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How Entrepreneurs Make an Economy Grow

Peter G. Klein Mises Institute and University of Missouri November 2013

What is entrepreneurship?

Entrepreneurship is more than small business

Common usage: entrepreneurship as an outcome or phenomenon


An occupation (self-employment) A type of firm or industry (new firms, small firms, high-growth firms)

Alternative perspective: entrepreneurship as a way of thinking or acting


Creativity, boldness, imagination Alertness to opportunities (Israel Kirzner) Innovation (Joseph Schumpeter) Judgment under uncertainty (Frank Knight, Ludwig von Mises, Peter Klein)

Mises: The term entrepreneur as used by [economic] theory means: acting man exclusively seen from the aspect of the uncertainty inherent in every action. [I]t is impossible to eliminate the entrepreneur from the picture of a market economy. The various complementary factors of production cannot come together spontaneously. They need to be combined by the purposive efforts of men aiming at certain ends and motivated by the urge to improve their state of satisfaction. In eliminating the entrepreneur one eliminates the driving force of the whole market system.

Institutions, entrepreneurship, and growth

Theories of economic growth


Neoclassical economics: emphasis on capital accumulation and technical know-how New growth theory: role of knowledge, endogenous learning, and increasing returns New institutional economics: focus on rule of law, stable property rights, uniform commercial practices, social networks

OK, good institutions create opportunities for investment, learning, economic growth. But are these opportunities automatically recognized and exploited?

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Entrepreneurship and growth

Entrepreneurship as judgment, responsibility, initiative (decision-making under uncertainty)


The driving force of the market economy (Mises) Hard to manipulate: main policy implication is provide secure property rights and free markets, then get out of the way Thought to be correlated with sustainable economic development Evidence is unclear, however (e.g., microcredit and microenterprise) Some people dont want to be entrepreneurs!

Note on self-employment and small firms


Lessons for policy

Dont be a central planner.


Creating the next Silicon Valley Picking technology winners Deciding how many people should be self-employed, and how many should be employees of large enterprise

Foster an environment that allows people to choose occupations and business activities, and encourages entrepreneurs to exercise good judgment.

Financial- and labor-market freedom Sound money: dont create asset bubbles. Dont stimulate, dont bail out failing enterprises. Protect private property, the rule of law, free and open competition.