66 Humberto Baretto's work,
The Entreprenettr in Microeconomic Theory; Disappearance and Explanation,
London: Routledge, 1 9 89, reviews the roles played by the entrepreneur from Richard Cantillon onwards, using a selected group of economists. He charts the disappearance of the entrepreneur from mainstream economic theory from the 1 930s onwards. In explaining why, Baretto claims that the entrepreneur disappeared in neoclassical economics, with the rise in importance of the theory of the firm. Rather than occupy a unique place with distinct qualities, the entrepreneur was considered another element in a line of productive inputs, and as such, was paid a wage according to the laws of supply and demand (see pp.47- 1 00). In addition, entrepreneurial activity did not accord with the assumptions behind the theory of the firm (see pp.1 0 1 - 1 1 7).or combinatio n seems to offer the best route to the desired end. The questions how far these deliberate forms of association are likely to destroy the freedom in which they had their o rigin and how far they are likely to be conducive to the public weal, will occupy a large share of our attention towards the end o f this treatise.69
Describing the new economic order, Marshall fastened on the entrepreneur. When Marshall considered the organisation and division of labour, he observed established fIrms as well as workingmen rising through the ranks to head their own enterprises. He observed large capital-rich fIrms with advantages over small flrms, and conversely, small fu:ms able to exploit advantages over larger concernsJIl Grappling with these new realities, Marshall used a number of terms to describe the person in charge of a business: manufacturer, producer, employer, the head of a business, management, adventurer, and undertaker. Up to Book IV he used these words synonymously,71 as if struggling to fInd the correct label.
Later in his discussion, the undertaker emerged as a uruque econotnlc class. Marshall saw some undertakers as highly speculative, for example, those who dealt on the stock exchange, while others were involved in lines of business that had a higher administrative component, demanding less speculative activity. The latter included property developers, the woollen trade, the furniture industry and the textile trade, who made use of outworkers instead of investing in factories. Marshall saw risk as a common element to all their endeavours.72
But in the greater part of the business or the modern world the task of so directing production that a given effort may be most effective in supplying human wants has to be broken up and given into the hands o f a specialized body of employers, or to use a more general term, of business men. They 'adventure' or 'undertake' its risks; they bring together the capital and the labour required for the work; they arrange or 'engineer' its general plan, and superintend its minor details. Loo king at business men from one point o f view we may regard them as a highly skilled industrial grade, from another as middlemen intervening between the manual worker and the consumer.
There are some kinds of businessmen that undertake great risks, and exercise a large influence over the welfare both of the producers and of the consumers o f the wares in which they deal, but who are not to any considerable extent direct employers o f labour.
(,x See for example, ibid., p.25 1 . 6 9 ibid., pp.9-10.
70 ibid., p.284-290.
71 ibid., p.620 as an example of using management, undertaker and employer interchangeably 72 ibid., pp.294-5.
FROM UNDERTAKER TO ENTREPRENEUR
The extreme type of these is the dealer on the stock exchange or the produce markets, whose daily purchases and sales are of vast climensions, and who yet has neither factory nor warehouse, but at most an office with a few clerks in it. The good and the evil effects of the action of speculators such as these are however very complex; and we may give out attention at present to those forms of business in which administration counts for most and the subtier forms of speculation for least. Let us tilen take some illustrations of the more common types of business, and watch tile relations in which the undertaking of risks stands to tile rest of tile work of tile business man.73
Marshall's unique contribution to economic thought regarding the entrepreneur was his descriptions of the routes various undertakers took to rise above their social or economic class. 74 He had observed men rise without possessing capital. Some had this through using their skills, talents, or networks; alternatively, s
�
dcombined their talents entering into partnerships,?5 Such success did not necessarily come quickly. Sometimes, claimed Marshall, it could take two generations. Indeed, he was relieved to see less of the meteoric rises that had occurred at the start of the
nineteenth century, of which he claimed, 'The workmen who at the beginning of the last century rose in such large numbers to become employers were seldom fit for posts of command: they were too often harsh and tyrannical, they lost their self-control, and were neither truly noble nor truly happy .. . '76 The following excerpt described the ability of the working classes to become undertakers,?7
About three-fourtils of the whole population of England belong to the wage-earning classes; and at all events when they are well fed, properly housed and educated, they have their fair share of tilat nervous strengtll which is the raw material of business ability. Without going out of tileir way tiley are all consciously or unconsciously competitors for posts of business command. The ordinary workman if he shows ability generally becomes a foreman, from that he may rise to be a manager, and to be taken into partnership with his employer. Or having saved a little of his own he may start one of iliose small shops which still can hold their own in a working man's quarter, stock it chiefly on credit, and let his wife attend to it by day, while he gives his evenings to it. In
73 ibid., p.293.
74 The above quote showed the influence of Carl Menger's writings in Marshall's work. The first part of this quote is similar to the functions of tile entrepreneur Menger described, in addition, Marshall also described goods of the first order and used Menger's framework for value. For goods of the first and second order see, Marshall, Pn'lIciples, p.64. For the functions of the entrepreneur see p. 284, where he discusses tile activities of tile heads of large and small firms. Also see p.292.
75 ibid., p.306. See also p.285 for anotiler example of a new man working his way up against larger competition .
these or in other ways he may increase his capital till he can start a small workshop or factory. Once having made a good beginning he will fInd the banks eager to give him generous credit. He must have time; and since he is not likely to set in business till after middle age he must have a long as well as a strong life; but if he has this and has also 'patience, genius and good fortune' he is pretty sure to command a goodly capital before he dies 7H
Marshall used the metaphor of a wheel to describe the modern industrial world. It was a world with private employers and managers of joint stock companies in the hub, many of whom had only small capital, and towards them radiated the interests of labour and the owners of capital. The interests of the two parties were intertwined. The companies required capital and labour, the owners of capital required outlets for investment; labour required places to sell its services. The reciprocal interests of each party held the economic world together. But that was not a complete picture and in his side notes to the text Marshall added: 'though the role of the undertaker is of growing importance. '79
. In the modern economy, Marshall observed a natural attraction of capital towards the man who proved he could usefully command it. Accompanying this trend was an increase in fmancial providers: banks, cooperative societies, supplier credit, etc.80 He saw some flrms rising quickly to prominence only to be outdone by younger flrms with even newer methods, a phenomenon that Schumpeter would later refer to as creative destruction. SI Marshall expanded this theme later in regard to the economic law of substitution, which he also ascribed to the entrepreneur.
'It is through their conscious agency,' he stated, 'that the principle of substitution chiefly works in balancing one factor of production against another; with regard to them it has no other agency than the indirect influence of their own competition.'82 Marshall saw that this had several effects. Firstly, it led some to succumb who may have done excellent work, while others rose to almost monopoly status. He also argued that it ensured that there was a constant increase in the forces that broke up monopolies, thereby causing an opening for men of small capital to start new businesses.
77 1'1.150 interesting is his description of the gradual rise of a working carpenter, ibid., pp.600-603. 78 ibid., p.309.
79 ibid., p.534.
81! ibid., p.308-312. 81 ibid., p.287.
FROM UNDERTAKER TO ENTREPRENEUR
Overall, Marshall provided an extensive treatment of d'le entrepreneur. He concluded iliat ilie undertaker, like d'le skilled artisan, provided an indispensable service to society. Moreover, if society were to engineer dUs service itself, it would come at a higher cost.83 Even iliough he used a variety of terms to describe iliose at ilie head of a business, in ilie end, Marshall resolved iliat ilie undertaker was in a class of his own.
There is no breach of continuity as we ascend from the unskilled labourer to the skilled, thence to the foreman, to dle head of a department, to dle general manager of a large business paid pardy by a share of me profits, to me junior partner, and lasdy to me head partner of a large private business: and in a joint-stock company dlere is even some what of an anti-clinlax when we pass from me directors to me ordinary shareholders, who undertake dle chief ultimate risks of the business. Neverdle1ess business undertakers are
to a certain extent a class apart 84
PURE PROF I T FRO M ENTREPRE NEUR I AL J U D GE MENT
The American, Frank Knight, submitted his doctoral iliesis in
1 9 1 6;
it was subsequendy rewritten and published in1 921
as ilie book,Risk, Uncertainry and Profit.8s
Knight's main contribution was towards'a ilieory of profit. His work, as he stated, was 'pure ilieory,' iliough he hoped it would make a special contribution towards ilie fuller understanding of the role of the entrepreneur as the 'central figure' of the economic system. At lengili, Knight described the assumptions behind d1e conditions of supply and demand and d'le principles of exchange. He constructed an 'imaginary society' that was rational, where labour was perfecdy mobile, where there was perfect competition, perfect knowledge, no prejudice, fraud, or deceit, and no irregular fluctuations or progressive change.86In doing dUs Knight was not indifferent to econonuc realities. He stated: 'Historically, of course, ilie other iliings have been so far from equal-especially the demand for capital has increased so rapidly through the increase of population and opening-up of new natural resources-that the interest rate shows an astonishing
83 ibid., p.664. 84 ibid., p.663.
8S Knight, Frank, H., Risk, Ullcertainry alld Profit, Boston: Houghton Nlifflin Company, 1 921. Knight was me first of the economists surveyed here to use dle term entrepreneur exclusively, in preference to undertaker. Very seldom, he uses the term enterpriser, though mosdy in deference to Hawley; on one occasion he uses dle word adventurer, though wim evidendy no particular inference.
constancy.'S7 Rather, Knight's purpose was to deepen a theoretical understanding of profit, and with it, the entrepreneur.
In defining the entrepreneur, Knight was influenced by the earlier work of economist Frederick B. Hawley. Hawley had published several papers dealing with profit, risk, and entrepreneurship between 1892 and 1902; he was vehement in his defence that the entrepreneur was unique economic class different in function from the manager or capitalist.8s As Hawley saw it, the entrepreneur must by definition bear proprietorship in an enterprise otherwise the residual profits, which were his reward for assuming risk, would not accrue to him. As Hawley stated:
Now why is it that this fact of the ownership of the entrepreneur is so significant? If bodl selling price and cost, inclusive of his own wages of management, were absolutely predetermined and certainly known to every body else as well as to himself, would iliere be any such iliings at all as profit? Manifesdy not, for dlen the cost and selling price would always equal each odler, unless ilie producer enjoyed some personal or monopolistic advantage iliat kept others from competing with him . . . The element of "profit," however; or of its complement, "loss," is attendant upon coordination when coordination happens to be an incident of ownership; and it is attendant upon ownership only so long as eiilier cost or selling price in undetermined, so long as ownership involves risk . . . . It is, ilierefore only dle "enterpriser
per se "
who is entided to dle undetermined residue or profit of dle transaction. 89Knight affirmed Hawley's emphasis in