An Economic Theory, Second Edition
Chapter 14: Alternative Theories of the Entrepreneur
14.1 INTRODUCTION This chapter critically reviews the leading economic theories of the entrepreneur: the X-efﬁciency theory of Leibenstein, the market process theory of Hayek and Kirzner, the risk-bearing theory of Knight and the innovation theory of Schumpeter. It also examines the relevance to entrepreneurship of the theories of the ﬁrm developed by Andrews and Penrose. It is suggested that the theory presented above is in many respects a synthesis and extension of these theories. Although there are a number of differences between the theories on speciﬁc aspects of entrepreneurship, on the whole their similarities are more signiﬁcant than their differences. Each theory is valuable because it emphasizes some particular aspect of entrepreneurship. The theories are essentially complementary, both to each other and to the theory presented in this book. 14.2 LEIBENSTEIN’S X-EFFICIENCY THEORY Leibenstein’s X-efﬁciency theory, originally developed for other purposes, has been applied by him to analyse the role of the entrepreneur. Basically, Xefﬁciency is the degree of inefﬁciency in the use of resources within the ﬁrm: it measures the extent to which the ﬁrm fails to realize its productive potential. For a given set of inputs, productive potential is identiﬁed with a point on the neoclassical production frontier. X-efﬁciency arises either because the ﬁrm’s resources are used in the wrong way, or because they are wasted – that is, they are not used at all. X-efﬁciency is more than a concept, however; it is a new paradigm which, according to...
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