The Importance of Entrepreneurship

Entrepreneurship is more important to us than we think. Most of us realise that land, labour and capital are needed in order to produce the goods and services that sustain and improve our lives. But entrepreneurship is the unseen factor of production. Land, labour and capital produce nothing until they are actively put to work. They need to be directed and focused by some human mind – an entrepreneurial mind that realises how they can be used to create value.

Entrepreneurship is crucial to us all as the driver of economic growth and prosperity. It motivates, directs and organises the other factors of production into the creation of value. Yet mainstream economists rarely appreciate this important catalytic function. In the mainstream economics textbooks, for example, the ‘firm’ is an entirely abstract idea. There are no explanations of why firms exist, how they are born, how different and diverse they are (apart perhaps from size), how they change and develop, what they mean to their founders, workers and customers – or even why they fail. In other words, human beings and entrepreneurial minds are entirely painted out of the picture. But human beings in general and entrepreneurs in particular are the key to understanding all economic life. It is they who motivate action, commerce and trade. Land, capital and even labour produce nothing of value until they are directed by some human mind to some purposive end. Sand is just sand, until human beings make it into concrete or computer chips; capital goods are just idle equipment until put to work on producing things of value; digging ditches is wasted effort unless it helps us drain or irrigate farmland or provide the footings for buildings or serve some other human purpose. Before we can understand economics, we must understand human motives and interactions.

Sadly, it is much easier for people to comprehend a simple ‘mechanical’ model of the economy than such richly complex human explanations. The easy textbook concepts such as ‘perfect markets’ – an imaginary world of identical products and identical buyers and sellers for whom trade is free and costless – are simpler to grasp than the swirling change and diversity of real markets. But those concepts are sterile and unreal.

Even more unfortunately, the ‘perfect markets’ idea suggests that wherever we find real markets to be ‘imperfect’, we (or specifically our government policymakers) should immediately intervene and try to bring them back to ‘perfection’. But markets are not and never can be ‘perfect’. If our economic life were perfect, nobody would have any reason to innovate or supply or sell or buy any product, because they could never improve things. No market would be needed; no market would exist at all. In reality, it is the very imperfections in economic life that cause people to take productive action and to trade things between each other. And tomorrow, circumstances will be different again. Markets respond to those changing circumstances. They are dynamic – a perpetual flux of changing demand for and supply of countless goods and services. That flux itself exposes other surpluses, shortages and opportunities just like the whirlpools and eddies that open up in a fast-flowing mountain stream. It is entrepreneurs who take action to fill those eddies with new processes and products. To do so, they innovate. And by innovating, they bring people new goods, services and choices that they might not even have imagined just a short time before.

Entrepreneurs do all this, even without the ‘perfect information’ that the textbooks imagine. They cannot know in advance which processes will prove practicable and profitable, nor what products the public might want, of what quality and at what price. Their task is all guesswork – albeit, in the case of many successful entrepreneurs, inspired and thoughtful guesswork. Entrepreneurs take risks, make investment decisions, and commit time, effort, capital and other resources into their project, while facing a fog of uncertainty about what the future will bring and what the needs and choices of future consumers will be. Who would have dreamed, for example, that nearly half the world’s population would even want a smartphone, never mind buy one? What producer of encyclopaedias, atlases, reference books, diaries, newspapers, calculating machines, cameras, music players or department stores would have predicted that their businesses would be devastated by some pocket gadget? But taking risks against such a background of uncertainty is, according to some theorists, the very definition of entrepreneurialism.