 1973, p. 222). Aside from the main profit motive, several other social and psychological motives were recognized. More specifically, Xenophon noticed that an entrepreneur deserves social distinction when he accumulates wealth by means of fair economic activities and shares part of that wealth by participating in public expenses (see Karayiannis, 1992a; 2003, pp. 554-6). During the early days of the mature industrial economy (the beginning of the 19th century), Senior stressed that the desire for social distinction drives the entrepreneur, who “wishes to raise himself in the world” (1836, pp. 94. 185), to accumulate and productively reinvest capital. During the peak of the mature industrial economy, Marshall regarded that entrepreneurs are motivated not only by economic, i.e. the profit motive (1890, pp. 12, 513), but furthermore by psychological and sociological incentives, such as: (i) “a noble emulation” (1890, p. 12) and “the hope of victory” (1890, p. 19); and (ii) a social “reputation for able leadership” (1919, p. 663; see also 1907, p. 330; Karayiannis, 2005).[2] In the same epoch in the industrially advanced American economy, two entrepreneurial incentives seem to have been the prevailing ones in the literature: the profit motive and the stimulus for social advancement. More specifically, Ely stressed two fundamental motives: the so-called self-interest motive and the love-of-social-esteem motive, both of which “direct production” (1889, pp. 140-1). The same inducements have been stressed also by Taussig (1911, pp. 167,169), Davenport (1913, pp.117, 140, 150,156) and Knight (1921, pp. 319,333,336). 4 In the central Continent (Austria), Schumpeter attributed to entrepreneurial activities incentives that were more psychological and social in character. He argued that there exist three groups of entrepreneurial motives. The first group includes “the dream and the will to found a private kingdom, usually, though not necessarily, also a dynasty” (1911, p. 93). The second group includes “the will to conquer: the impulse to fight, to prove oneself superior to others, to succeed for the sake, not of the fruits of success, but of success itself” (Ibid.,). The third group include “the joy of creating, of getting things done, or simply of exercising one’s energy and ingenuity” (Ibid.). This last stimulus is similar to that developed more recently by David McClelland (1961) as the motive of the “need for achievement”. The rate of profit was considered not only as a source of wealth, but also as a measure of success. Such a treatment of profit was put forward by Marshall (1919, p. 663), Schumpeter (1911, pp. 93-4), Sombart (1913, pp, 177-8) and McClelland (1961, pp. 233-7). The motive for freedom of control from others, or the desire for autonomy, is primarily advanced in contemporary economic theory to describe a strong psychological motive for entrepreneurship (see e.g. Hagen, 1971, pp. 128-9; Ronen, 1983, p. 140; Kaiser, 1990, p. 10). Thus, as the above discussion demonstrates, a majority of writers on economic issues have emphasized, throughout time, the following entrepreneurial motives, which are still functional today: Core entrepreneurial motives • • • • Profit/wealth motive The will of creativity Independence motive Social advancement/ distinction II. Entrepreneurial functions 5 The crucial entrepreneurial functions that characterize the non-perfectly substitutable activities of the entrepreneur with another hired agent of production will be examined in the coming pages. In accord with Kirzner’s (1973, p. 16) distinction between pure and non-pure entrepreneurship, those entrepreneurial functions and activities which characterize “pure entrepreneurship” will be discussed first; namely, those entrepreneurial functions that are initiated without owned capital and/or other assets. The main entrepreneurial function analyzed by Xenophon (Oeconomicus, vii. 3-4, xi.16) was that of the organization, control and superintendence of the production process.[3] Another function attributed by Xenophon (Memorabilia, I,iii.2) to the entrepreneur is the assumption of various risks. A third function of the entrepreneur clearly described by Xenophon (Oeconomicus, xx.27-8) was that of having special market knowledge and information to discover and/or exploit any new profit opportunity (mainly in the trade sector of economy). The function of the entrepreneur in organizing and coordinating the factors of production and superintending the enterprise was the main function developed by significant authors of the classical school, such as J.B.Say (1803, pp. 28-9) and J.S.Mill (1848, pp. 401,494-5,556). This function continued to be stressed later on by eminent economists of the 19th century, such as L. Walras (1874, p. 222-3), F.A.Walker (1876, p. 245), and J.B. Clark (1891,1892). However, the economist who more extensively elaborated on such an entrepreneurial function was A. Marshall. He treated (1890, p. 115) entrepreneurship under types of organizational function as the fourth factor of production. He stressed that through the “principle of substitution”, the entrepreneur, by economizing resources and using “new arrangements”, would increase the efficiency of the economic system (1890, pp. 200, 245; see also Karayiannis, 2005). The role of the entrepreneur in organizing, coordinating and allocating economic resources was more intensively interpreted and related with economic growth by modern scholars.[4] For example, H. Leibestein (1968, pp. 72,75) argued that such a role decreased the rate of x-inefficiency existing in an economy. Similarly, T. Schultz (1980) developed the role of entrepreneurial ability to allocate scarce resources. The same line was followed by Casson (1982, pp. 23-5, 59), who analytically examined such an entrepreneurial role and described its various economic effects. Another main entrepreneurial function, which was recognized and developed by many scholars of the past, was that of bearing the various (mainly non-insurable) risks. Not only during Xenophon’s time, but during the Middle Ages as well, some scholastics (e.g. J.D.Scotus, Bernadinus of Siena) considered that such an entrepreneurial (mainly merchant’s) activity was 6 deserving of special reward (see Gordon, 1975, pp. 230-5,344). During the era of mercantilism, such a function was also noticed by Mandeville (1714, p. 365), but was developed later on as a distinct and fundamental entrepreneurial activity by Cantillon. Cantillon claimed (1755, pp. 47-53) that the entrepreneur, having contractual expenses, awaits an unknown and uncertain selling price. Thus, he deserves a non-contractual income which is partly determined by his personal abilities and partly by uncontrolled factors. This function of bearing the various risks was recognized also by some economic thinkers of the classical school (such as Smith, Ricardo, Scrope, etc; see Karayiannis, 1990, p. 249), but they related this function with the responsibility of the capitalistentrepreneur. More than a century later, Rowland Hamilton developed, using a more analytical approach, the entrepreneurial theory of bearing the risk of uncertainty. By distinguishing between insurable and non-insurable risks, he argued (1878, pp. 208-10, 216, 218-9) that the role of the entrepreneur is to organize and control the operation of his enterprise and mainly to be responsible for bearing the non-insurable risks (see also Karayiannis, 1992b).[5] Such a theory, however, was mainly analysed by a variety of American economists contemporary with the mature industrial economy and incorporated into the economic thinking of that time. More specifically, Hawley stressed in various studies that “profit is simply the price paid by society for the assumption of business risks [and] ………. The pure profit will vary with the personal ability shown in the selection of business risks” (1890, p. 388; see also Ibid., p. 391; 1893, pp. 465, 470; 1900, pp. 75-8). Thus, such profits are the residual element of income distribution (1890, p. 391). Into such a context, “the undertaker ………… is primarily……… the person who relieves others of risk for a consideration always in excess of the chance of loss supposed to be incurred” (1892, p. 291). The well-circulated theory of entrepreneurship as a risk-bearing function was advanced also by Haynes (1895, p. 409) who referred to the distinction of von Mangoldt (see also Hennings, 1980) between risk from irregularities and economic risks. Haynes regarded the following sources of risks: (a) those arising from ignorance; and (b) those due to dynamic changes and mostly changes in the methods of production (1895, pp. 412-3). Although he was well aware that such a riskbearing function “does not increase product as labor and capital increase it” (1895, p. 416), he argued that it was a necessary function deserving a proper remuneration (1895, pp. 434,449). Frank Knight’s main contribution on entrepreneurship is the clear justification of an entrepreneurial function based on the specific grounds that the bearing of non-measurable and noninsured risks arise primarily from the entrepreneur’s imperfect knowledge and foresight.[6] 7 Knight’s entrepreneurial theory of risk-bearing uncertainty, while not specifying any direct productive entrepreneurial contribution, does so through the establishment and function of the firm. Knight specifies that the entrepreneurial function is most obvious in a non-competitive world where perfect knowledge and foresight are absent (1921, p. 19). In such a world, both calculable and non-calculable risks will arise (1921, pp. 19-20). The calculable risks are included through the risk premium in the cost of production, while the non-calculable risks that characterize uncertainty are assumed by the entrepreneur. According to Knight, uncertainty exists not only because of e unforeseen economic and other changes, but furthermore because “business decisions……… deal with situations which are far too unique ………. For any sort of statistical tabulation to have any value for guidance” (1921, p. 231). Thus, “it is this true uncertainty which by preventing the theoretically perfect outworking of the tendencies of competition gives the characteristic form of enterprise to economic organization as a whole and accounts for the peculiar income of the entrepreneur” (1921, p. 232). The “amount” of uncertainty is affected by the following factors: (a) “the time length of the production process”; (b) “the general level of economic life”; (c) the non-stable and non-predicted economic wants; (d) the unknown “development of science and of techniques of social organization” (1921, p. 265; see also 1933, p. 120); (e) “the sale price of his product” (1921, p. 317); and (f) “the amount of supply to be expected from other producers and the consumers’ wants and purchasing power” (1921, p. 318). Another crucial entrepreneurial function is the innovative, which although recognized by some authors of the classical period (see Karayiannis, 1990, p. 250), was not particularly analysed and stressed until the end of the 19th century.[7] Such an entrepreneurial function and its related activities were clearly developed by A. Marshall. By following J.S.Mill (1848, p. 559), Marshall made relatively explicit the fact that the entrepreneur is trying to see “where there is an opportunity for supplying a new commodity that will meet a real want or improving the plan of production an old commodity” (1890, p. 248; see also Ibid., p. 296). He also noticed that one of the tasks of the entrepreneur is to introduce “new methods of production [which] bring into existence new commodities, or lower the price of old commodities” (1890, p. 296; brackets added). Thus, Marshall clearly mentioned two kinds of entrepreneurial innovative activity: establishing a new and/or more efficient method of production, and introducing a new product, both of which activities are sources of economic progress (see Karayiannis, 2005). Some years later, J.B.Clark (1899, pp. 405, 410, 425) also stressed the innovative entrepreneurial function. He regarded that 8 one of the causes of a dynamic economy is the introduction of innovation. The entrepreneur, as J.B.Clark argued, introduces newer, more economical methods of production, as well as a more productive organization of the enterprise, thus obtaining an extra short-run profit. Such a profit would be eliminated when these new methods of production were diffused throughout other firms (1899, pp. 406, 410). Despite these earlier observations regarding the importance of the innovative entrepreneur, such a function was most fully developed in economic theory by J.A. Schumpeter. He considered (1911, p. 61, ft.1) the entrepreneur to be the main source of economic development and “the fundamental impulse that sets and keeps the capitalist engine in motion” (1943, p. 83). The entrepreneur’s specific function is to introduce the following innovations: “(1) The introduction of a new good- that is one which consumers are not yet familiar- or of a new quality of a good. (2) The introduction of a new method of production………… [which] can also exist in a new way of handling a commodity commercially. (3) The opening of a new market……… (4) The conquest of a new source of supply of raw materials or half-manufactured goods…… (5) The carrying out of the new organization of any industry” (1911, p. 66;p see also 1939, pp. 88-92).[8] Schumpeter gave paramount importance to entrepreneurs, not only for their role in changing the technological standards of economic process, but for their expertise in determining and scheduling the wants of consumers (1911, p. 65). Schumpeter was well aware that such innovative activities could also be accomplished by corporation managers who would receive high wages and special bonuses, such as the “promoter’s shares” (1911, pp. 137-8, 155). Thus, he argued that “the entrepreneurial function may be and often is filled co-operatively” (1949, p. 53; see also Ibid., p. 60). Also, he clearly distinguished between the process and function of invention and that of innovation: “although entrepreneurs of course may be inventors just as they may be capitalists, they are inventors not by nature of their function but by coincidence and vice versa. Besides, the innovations which it is the function of entrepreneurs to carry out need not necessarily be any inventions at all” (1911, pp. 88-9; see also 1928, p. 32; 1939, pp. 84-6).[9] Schumpeter’s main thesis was that entrepreneurship “does not essentially consist in either inventing anything or otherwise creating the conditions which the enterprise exploits. It consists in getting things done” (1943, p. 132). That is why he defined innovation as “putting resources to uses hitherto untried in practice, and withdrawing them from the uses they have served so far” (1928, p. 31). 9 The Schumpeterian entrepreneurial function of innovation was adopted by many economists and subsequently incorporated into a variety of relevant textbooks on economic theory. These economists followed a variety of methodological routes and were members of various schools of economic thought. For example, the institutionalist Veblen (1923, pp. 102-4, 109; see also Griffin, Karayiannis, 2002) strictly described the various innovative activities of the entrepreneur, while the radicals of the early 20th century, such as M. Dobb (1925, pp. 32-9), clearly justified profits as the special reward of the innovative entrepreneur. Another fundamental entrepreneurial role, that of creating and /or exploiting the various profit opportunities, was observed as early as Xenophon, but was most fully developed in the late 20th century by Israel Kirzner. However, before Kirzner, some economists had recognized the existence of such a function. For example, Marshall (1890, (p. 426) considered that entrepreneurs are constantly on the alert for the possibility of any profit opportunity within the production process. Such a function was also recognized by Pantaleoni (1898, p. 279). Some years later, Davenport (1913, p. 5) similarly argued that man’s “problem is to adapt activity to opportunity, to seek out his best adjustment to his situation and his best utilization of it”. Namely, that the effort for the exploitation of opportunity is the main source of profitability and economic development. Kirzner’s theory of entrepreneurship based on Austrian economic approach and arguments is one of the most recent and widely accepted contributions. Kirzner argues (1973, pp. 14, 38; 1997, p. 62) that there is no perfect knowledge among economic agents, and ignorance exists among the market participants. Thus, entrepreneurs are able to notice profit opportunities that are revealed by market discrepancies (in prices and quantities). He viewed the entrepreneur as “being alert to the opportunities that exist already and are waiting to be noticed. In economic development, too, the entrepreneur is to be seen as responding to opportunities rather than creating them; as capturing profit opportunities rather than generating them” (1973, p. 74). Entrepreneurs are activated by discovering a market error mainly in the following profit opportunities because of the existence of market imperfections: (1) where there is no perfect knowledge among the market participants (1973, pp. 14, 67); (2) when there exist an “imperfect coordination between the transactions in the resource markets and those in product markets” resulting in price differences (1973, p. 44); (3) when “a bundle of resources is being used to produce units of commodity A at a time when the resources could be used to produce units of commodity B, for which consumers are paying (or would be prepared to pay) greater sums of money” (1973, p. 138). 10 For Kirzner, entrepreneurship represents superior command over information. The entrepreneur is an agent who knows some or all of the following: (a) “where resources can be purchased most cheaply”; (b) “where products can be sold at the higher prices”; (c) “what technological or other innovations will prove mist fruitful”; and (d) “which assets can be expected to increase most in value” (1973, p. 66). An exploitation of such knowledge may result in entrepreneurial profits (1973, pp. 67,74). In other words, profit exists, according to Kirzner, because there are various market imperfections (mainly caused by imperfect knowledge and information), the successful entrepreneur recognizes these imperfections and thus, “by exploiting his superior knowledge ……….. [he] captures profits” (1973, p. 66). In order to investigate the acceptance of the above theories of entrepreneurial functions by economists, we reviewed a random sample of forty general economics textbooks to establish the amount of space they gave to various entrepreneurial theories.[10] The results were: 77,5% explained the entrepreneurial function (at least in one paragraph), while the remaining 22,5% contained no special exegesis of the entrepreneurial function (which has been substituted by the firm). Of those that explicitly referred to the entrepreneurial function, 42% explained the function of organization/coordination; 38,5% included a brief discussion of the function of the risk-bearing uncertainty; and 19,5% presented the innovative function. Additionally, twenty special treatises on income distribution, capital theory, firm’s theory, etc. (those dealing with entrepreneurship were excluded), published between 1956 to 1980, were examined to ascertain which entrepreneurial function they analysed and how much space was accorded the discussion of that function.[11] Of these treatises, 60% exhibited no special explanation of entrepreneurial function and only 40% analysed such a function at the mean rate of one page per treatise.[12] Of those treatises that actually present the entrepreneurial function, 31% focus on the organization/coordination function, 46% on the risk of uncertainty bearing, and 23% on innovation.[13] The neo-Austrian entrepreneurial theory of creating/exploiting profit opportunities is a relatively new one and, although well accepted and analysed in articles, it has not yet been included in a wide spectrum of basic textbooks and/or specific (non- entrepreneurial) treatises on income distribution, profit and capital theories, etc. From the above theoretical analysis and the simple arithmetic regarding the product “entrepreneurship” in the student’s market, it may be deduced that the following main functions are those that are developed and accepted by the majority of economists. 11 Core Entrepreneurial functions • Organization/coordination of production • • Risk of uncertainty bearing • Innovations Creation/exploitation of profit opportunities III. Entrepreneurial essential characteristics The entrepreneur’s personality and special qualities were from early historical times distinguished from those having other agents of production (i.e. laborers, capitalists). Xenophon (Memorabilia, II,i,28, III,iv,11; Oeconomicus, ii. 17-8, xx. 2-3, xxi,2) clearly specified that the successful entrepreneur must have the following distinguishing personal qualities: (i) adequate knowledge for the operation of enterprise; (ii) efficiency in managing and superintending laborers; and (iii) fairness in his economic transactions.[14] Making a great historical leap, we arrive at the period of mature industrial capitalism. During this era, an extensive treatment of entrepreneurial personality and characteristics can be found, especially in the writings of the late 19th century economist, Alfred Marshall. He recognized the following traits of a dynamic and progressive entrepreneur: (1) To have business skill and ability (1890, p. 261) and be efficient in the organization of his firm (1890, p. 208; 1919, p. 355);[15] (2) To have a relevant experience (1890, p. 208) and knowledge “in his own trade”, and to “understand the materials and machinery used in his trade” (1890, p. 248).[16] (3) To have “inventiveness” (1890, p. 255); and (4) to have “the power of forecasting the broad movement of production and consumption” (1890, p. 248) and thus to act as a moderate risk bearer (1890, pp. 355, 509).[17] Another important economic theorist, Joseph Schumpeter, stressed that an entrepreneur in order to successfully introduce an innovation must dispose of “the work and care of the daily round, scope and time for conceiving and working out the new combination and to bring oneself to look upon it as a real possibility and not merely as a day-dream. This mental freedom presupposes a great surplus force over the everyday demand and is something peculiar and by nature rare” (1911, 12 p. 86). Also, the successful entrepreneur must possess certain leadership qualities, such as “personal weight”, in order to lead “the means of production into new channels”, and to lead “in the sense that he draws other producers in his branch after him” (1911, p. 89). In general, the above analysis of the characteristics of successful entrepreneurs holds true in modern capitalism as well. As has been shown (see Chandler, Jansen, 1992), the most successful founders of a firm are those who are competent in recognizing business opportunities, are efficient managers and have adequate technical knowledge.[18] From the extensive array of significant personal entrepreneurial characteristics presented by representative authors in various economic epochs, the following generally-accepted profile emerges of the successful entrepreneur.[19] Entrepreneurial essential characteristics • Experience and knowledge (on market and firm) • • • Moderate risk bearing Leadership qualities Organizational abilities IV. The Entrepreneur We may conclude from the above analysis that “the entrepreneur” is described by twelve main behavioral, sociological and economic elements. The first four elements outline the motivational character of his “ideal type”. The second elements, which are interrelated with these motivational elements, consist also of four constituents of his personality characteristics and qualities. These two main corners of the triangle (see diagram 1), or angles, of “the entrepreneur” are strongly interrelated, as the operation of the first group of characteristics have operational power only when “the entrepreneur” disposes of the majority or all of the second group of characteristics. In other words, the entrepreneurial motives are operational mainly when an individual has some of the requisite personal qualities. On the other hand, an individual may have some specific entrepreneurial traits which are functional only when he (or she) has some strong stimulating motives. Such an interrelationship is depicted in the upper segment of diagram 1. 13 Core entrepreneurial motives • Profit/wealth motive • Social advancement/ distinction • The will of creativity Entrepreneurial essential characteristics • Experience and knowledge (on market and firm) • Moderate risk bearing Core Entrepreneurial functions • • • • Organization/coordination of production Risk of uncertainty bearing Innovations Creation/exploitation of profit opportunities Diagram 1 These two entrepreneurial preconditions, i.e. motives and characteristics which are strongly influenced by the social, political, economic and cultural environment (see McClelland, 1961; Karayiannis, 1996; Kyro, 1996; Zafirovsky, 1999; Baughn, Neupert, 2003), are “expressed” through four main entrepreneurial functions, as is shown in the lower part of diagram 1. These functions, however, do not necessarily operate distinctly one from another. On the contrary, in empirical situations, an entrepreneur may be functioned by two or more kinds of his 14 functional activities. In other words, the main functional activities of an entrepreneur take place through a “synthetic operation” (see Karayiannis, 1990). For example, let us say that an entrepreneur establishes a firm by introducing a new and/ or better product and/or process of production. By so doing, he also reallocates resources and, perhaps, reorganizes the production process. At the same time, he assumes some risks of uncertainty for such a new activity. In a later stage, if he wants to develop his firm, he may introduce a specific innovation through which he also re-coordinates and reorganizes the resources and also assumes the extra risks of uncertainty. By so doing he may, at the same time, not only try to create, but also discover and exploit any profit opportunity. Thus, an entrepreneur may activate through four main different functions, those of organization/coordination, innovation, uncertainty bearing, and exploitation of profit opportunities (see Karayiannis, 1990). Such a synthetic entrepreneurial function has been developed in the existing literature. For example, Gurzynski (1976) argued that innovative and organizational entrepreneurial functions always co-exist with the uncertainty assumption. Kaiser (1990) developed a model which shows that innovation, risk taking and the reallocation of resources are interrelated and interdependent facets of entrepreneurial activity. Bygrave, Hofer (1991, p. 14) defined the entrepreneurial process as involving “all the functions, activities, and actions associated with the perceiving of opportunities and the creation of organizations to pursue them”. Similarly, part of such a synthetic function has been suggested by Davidson, Ekelund (1994, p. 268) who describe the entrepreneur “as a discoverer of profitable margins ….[who is]…….. breaking the gap between resource opportunity cost and consumer’s ………. valuations ….[and]….as innovator the entrepreneur has a creative role in finding those products of products qualities……….. that will increase the utility of consumers”.[20] The special reward of the entrepreneur for successful accomplishment of the above function is, ultimately, net profit. Such profit has been considered by the majority of economists of different schools of economic theory as the residual of income distribution and in a differential rate according to entrepreneurial abilities.[21] Another kind of entrepreneurial profit developed is that of “windfall” profits arising from random profitable conditions (see e.g. Senior, 1836, p. 130; Marshall, 1890, p. 519; Keynes, 1930, p. 111). Conclusions 15 From the previous retrospective analysis may be deduced three main arguments: (a) economists have distinctively recognized and emphasized core entrepreneurial motives, characteristics and functions; (b) such elements have the consensus of various leading economists throughout history and in various phases of capitalism; and (c) all these elements consist of a distinct entrepreneurial theory. Such a theory may be fruitfully employed in explaining the various effects of entrepreneurship on economic development, income distribution, technological process, occupational choice as recently have taken place (see e.g., Bradford, Osborne, 1976; Schmitz, 1989; Holmes, Schmitz, 1990) etc., while the theory’s additional value resides in the fact that it may also be employed in the formation of various economic models of the firm. Notes 1. The various theories of economists on entrepreneurship are presented in Hebert, Link (1982); Barreto (1982); Karayiannis (1990); van Praag (1999); Jackson, Gaulden, Gaster (2001). For an 16 extensive literature review of the analysis of entrepreneurial motives and characteristics, see Carland, Carland, Ensley (2001). 2. The motive of social reputation stressed by Marshall was advanced by Keirstead (1953, pp. 3941) as one of the social incentives (other than that of economic wealth) –the other he held to be the motives for “power” and “security”- which characterize entrepreneurs. 3. Xenophon (Oeconomicus, iv,5-7) draws the main similarities between the coordinating role of the entrepreneur and that of the governor and the general in an army. 4. Such an entrepreneurial crucial function was also stressed in the literature of the late 19th and the beginning of the 20th centuries by economists who represented various schools of thought, such as Edgeworth (1881, pp. 32-3), Hobson (1909, pp. 58, 123; 1911, p. 143) and Veblen (1904, p. 35). 5. Marshall (1890, p.248; 1919, p. 309) had also recognized the function of the assumption of the various risks; however, he considered (1919, p. 645) that only the proprietor of the firm bears these risks. An argument also followed later on by Veblen (1904, p. 167) and Schumpeter (1911, pp. 75, ft.1, 137). 6. Demsetz (1988, pp. 236-7) characterized Knight’s contribution on entrepreneurial and profit theory as one of the most sophisticated that has lasted into the present. 7. An explanation of such a “delay” was offered by Baumol (1990) who argued that, in previous epochs, societies did not direct the productive entrepreneurs through their system of rewards toward innovative activities. 8. Aside from the above innovative activities of the entrepreneur, there is another one, mainly developed by Drucker (1985, pp. 203-7), which is exercised through the creative imitation activity. 9. The separation of the persons and process of invention from innovation was already recognized by Marshall (1890, pp. 206-7,212, ft 1.; 1919, p. 203), Hobson (1909, pp. 129-135) and Veblen (1904, pp. 44-5). 17 10. A similar technique was followed by Kent (1989) who demonstrated that entrepreneurship was also neglected in economic education. We searched forty general and/or introductory economics and microeconomic textbooks randomly selected from 1958 until 1998. These textbooks are: Due, Clower (1947); Nevin (1958); Hyde (1958); Ryan (1958); Henderson, Quandt (1958); Ulmer (1959); Lipsey (1963); Reynold (1963); Stonier, Hague (1964); Newman (1965); Lipsey, Steiner (1966); Allen (1967); Ferguson (1966); Ferguson (1969); Fleming (1969); Harvey (1969); Gisser, Barth (1970); Edwards (1970); Walsh (1970); Wykstra (1971); Solmon (1972); Hailstones (1972); Malinvaud (1972); Hanson (1972); Thompson (1973); Mansfield (1974); Koutsoyiannis (1975); Hailstones, Brennan (1975); Gwartney (1976); Baumol, Blinder (1979); Bradley (1980); Wolken, Glocker (1982); Kohler (1982); Fisher, Dornbusch (1983); Ruffin, Gregory (1983); Bowden (1986); Browning, Browning (1986); Apgar, Brown (1987); Sloman (1991); Samuelson, Nordhaus (1998). 11. These treatises are: Lachmann (1956); Weintraub (1958); Penrose (1959); Andrews (1964); Dewey (1965); Lamberton (1965); Edwards, Bell (1965); Brown (1968); Kregel (1971); Bronfenbrenner (1971); Johnson (1973); Eltis (1973); Passineti (1974); Wood (1974); Atkinson (1975); Bliss (1975); Harris (1978); Howard (1979); Craven (1979); Dougherty, (1980). In special readings (i.e. microeconomics, price theory) only two papers are included which examine and/or develop the entrepreneurial theory of risk of uncertainty bearing [F. Knight’s (1934, in Fellner, Haley (1950), and Bronfenbrenner’s (1960, in Breit, Hochman, 1968, ch. 28; Neel, 1973,ch. 28)]; and only one on organization/coordination of the entrepreneur [Scitovsky’s (1943, in Stigler, Building, 1953, ch.17)]. 12. Such an exclusion of entrepreneurship from influential “for the progress of economics” treatises, justifies the argument of its minimization in the neoclassical paradigm as emphasized and explained by Baumol (1968), Demsetz (1983) and Barreto (1989, ch. 2). 13. Parker (2003) has concentrated his empirical analysis of entrepreneurship upon these three functions. 18 14. Xenophon was correct in stressing the virtue of fairness and honesty in transaction as a special characteristic of the successful entrepreneur. As has been shown in our time, fairness in transaction is regarded as a significant characteristics of entrepreneurs in the decision-making process (see e.g. Dobson, 2002). Teal, Carroll (1999), after an empirical investigation, concluded that entrepreneurs may exhibit moral reasoning skills at a slightly higher level than middle-level managers or the general adult population. Into such a realm of analysis Medlin, Green (2003) have shown that small business is a relatively ethical arena in which leaders tend to be ethical decision makers. 15. A characteristic also stressed by J.S.Mill (1848, pp. 494-5). 16. Such an entrepreneurial characteristic was also emphasized by members of the classical school such as J.B.Say (1803, p. 104) and Senior (1836, pp. 207,209) and modern authors such as Schumpeter (1911, pp. 6-7) and Kirzner (1973, pp. 14-5,19). A psychological characteristic which, in recent times, was proved by McClelland’s (1961, pp. 207,210-1) research. 17. Knight held that individuals who are the less risk-averse and the abler become entrepreneurs (1921, pp. 273-4, 282-3). The first characteristic has been proved by Kihlstrom, Laffont, (1979) while the second by Laussel, Le Breton (1995). 18. Casson recently argued (1999, p. 63) that the size of the corporation mainly reflects the entrepreneurs’ organizational capabilities and leadership qualities. 19. 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(1896) Wages and Capital: An Examination of the Wages Fund Doctrine, New York: A.M.Kelley, 1968. Taussig,F.W. (1911) Principles of Economics, vol.II, 2nd ed. New York: The Macmillan Company, 1920. Teal,E., Carroll,A. (1999) “Moral Reasoning Skills” Are Entrepreneurs Different?”, Journal of Business Ethics, vol. 19, pp. 29-240. Torrens, R. (1821) An Essay on the Production of Wealth, New York: A.M.Kelley, 1965. van Praag,M. (1999) “Some Classic Views on Entrepreneurship”, De Economist, vol. 147, pp. 311-335. Veblen,T. (1904) The Theory of Economic Enterprise, New Jersey: A.M.Kelley, 1975. Veblen,T. (1914) The Instinct of Workmanship and the State of the Industrial Arts, New York: A.M.Kelley, 1964. Veblen,T. (1923) Absentee Ownership and Business Enterprise in Recent Times: The Case of America, New York: A.M.Kelley, 1964. Walker,F.A. (1876) The Wages Question: A Treatise on Wages and Wages Class, New York: A.M.Kelley, 1968. Walras,L. (1874) Elements of Pure Economics, Engl. Trnsl. W. Jaffe, New York: A.M.Kelley, 1977. Weston,F. (1950) “A Generalized Uncertainty Theory of Profit”, American Economic Review, vol. 40, No 1, March, pp. 40-60. Xenophon Memorabilia, Engl. trnsl. by E.C.Marchant, Loeb Classical Library, vol. VII, Cambridge: Mass: Harvard University Press, repr. 1968. Xenophon Oeconomicus, Engl. trnsl. by E.C.Marchant, Loeb Classical Library, vol. IV, Cambridge: Mass: Harvard University Press, repr. 1968. 24 Zafirovsky,M. (1999) “Probing into the social layers of entrepreneurship: outlines of the sociology of enterprise”, Entrepreneurship & Regional Development, vol. 11, No 4, pp. 351-371. Appendix List of Economics textbooks and special treatises Allen,C.L. (1967) The Framework of Price Theory, Belmont, California: Wadsworth Publ. Co. Andrews,P. (1964) On Competition in Economic Theory, London: Macmillan & Co. Apgar,W., Brown,J. (1987) Microeconomics and Public Policy, Glenview, Illinois: Scott, Foresman and Co. Atkinson,A. (1975) The Economics of Inequality, Oxford: Clarendon Press. Baumol,W., Blinder,A. (1979) Economics: Principles and Policy, 2nd ed. New York: Bruce Jovanovich, inc, 1982. Bliss,C.J. (1975) Capital Theory and the Distribution of Income, Amsterdam: North-Holand, Publ. Co. Bowden,E. (1986) Economics: The Science of Common Sense, Cincinnati, Ohio: South-Western Publ. Co. Bradley,M. (1980) Microeconomics, Glenview, Illinois: Scott, Foresman and Co. Breit,W., Hochman,H. (1968) (eds.) Readings in Microeconomics, Hinsdale,Illinois: Dryden Press. Bronfenbrenner,M. (1960) “A Reformulation of Naïve Profit Theory”, Southern Economic Journal, April, pp. 300-309, repr. in Breit,W., Hochman,H. (eds.) Readings in Microeconomics, Hinsdale,Illinois: Dryden Press, 1968, pp. 411-422; and R. Neel (ed.) Readings in Price Theory, Cincinnati, Ohio: South-Western Publ. Co, 1973, pp. 442-457. Bronfenbrenner,M. (1971) Income Distribution Theory, New York: Aldine Publishing Comp. Brown,P. E. (1968) Pay and Profits, New York: A.M.Kelley. Browning,E., Browning,J. (1986) Microeconomic Theory and Applications, 3rd ed. Glenview, Illinois: Scott, Foresman and Co, 1989. Craven,J. (1979) The Distribution of the Product, London: George Allen & Unwin. Dewey,D. (1965) Modern Capital Theory, New York: Columbia University Press. Doughrty,C. (1980) Interest and Profit, London: Methuen & Co. Due,J. Clower,R. (1947) Intermediate Economic Analysis, 5th ed. Homewood,Illinois, Richard Irwin, Inc, 1966 Edwards,E., Bell,P. (1965) The Theory and Measurement of Business Income, Berkeley and Loss Angeles: University of California Press. Edwards,G. (1970) The Framework of Economics, 2nd ed. London: McGraw-Hill. Eltis,W. (1973) Growth and Distribution, London: Macmillan. Fellner,W., Haley,B. (1950) Readings in the Theory of Income Distribution, London: George Allen and Unwin, Ltd. Ferguson, C.E. (1966) Microeconomic Theory, Homewood: Richard D. Irvin. Ferguson, C.E. (1969) The Neoclassical Theory of Production & Distribution, Cambridge: Cambridge University Press Fisher,S., Dornbusch,R. (1983) Economics, London: McGraw-Hill International Book Comp. Fleming,M. (1969) Introduction to Economic Analysis, London: George Allen & Unwin, Ltd. Gisser,M. Barth,P. (1970) Basic Economics, Scranton: Pennsylvania, International Textbooks, Comp. 25 Gwartney,J. (1976) Economics: Private and Public Choice, New York: Academic Press. Hailstones,T. (1972) Basic Economics, Cincinnati: South-Western Publ., Co. Hailstones,J. Brennan,M. (1975) Economics: An Analysis of Principles & Politics, Cincinnati: South-Western Publ., Co. Hanson,J. (1972) A Textbook of Economics, London: Macdonald & Evans, Ltd. Harris,D. (1978) Capital Accumulation and Income Distribution, Stanford, California: Stanford University Press. Harvey,J. (1969) Modern Economics, London: Macmillan. Henderson,J., Quandt,R. (1958) Microeconomic Theory: A Mathematical Approach, Tokyo: McGraw-Hill Kogakusha, Ltd. Howard,M.C. (1979) Modern Theories of Income Distribution, London: Macmillan. Hyde,F. (1958) A new Prospect of Economics, Liverpool: Liverpool University Press. Johnson,H. (1973) The Theory of Income Distribution, London: Gray-Mills Publ., Ltd. Knight,F. (1934) “Profit”, Encyclopaedia of the Social Sciences, vol. XII, pp. 480-6, repr. in Readings in the Theory of Income Distribution, London: George Allen and Unwin, Ltd., 1950, pp. 533-46. Kohler,H. (1982) Intermediate Microeconomics: Theory and Applications, Glenview, Illinois: Scott, Foresman and Co, 1990. Koutsoyiannis,A. (1975) Modern Microeconomics, 2nd ed. London: Macmillan, 1979. Kregel,J.A. (1971) Rate of Profit, Distribution and Growth: Two Views, London: Macmillan. Lachmann,L. (1956) Capital and its Structure, Kansas City: Sheed Andrews and McMeel, Inc, 1978. Lamberton,D. (1965) The Theory of Profit, Oxford: Basil Blackwell. Lipsey,R. (1963) An Introduction to Positive Economics, 4th ed. London: Weidenfeld and Nicolson, 1975. Lipsey,R., Steiner,P. (1966) Economics, 4th ed. New York: Harper & Row Publ., 1975. Malinvaud,E. (1972) Lectures on Microeconomic Theory, Amsterdam: North-Holland Publ. Co. Mansfield,E. (1974) Economics: Principles, Problems, Decisions, New York: W.W.Norton & Co. Neel,R. (1973) (ed.) Readings in Price Theory, Cincinnati, Ohio: South-Western Publ. Co. Nevin,E. (1958) Textbook of Economic Analysis, 4th ed. London: Macmillan, 1976. Newman,P. (1965) The Theory of Exchange, New Jersey: Prentice-Hall. Passineti,L. (1974) Growth and Income Distribution: Essays in Economic Theory, Cambridge: Cambridge University Press. Penrose,E. (1959) The Growth of the Firm, Oxford: Basil Blackwell, 1980. Reynold,L. (1963) Economics: A General Introduction, 4th ed. Homewood, Illinois: Richard Irwin, Inc. Ryan,W. (1958) Price Theory, London: Macmillan, 1967. Ruffin,R. Gregory,P. (1983) Principles of Microeconomics, 2nd ed. Glenview, Illinois: Scott, Foresman and Co, 1986. Samuelson,P., Nordhaus,W. (1998) Economics, New York: McGraw-Hill, Comp. Scitovsky,T. (1943) "A Note on Profit Maximisation and its Implications", The Review of Economic Studies, vol. XI, pp. 57-60, in G.Stigler, K. Boulding (eds.) Readings in Price Theory, London: George Allen and Unwin, Ltd., 1953, pp. 352-358. Sloman,J. (1991) Economics, London: Prentice Hall-Harvester Wheatsheaf, 1995. Solmon,L. (1972) Economics, 2nd ed. Reading,Mass: Addison –Wesley, Pub., Com, 1976. Stigler,G. Boulding,K. (1953) (eds.) Readings in Price Theory, London: George Allen and Unwin, Ltd.. Stonier,A., Hague,D. (1964) A Textbook of Economic Theory, 5th ed. London: Longman, 1972. 26 Thompson,A. (1973) Economics of the Firm: Theory and Practice, 2nd ed. New Jersey: Prentice Hall, Inc, 1977. Walsh,V. (1970) Introduction to Contemporary Microeconomics, New York: McGraw-Hill Bpook Comp. Weintraub,S. (1958) An Approach to the Theory of Income Distribution, Westport, Connecticut: Greenwood Press. Wolken,L., Glocker,J. (1982) Invitation to Economics, Glenview, Illinois: Scott, Foresman and Co. Wood,A. (1974) A Theory of Profits, Cambridge: Cambridge University Press. Wykstra,R. (1971) Introductory Economics, New York: Harper & Row Publ. Ulmer,M. (1959) Economics: Theory and Practice, 2nd ed. Boston: Houghton Mifflin, Co. 27