A short note on etrepreneurship:
J. A. Schumpeter and L. von Mises compared
The theory of economic equilibrium is Walras’ claim to immortality, that great theory whose crystal-clear train of thought has illuminated the structure of purely economic relationships with the light of one fundamental principle.
Joseph A. Schumpeter
It is only the passionate pro-socialist zeal of mathematical pseudo-economists that transforms a purely analytical tool of logical economics into an utopian image of the good and most desirable state of affairs.
Ludwig von Mises
Take Away
An entrepreneur acts as a motor of economic development. Profit or reward expectations serve as the motifs of entrepreneurial action – for both, the pioneer of innovation and the imitators. Quite different from Ludwig von Mises and the Austrian School, Joseph A. Schumpeter applies the Lausanne School’s concept of equilibrium in the neoclassical sense as the starting point of his dynamic analysis. For Schumpeter thus the entrepreneur is an economic actor who breaks the statics to push the economy toward development, which is not merely economic growth because development signifies that fundamental changes of the economy take place in the process. The Austrian theory of entrepreneurship, promulgated by Ludwig von Mises depicts the entrepreneur as anyone who “buys cheap and sells dear”.
Entrepreneurship
With regard to the idea of entrepreneurship, the Austrian School was always something of an exception. The groundwork for this exceptional status was laid by Carl Menger (1840-1921), the founder of the school. Menger viewed entrepreneurship as a special service, which could neither be bought nor sold and thus did not have a market value. The reason that Menger’s work could serve as the basis of a theoretical appreciation of the nature of the entrepreneur in economic life was his emphasis of the role of ignorance, error and uncertainty in all human affairs. These prevailing conditions create an opportunity to connect the element of Menger’s description of the tasks of the entrepreneur with an analysis of the central problem of economic theory, namely the spontaneous formation of prices. As long as the future is uncertain there will be a place for the entrepreneur in the process of social exchange. Since Schumpeter’s name is permanently linked with the idea of entrepreneurship (the word entrepreneur almost became his trademark), it seems worthwhile to briefly reflect on some of the differences between Schumpeter’s approach and that of L. von Mises, representing many other members of the school.
3rd generation of the Austrian School
It was especially Boehm-Bawerk’s famous seminar at the University of Vienna that he conducted more or less between 1900 and 1904 that soon attracted the keenest minds among the younger Austrian economists. Boehm-Bawerk’s colloquium “Topics on Themes in Economic Theory” thus shaped the methodological position of the highly influential 3rd generation of the Austrian School of Economics.
Although Joseph A. Schumpeter (1883-1950) and Ludwig von Mises (1881-1973) played the dominant role in this seminar, mention must also be made to a few other important participants, among them Alfred Amonn (1883-1962), Franz X. Weis (1855-1956), Felix Somary (1881-1956), Richard von Strigl (1891-1942), Emil Lederer (1882-1939), Hans Mayer (1879-1955), Wilhelm Vleugels (1891-1941) or Otto Bauer (1881-1938). Being exposed to the same teacher, it is interesting that especially Schumpeter, von Mises but also Bauer developed quite opposing theoretical as well as methodological positions. While Bauer became the leading thinker of the Austromarxists, Schumpeter increasingly was drawn to the accomplishments of Leon Walras and the Lausanne School. And after the publication his The Theory of Money and Credit (1912), Ludwig von Mises emerged as the unrivaled representative of the 3rd generation of the Austrian School of Economics.
Although much indebted to his mentor Eugen von Boehm-Bawerk (1851-1914) throughout his life Schumpeter was captivated by and has assumed many distinctly differing influences. Thus it is certainly debatable that he is featured as a prominent member of the 3rd generation of the Austrian School of Economics in leading accounts of the history of economic thought. The same might be said of Schumpeter’s exact contemporary and lifelong friend, Alfred Amonn, with whom he shared his admiration for the theoretical accomplishments of Leon Walras (1834-1910).
“Creative destruction”
Schumpeter’s liking of the neo-positivistic philosophy that was emerging in Fin de Siècle Vienna and his belief that economists should attempt to base their research on the model provided by the natural sciences, in particular by physics, clearly caused him to decisively deviate from the Austrian School’s methodological position. He attributed the failure to ascend to the height of Walras’ accomplishment to the “defective technique” of the Austrians. But while Schumpeter was fascinated with the Lausanne School’s description of the characteristics of a state of equilibrium and while he believed that this explanation formed the foundation of a truly objective science of economics, his own background prompted him to recognize that Walras had provided an essentially static model of a society without much regard for and very little insights into the diverse problems of economic developments. A substantial portion of Schumpeter’s work was actually devoted to an attempt to discover how a general equilibrium system could be transformed from a static model into a dynamic theory. And as early as 1912 he elaborated in his book Theorie der wirtschaftlichen Entwicklung on the important role an entrepreneur could play in this transformation. Schumpeter was convinced that the static idea of the general equilibrium had true empirical relevance that provided adequate description of the essential characteristics of a typical economy under normal circumstances.
Economic changes and any progress were initialized by the innovating entrepreneur who sends what Schumpeter referred to as waves of “creative destruction” through the economy, causing continuous progress. Accordingly, as innovations replace existing ones that are then rendered obsolete, for Schumpeter these processes are essential to capitalism and thus for long-term economic growth. It is the repetition of these processes which raises mankind to ever higher levels of welfare. Therefore Schumpeter’s entrepreneur is primarily an “agent of innovation” who is pushing the economy forward by breaking away from the status quo. He believed that over time entrepreneurs would assume the role of social leaders who eventually somehow will replace the members of an upper class. However the entrepreneur would continue to hold on to his own leading role in society only as long as he retained the will to continue to perpetuate the process of creative destruction and only as long as the objective possibilities for setting this process in motion continued to exist. For Schumpeter in the end a point will be reached at which all of the creative energies of the entrepreneurial class and all of the opportunities for innovation would be exhausted and a conclusive state of socio-economic equilibrium will be established. Such social order will soon adopt the character of a highly bureaucratized socialistic society in which the entrepreneur would be replaced by politically appointed technocrats.
Socialism: An Economic and Sociological Analysis
On the other hand, Mises’ approach to entrepreneurship was set forth in his groundbreaking and seminal book Die Gemeinwirtschaft. Untersuchungen über den Sozialismus (1922) in which he demonstrated the impossibility of economic calculation in any socialist society. An English translation appeared as Socialism: An Economic and Sociological Analysis (1936). However, Mises developed his full account of the entrepreneur’s role in his magnum opus Nationalökonomie. Published in 1940 in Geneva and due to WWII, the book did not reach the German readership and thus remained almost completely unread. The English translation published in 1949 as Human Action: A Treatise on Economics by Yale University Press, established Ludwig von Mises’ reputation in the USA.
Mises distinguished there three different ways in which the word entrepreneur could be used. In the first sense Mises turned to a Weberian ideal type which contained a number of elements not all of which could be described by the categories of economic theory. Secondly, Mises referred to any economic decision maker who is particularly active in attempting to profit from changes in market data and in helping to bring these changes about. And lastly, Mises discussed a pure praxeological category. According to Mises, praxeology is the general science of human action and the discipline of economics thus becomes simply a branch of praxeology. Because he views the concept of equilibrium as a moving target that can never be reached in real life and that had no empirical significance for him, Mises refused to accept the idea that the entrepreneurial activity involved anything which was destructive in character. Unexpected changes in the data with which economic actors were confronted would always change the nature of the goal itself. Due to the fact that Mises dealt with the entrepreneur in a purely praxeological sense, he consistently reached the opposite of the Schumpeterian approach. Rather than disturbing a state of equilibrium, the entrepreneur for Mises was always an acting individual who in his actions helped to reduce the disequilibrium of human affairs. Thus the whole idea of entrepreneurship becomes a logical component of all future actions and exchanges. As all human actions are undertaken with the rational belief to be better off than otherwise, individuals attempt to improve their position by utilizing “competition as a discovery procedure”, which leads to these exchanges.
For the Austrian School the entrepreneurial activity thus is always something like an arbitrage, a form of simultaneous selling and buying. If the acting individuals were correct in their actions or estimations they will reap entrepreneurial profit, if they were wrong they will suffer entrepreneurial losses. No equilibrium theory could account for this kind of activity for the simple reason that in an equilibrium itself all entrepreneurial profits and losses have come to a grinding halt at zero. For the members of the Austrian School thus the discovery of profit opportunities creates a movement of marginal resources into the lines of production in question. This increases supply, lowers prices and gradually eliminates that component of the return which could be classified as pure entrepreneurial profit. When losses are suffered a reverse process is set in motion. If the market were actually to arrive at some final equilibrium position, the only returns from the production which would remain would be wages and interest. Thus, for Austrians, the term entrepreneur must be applied to anyone who acts according to the maximizing principle.
In free markets, the burdens of uncertainty tend to fall on individuals who are especially willing or particularly equipped and able to accept them. For Mises this leadership role cannot be taught, but is acquired through superior insights and persists as long as the division of labor exists. In general activists, speculators, promoters or traders always appear and assume this role which outwardly has much in common with the one described by Schumpeter. However, in the final analysis, in view of the Austrian School, everyone is in some sense an entrepreneur as long as the logic of choice forces the individual to choose one course of action as opposed to another.
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