Resurrecting the ghostly entrepreneur

The longstanding debate on the exact theoretical role and nature of the entrepreneur has traditionally featured the works of three great economists, Joseph Schumpeter, Frank Knight and Israel Kirzner. Each had a somewhat different take on this question, but each of them shared the common assumption that the entrepreneurial function exists as an independent and objective input into the productive order. However, this assumption was vigorously called into question in a little noticed but very important piece by Harold Demsetz in 1983. Demsetz may be said to have “unbundled” the other writers entrepreneurial packages and could find substantially nothing therein that was not already accounted for in the standard neoclassical market model, with investors being rewarded for taking risk under conditions of uncertainty. He comes very close to denying that there even exists a separate entrepreneurial function in the production process. This paper then proceeds to argue that Demsetz has overstated his case and that there is a distinctive aspect to entrepreneurship that has not heretofore been noted in the literature. That is the idea of “the idea”, the original cognitive formulation of a plan, a new business, an invention, a reorganization or any other new concept. The problem in understanding the role of the entrepreneur is one of intellectual property, since, at the moment of idea formulation, there is no practical way to give property right protection to an abstract idea. A comparison to the patent and the copyright system elucidates this point. The only practicable method of protecting the inherent value of a new non patentable or non-copyrightable idea is by joining it with another input which can receive property right protection, such as any of the traditional production inputs. This explains the common confounding between entrepreneurship and starting a new firm. Because of the team production nature of the venture, it is impossible to measure the marginal contribution of each of the constituent elements, thus explaining why a lot of entrepreneurial ventures are “one-man” firms. The matter of compensating for entrepreneurial services in publicly held corporations is also considered.