Menger and the Entrepreneur

He goes by many names: businessman, entrepreneur, capitalist, exploiter (depending on who you ask), etc. But what does it mean to be one? In his seminal work, Principles of Economics, Carl Menger sets out a list of criteria that he believes summarizes the function of the entrepreneur. The list itself provides a fine picture of what it is the entrepreneur does. In fact, I would consider the list to be fairly exhaustive. However, he commits the same error of so many other theoreticians in that he misses the true essence of the entrepreneur. He sees it, but he passes it over.

Menger gives four functions of the entrepreneur:

“Entrepreneurial activity includes: (a) obtaining information about the economic situation; (b) economic calculation — all the various computations that must be made it a production process is to be efficient (provided that it is economic in other respects); c) the act of will by which goods of higher order (or goods in general — under conditions of developed commerce, where any economic good can be exchanged for any other) are assigned to a particular production process; and finally (d) supervision of the execution of the production plan so that it may be carried through as economically as possible.” (Principles of Economics, pg. 160)

Restated, we can list these four functions as:

  1. Gathering information
  2. Profit/Loss Calculation
  3. Organization of factors of production
  4. Supervising the production process

It is important to note that Menger does not view these as being just facts that are commonly associated with the entrepreneur, but rather, as integral and present in all entrepreneurs. He writes:

“But however extensive the activities of these helpers may be, the four functions listed above can always be observed in the actions of the entrepreneur…”

But is this really the case? Can we imagine an entrepreneur that does not possess any of these four attributes? Not only we can show that one of these items is superfluous, all but one is unnecessary for uncovering the true nature of the entrepreneurial function.

First, let’s take the process of gathering information. To be sure, in order for an entrepreneur to successfully earn profits, he needs information about market conditions, the factors at his disposal, the prices of his inputs and outputs, etc. However, these are only necessary for an entrepreneur to attain any level of success. We can imagine a businessman who gathers no information at all and simply acts on his own whim and instinct. We would not expect for him to remain in business for long, as this abstention from new information will almost certainly hurt his business, but he would still be an entrepreneur. In other words, we can imagine the entrepreneur who does not gather information, short-lived as his business ventures would be. Consequently, we can reject Menger’s first criteria as a requirement for the entrepreneurial function. In order for one to qualify as an entrepreneur, it is not strictly necessary.

What about the fourth function listed, the supervision of production processes? In order for the entrepreneur to earn any profit, there is no question that he would have to oversee his production processes and ensure that they are being performed correctly and cost-efficiently. It is easy to imagine that without any watchful eye, inefficiencies and inaccuracies would begin to slip in. But yet again, can we conceive of an entrepreneur who does not supervise his production at all? Even though such an entrepreneur, much like the one who gathers no information, would quickly find himself without money, capital, or the goodwill of his creditors, such a person is conceivable. A poor entrepreneur they would be, but an entrepreneur nonetheless. Therefore, we also reject Menger’s fourth criteria as necessary to the entrepreneur.

And what of the second function, the calculation of profit and loss? Just on first glance, this process of calculation is very close to the entrepreneur. Whenever we have talked about the failure of the entrepreneur in both of the above functions, the method by which we gauge this failure is through profit and loss. However, even here we do not find the nucleus of what the entrepreneur is. Just as before, we can imagine an entrepreneur who makes decisions with no regard at all to their cost or future prospects. Instead of keeping track of his expenses and revenues, he makes production decisions on a whim. While again, this entrepreneur would not be around for long, he would still be an entrepreneur. While profit and loss represent a much more crucial component of the entrepreneur than supervision or information-gathering, we still must venture even deeper.

This brings us to the third function, the organizing of the entrepreneur’s factors. Put into simpler terms, this means the act of making decisions regarding production. Can we imagine an entrepreneur who does not make production decisions? Try as hard as we might, we cannot. The entrepreneur, if he does nothing else, must have control over the firm’s production. We can illustrate this concept in more detail with the following dialogue of questions and answers:

What is the entrepreneur?
— He is the individual who owns a firm.
What is a firm?
— An organization that owns or rents land and capital and hires labor
What does it mean to own something?
— It means that one has control over the usage or disposal of the entirety in question

Thus, an entrepreneur is one who has the ultimate control over the usage of the factors of production. All of the other functions Menger listed are connected to this fact, especially profit and loss, but this one fact is the core essence of the entrepreneur as an economic figure. We can’t imagine him without it.

This definition of the entrepreneur carries two components: the fact that the entrepreneur makes decisions and that he manifests them through the firm. Importantly, this tells us that the theories of the firm and entrepreneur are not to be separated. The two are intertwined. The entrepreneur needs the firm to exercise his judgement, and the firm has no purpose to exist outside of his will. The economics profession has traditionally treated these two as separate and distinct areas of study, but we can see that there is no reason why this should be so. The two are united, both in their purpose and their action.

How was it that Menger overlooked the true nature of the entrepreneur? He understood this function, but why did he feel the need to add to it? Predicting the future is no easy task, and the process of doing so in a market economy is intricately complex. The entrepreneur must do everything listed by Menger and much more if he is to outcompete his fellow businessman in providing for the wants of the consumer. As such, our view and conception of the entrepreneur is clustered with his various undertakings and activities. But underneath all of these lies the core: the entrepreneur, and his judgement over the firm.

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