Role of Entrepreneurs in the Economy
Entrepreneurs are key movers of the economy as creators of firms, effectively setting the economy in motion. This is because firms account for nearly all economic activities, except those undertaken by the government, including pricing, labor, innovation, raising financial capital, marketing services and goods, and contraction (Ellison, 2002). In a state of equilibrium, firms are in a position to create organizations and markets. Therefore, the activities of entrepreneurs determine economic equilibrium in its varied states, including the nature of transactions and the allocation of goods. Various theories have emerged to explain the role of entrepreneurs in the economy. This essay is concerned with the theories of Frank Knight and Israel Kirzner.
Knight's Theory of Entrepreneurs
Entrepreneurs play a key role in Knight's discussion of uncertainty, profit, and risk. In drawing a distinction between uncertainty and risk, Knight opined that risk arises when we are unsure of the outcomes but can forecast them with a certain level of probability. In contrast, uncertainty occurs when we cannot compute the probability of outcomes. Knight defined true uncertainty as a situation in which the future is “unknowable” concerning the non-existent distribution of results and situations that cannot be categorized. Knight views uncertainty as a determinant factor in entrepreneurial decision-making due to its association with the exercise of opinion or judgment about the future of the firm. Entrepreneurs have expectations of desired outcomes as opposed to scientific knowledge within narrow limits. In deciding to invest, entrepreneurs rely on belief or opinion in the likelihood of realizing future gains.
Faced with uncertainty, "the primary problem or function is deciding what to do and how to do it" (p. 268; cited by Mangel, 1984, p. 3). Knight argues that this basic function or problem defines the entrepreneurial role, namely, deciding how to achieve various objectives and determining which objectives ought to be pursued. In other words, Knight views the entrepreneur as an individual who is ready to assume the costs of uncertainty. He further maintained that entrepreneurs assume risks due to traits such as being venturesome and confident. This enables them to employ the timid and doubtful, guaranteeing them a defined income by helping the firm achieve the actual outcome. In other words, Knight saw a key role of the entrepreneur as making "judgments about the uncertain future" (Ricketts, 1994, p. 57). The entrepreneur is then rewarded for his decision to assume uncertain risk in the form of profit for the firm.
Kirzner's Theory of Entrepreneurs
Elsewhere, Kirzner introduced the concept of "entrepreneurial discovery" or "alertness" based on the argument that imperfect information entails an aspect that does not fit well with the concept of "sheer" ignorance as popularized by neoclassical models. According to Kirzner (1997), entrepreneurial “alertness” or “entrepreneurial discovery” is vital in entrepreneurship as it enhances mutual awareness among market participants, thus pushing back the limits of sheer ignorance. Consequently, input and output qualities and quantities, as well as prices, move toward desired equilibrium values.
This alertness, according to Kirzner, is the bedrock of entrepreneurship, particularly regarding unnoticed opportunities. Kirzner describes arbitrage as the paradigmatic nature of entrepreneurship. He views the entrepreneur as a highly innovative and creative individual who also possesses significant managerial capabilities (Acs and Audretsch, 2010). This enables entrepreneurs to identify and exploit various situations to buy at low prices and sell at high prices, thereby realizing profits. Such alertness for profit opportunities is, according to Kirzner, a demonstration of implied arbitrage activities. His arbitrage theory of profit holds that profit opportunities in the market arise due to the state of disequilibrium that exists in such a market.
In the case of different prices for the same goods, individuals are inclined to purchase goods from the market with the cheaper price and thereafter sell these in the market offering the higher price, thus engaging in arbitrage. Consequently, there will be an increase in demand for goods offered at a cheaper price while there is also a resultant increase in the supply of goods in the market with the higher price. The rising demand will trigger an increase in the market price of goods at the cheaper price market and a decrease in the price of goods supplied at the higher price market. Arbitrage ends only when prices in both markets are similar.
Conclusion
Entrepreneurs are key movers of the economy. They do so by taking risks in unknown situations. The ability of an entrepreneur to assume the cost of uncertainty enables them to realize firm profits. Knight contends that the ability of entrepreneurs to make judgments even when faced with risks is a crucial aspect of their entrepreneurial spirit. Kirzner, on the other hand, views an entrepreneur's alertness as the basis of entrepreneurship. He describes the entrepreneur's implied arbitrage activities as crucial in enabling individuals to exploit situations to purchase goods at a cheaper price and sell them at a profit, demonstrating their creativity and innovativeness.
References :
Acs, Z.J., and Audretsch, D.B. (2010). *Handbook of Entrepreneurship Research: An Interdisciplinary Survey and Introduction.* New York: Springer Science & Business Media.
Ellison, A.P. (2002). *Entrepreneurs and the Transformation of the Global Economy.* London: Edward Elgar Publishing.
Kirzner, I.M. (1997). Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach. *Journal of Economic Literature,* 35(1), 60-85
Mengel, 1984. *Decision and Control in Uncertain Resource Systems.* New York: Academic Press
Ricketts, M.J. (1994). *The Economics of Business Enterprise: An Introduction to Economic Organisation and the Theory of the Firm.* Sussex: Harvester Wheatsheaf.
