Reference no: EM133066369

In Praise of Entrepreneurs

Mainstream neoclassical economics assumes that economic agents, with perfect knowledge and perfect foresight, 'maximize utility', i.e. they choose the least expensive means to satisfy their preferences. Their fully rational decisions lead to actions that rapidly converge to an economic equilibrium. Prices and quantities 'adjust themselves' until supply meets demand. Consequently, economic profits and losses must be non-existent or at least very short-lived. 

Yet the equilibrium approach does not explain how change can occur. It presupposes that agents' expectations are always fulfilled and their plans are successfully carried out, so they never find themselves in a situation in which they have to change their beliefs or actions. It describes an end state, in which all equilibrating adjustments have occurred and entrepreneurial activity has ended. General equilibrium analysis assumes that all profit opportunities have already been identified and eliminated. Instead of understanding competition as a process in which participants in a market struggle to beat each other, it describes a state of affairs in which any such struggle is both unnecessary and inconceivable.

This static view of the economy does not leave any space for real human beings to act, to make choices, or to use their imagination. It does not contain a role for the entrepreneur, or for profit and loss. In other words, equilibrium economics simply assumes away the most difficult - and interesting - problems in a commercial society: imperfect information, uncertainty, change, learning, discovery and conflict. This may be because they are all a result of disequilibrium situations. 

The 'Austrian School' of economics, on the contrary, regards people as sources of never-ending change, inquisitiveness, alertness, and creativity. They believe in the existence of 'radical ignorance'. Market exchanges may not take place because producers are unaware of consumers' wants or of the possibility of satisfying them. Real markets are not stating of perfect knowledge. They are full of undiscovered but profitable 'facts'. The ignorance of economic agents leads to disequilibrium prices. These provide profit opportunities that attract the attention of alert entrepreneurs, stimulating them to discover previously unconsidered alternatives.

Entrepreneurship consists of alertness to instances where the presence of radical ignorance prevents resources from being used in the best way. The entrepreneur discovers a profitable way of satisfying needs. He or she perceives an opportunity to serve the market better than it is currently being served. Such opportunities are not automatically exploited when the expected price of a product is higher than the market prices of production: they first have to be noticed or discovered. 

Thus, according to this logic, profit does not come from land, labor, capital, or the technological knowledge of how to turn inputs into outputs, but from mental alertness. Entrepreneurial knowledge consists of the awareness that it is profitable to produce a product, rather than knowledge of how to produce it. Like management, technical knowledge is part of the labor input. The entrepreneur sees the possibility of new products, or of new technologies, production processes, forms of organization, marketing techniques and distribution methods. Many of the best-known entrepreneurs are more interested in - and better at - starting companies than running them. They hire experienced people to do this and move on to a new idea. For example, the British-based Greek entrepreneur Stelios Haji-loannou founded the low-cost airline easy Jet in 1995, the chain of internet cafes easy lnternetf'afe in 1999, the low-cost car-hire company easy Car in 2000, and two further companies in 2001.

Questions

1. Answer the following questions based on the text above.
2. What do you know about neoclassical economics? 
3. What is equilibrium economics?
4. Why some people believe in the existence of radical ignorance?
5. In your opinion, what are the criteria of good entrepreneur? According to the text, decide whether the statements below are TRUE or FALSE
6. According to the general equilibrium model, it is impossible for large quantities of goods to remain unsold for any length of time.
7. According to the general equilibrium model, long-term unemployment cannot exist. 
8. According to the general equilibrium model, businesses cannot lose money.
9. General equilibrium theory disregards the role of aggressive competition in business.
10. General equilibrium theory accepts the existence of long-term disequilibria.
11. The Austrian School assumes that all economic agents are ignorant.
12. Entrepreneurs can make a profit by finding new ways to serve customers. 
13. Entrepreneurship is more a matter of knowing what can be done rather than knowing exactly how to do it. 
14. Knowledge is more important than the physical factors of production, namely land, labour and capital. 
15. Entrepreneurs are not very good at managing companies. 

Match the right column with the left column