An Economic Theory, Second Edition
Chapter 1: The Significance of the Entrepreneur
1. The signiﬁcance of the entrepreneur 1.1 A GAP IN ECONOMIC THEORY The stimulus for writing the ﬁrst edition of this book was a perception that, at the time, there was no established economic theory of the entrepreneur. The subject area had been surrendered by economists to sociologists, psychologists and political scientists. Indeed, it seemed that all the social sciences, except economics, had a theory of the entrepreneur. There were two main reasons why there was no economic theory of the entrepreneur. These were connected with the limitations of the two main schools of economic thought at the time. First, the neoclassical school of economics made very extreme assumptions about access to information. Simple neoclassical models assume that everyone has free access to all the information they require for taking decisions. This assumption reduces decision making to the mechanical application of mathematical rules for optimization. It trivializes decision making, and makes it impossible to analyse the role of entrepreneurs in taking decisions of a particular kind. Secondly, the Austrian school of economics, which takes the entrepreneur more seriously, is committed to extreme subjectivism – a philosophical standpoint which makes a predictive theory of the entrepreneur impossible. Austrians argue that anyone who has the sort of information necessary to predict the behaviour of entrepreneurs has a strong incentive to stop theorizing and become an entrepreneur himself. They suggest, furthermore, that by entering the system himself, the theorist might well generate a behavioural response which would falsify his own prediction. This argument,...
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