01.11.2024

Introduction

This essay focuses on Schumpeter's perspective on the role of entrepreneurs in discussions with neoclassical economic positions. It attempts to discuss the entrepreneur's role in economic development according to Schumpeter. To do so, this text will briefly look into economic development prior to understanding why the role entrepreneur as a driver for the economy is discussed by Schumpeter in economic history. This will give a deeper insight into Schumpeter's perspective on the role of an entrepreneur as an economic driver, as the text will delve into the question of: What distinct contribution do entrepreneurs make that sets them apart from other economic agents? Schumpeter's perspective on how the equilibrium of a market behaves differs from the classical economic view of Karl Marx and Adam Smith, which states that there is a static dynamic equilibrium. They take exogenous factors into account that influence the equilibrium and look at the role of an entrepreneur in terms of function. To Schumpeter, the role of an entrepreneur is taken from the term of production, which, in its outcome, is driven by an entrepreneur who creates distribution to the market by introducing new products and methods of production that introduce a new market. The market experiences an endogenous change driven by an entrepreneurial contribution to the economy. Further, he looks at the entrepreneur as an innovator who introduces new products and methods of production that, in their outcome, open a new market but also disturb existing markets, as discussed in this text example of the development of digital film and photography.

         This essay concludes with recommendations for policymakers and educational institutions to open paths for entrepreneurs to thrive, to encourage change and innovation in society as a whole.

The Role of Endogenous Factors in Economic Equilibrium

In 20th-century economic philosophical history, we have three main periods. Neoclassical economics starts with the economics of Adam Smith, David Ricardo, and Karl Marx. They help to understand market processes in terms of supply and demand, static equilibrium models, and how the market meets potential equilibrium between supply and demand. From those neoclassical perspectives, it is understood that the role of an entrepreneur is mainly a manager, a capitalist or an investor. An entrepreneur to Adam Smith, is an individual who can form an organisation for commercial purposes, who is a proprietary capitalist, a supplier of capital, and simultaneously a manager. To Karl Marx, an entrepreneur's role is simply to encourage the provision of substantial capital funds. In terms of capital that can generate financial capital for itself as capital provisioning, the entrepreneur in this perspective is a capitalist actor. In Blaug (1987), it is mentioned that in Karl Marx’s analysis, there is an absence of the notion of the entrepreneur as he treats the running of a business simply as an adjunct to the provision of capital funds. The overall role of the entrepreneur was not much discussed and seen more as a managing actor within the market.

Taking Schumpeter's perspectives on the role of an entrepreneur into account, the consequence of viewing the entrepreneur solely as a function that can be executed by an agent rather than considering the entrepreneur as a factor of production is significant.

In neoclassical tradition, attention has shifted from internal enterprise and political economy to the overall functioning of the economy as a static model. In terms of the mechanisms that offer supply and demand to achieve equilibrium to stability. To neo-classical economists, this perfect state is reached when there is no excess in demand or supply. The market will only experience exogenous and endogenous change or shift due to external factors such as war, crises and diseases, as the world recently experienced with the Covid-19 pandemic, new resources shape and shift the reactive response to impulses that then have an effect on the equilibrium of a market. Exogenous factors are interpreted as external pressure that affects the economy, although they do not derive from within the economy.

When looking at the neoclassical perspectives on where the perfect state of the market meets the equilibrium in which these movements of suppliers enter in and out of a competitive market then the consequence to Schumpeter is that this state in the long run, the movements of suppliers getting in and out of competitive markets will tend to equilibrium - a state in which the entrepreneur neither makes money nor loses it (Schumpeter, 1953, p. 893)

In this state, there are no incentives for an entrepreneur to enter or exit a market. Schumpeter questions how the market can change if the equilibrium appears stable. 

Here is where endogenous factors are understood as internal pressures from the economic system that have an effect on the economy. To Schumpeter, these are internal factors that have an effect on the equilibrium of a market that give an incentive for participants of the market to have a return on investment. Otherwise, how can it be reasoned that a market stays stable? At some point the curves go up the equilibrium moves above the horizon, when profits are made that means the equilibrium is not stable, it is shifting it's not dynamic, the state of equilibrium is moving from one equilibrium to next one, making it more sense to see it as a state of constant equilibriums that is pushed from inside.

Such endogenous factors can be, e.g. technological advancements, those incentives are driven by entrepreneurs that, in Schumpeter's sense, cause a disturbance to a static equilibrium that causing a collapse of the equilibrium. To him, a new state of equilibrium is reached by the reaction to the motive forces of development caused by individuals who generate innovations. He points out the role of the entrepreneur as agents of change who drive innovation and economic development from the inside. Entrepreneurs shape and create new markets and exploit the market structure by demonstrating endogenous mechanisms that drive change and new market development. Here is where Schumpeter speaks of the example that many people are capable of singing and using their voices to create vocals, but even fewer will be struck by their singing ability; only some will be able to be in the supreme instances that can become the characteristic mark of a person to develop a chorus. Here we see many people carry capabilities, but what differentiates us from others is being particular to it. This, in a sense, can be applicable in understanding that some are in the object to drive and create innovation, as the entrepreneur can be read as an innovator. To Baumol (1987), the entrepreneur, seen as an innovator, plays a peculiar function and acquires profits out of uncertainty in the market. This innovator plays a critical role in economic development as an outcome of the economy that can be driven by a single agent. Entrepreneurs are, to Schumpeter, the agents that set changes in motion for humanity, therefore the economy as a whole.

Placing the entrepreneur as a wheel for innovation that introduces new methods of production, for the movie industry, this can be the introduction of Adobe Software for photos and filmmakers. This new post-postdiction software makes the work processes more efficient, in the sense that a photo and film producer does not need a huge post-production team that cuts the film and manually glues sequences together.

It goes in hand with the introduction of a new good, such as the digital camera, whereas the prior analogue camera was required to set up a darkroom that required a studio space, and time for the development of the film, photo and film material can be digitalised and processed directly through the computer software. It means, at the same time, an end to many film laboratories that have skilled workers and equipment that is needed to process those films, as this can now be done from the comfort of simply running it through the software.

The consequences of these new methods of production and new goods are that, in this case, many companies have stopped their production of analogue films and today. Successful companies such as Fujifilm have survived this downfall, but today, there are of few that offer the production of analogue film ​​(FUJIFILM Schweiz, 2024). The price of rolls has risen and is more scarce to buy as fewer local photo studios offer such services. It is a process that still has its value in the art sector, as an analogue film offers a nostalgic aesthetic to the image. As trends change, these days we can see in turn to the fast and oversaturation of photos that can be taken on people's smartphones the idea of taking the time to make conscious decisions of the images that are being shot the analogue film has its small comeback to a new generation of photographers (Kendal, 2024). This does not indicate that this trend will continue in a market; it is seen that with the introduction of digital photography, the market for analogue film was disrupted, and a new market for digital photography production was introduced. Filmmakers need to reeducate themselves and adjust their practice to stay in business, as many could not restructure their studios. It is aligned with the fact that many business owners had to exit this market, as a new market for digital photography was introduced.

Schumpeter speaks here of creative destruction, as the economy is in a constant state of disruption. The entrepreneur produces and introduces new products to the market and therefore creates welfare. The role of an entrepreneur to Schumpeter, is to disturb the market by reinventing the new market systems.

Economist Israel Kirzner (1999) views these developments and the role of the entrepreneur as re-establishing a new equilibrium in a market. The entrepreneur as an innovator in its outcome, offers solutions to an existing disruption and therefore restores the equilibrium. To him, introducing new products is stabilising the market. An example of this can be yet again in the film industries, as with the introduction of DVDs to the market, many consumers became free riders as the home DVD burners and the duplication and distribution of movies became an easier and cheaper way to consume movies rather than buying the movies as DVD directly from the licensed stores. Not only duplicating DVDS on one's home computer, illegal downloading made it difficult for movie producers to make revenue. The case of Kino.to made it clear that there is a demand for illegal movie streaming consumption, but copyright law did not allow the distribution of content to such a wide audience (Prozess Gegen Betreiber Von Kino.to Startet, 2019).

Later, with the introduction of streaming services, this market was stabilised as subscription models offered solutions to a disrupted market that, in its outcome, stabilised the market. In that sense, the focus of the entrepreneur is strictly on profit maximisation. The entrepreneur to Kirzner is an opportunity seeker, who focuses on profit maximisation by buying cheap and selling the product at a high profit. Kirzner, in this case, refers to the term arbitrage as he describes the ability of an entrepreneur to identify price discrepancies and, in a outcome, captures the profit opportunity that arises from price gaps.

Furthermore, he views the entrepreneur also as an opportunity seeker, as they demonstrate a certain alertness to adverse information. The circumstances of adverse information open the door to identifying the momentum in which information that the entrepreneur receives, displays to the actor the market inefficiencies that, in the outcome, lead to a balanced allocation of resources.  

Baumol (1990) has two views on the role of an entrepreneur, one looks at the productive and one at the unproductive entrepreneur. He agrees with the role of a productive entrepreneur who introduces new products or production methods that, in their outcome, create welfare, but also looks at the unproductive entrepreneur who solely creates without any benefit for the market as a whole. Examples of unproductive entrepreneurs can be, to some extent, bohemian artists who create art for art's sake without introducing new tools for the economy as a whole. Further, the example of the operator of the website Kino.to displays how the entrepreneur did not create welfare and is therefore a rather unproductive entrepreneur.

Conclusion

This essay discusses the various perspectives of the role of an entrepreneur in relation to Schumpeter’s perspective. It illustrates the contribution of Schumpeter in placing the entrepreneur as an endogenous driver for change in the economy. They are essential for innovation and the introduction of new products and production methods that, in their outcome, generate welfare.

When looking at the examples of technological innovations in the case of digital photography, it demonstrates that the entrepreneur has a need to adapt to market changes and demonstrate alertness to introduce new technologies and production processes.

It can be argued that the entrepreneurs are economic drivers that in overall, operate differently in terms of their motivation, circumstances and the outcome that entrepreneurs bring to the economy as a whole. Taking Schumpeter’s view into account, it makes it more essential to encourage policymakers and educational institutions to foster entrepreneurship growth to stay competitive in a market and drive innovation for society as a whole.