chap 3

1. What do entrepreneurs do?
Ch no.3

2. • Woolworths, the pyramids and the Internet have one thing in
common: they started out as nothing but an idea.
Guy Claxton (2001)

4. Sir Richard Branson
• Student (Magazine)------1966
• 1968

5. Imagination Persistence Persuading Creative

6. • business opportunity
• Virgin Mail Order Records came into existence in 1970
• Adaptability
• Negotiating skills
• reputation.
• Simon Draper’s ---- of the company called Vrigin Music

7. • Increasing the number of record shops was also on the agenda
throughout the tail end of 1971 and all of 1972.
• By the end of 1972 14 shops
• Branson puts it: ‘Our gamble that we could promote it ourselves
made us our first fortune.
• By the end of 1973 Virgin consisted of three mutually compatible
businesses: a recording studio, a record label and a retail network.

8. Lessons from the Richard Branson story
• take risks
• make decisions about entering markets
• exercise foresight, exercise creativity
• employ other people
• persuade
• sell, make things happen
• create companies
• perceive business opportunities
• manage the workforce.

9. Six perspectives on the economics of
the entrepreneur
What is that entrepreneurs do that distinguishes them from the other
economic actors?
• The mainstream perspective on the entrepreneur
• The entrepreneur and the inefficient firm
• The Austrian perspective on the entrepreneur
• Schumpeter on the entrepreneur as innovator
• The entrepreneur as a specialist in co-ordination
• Empirical analysis of the entrepreneur

10. The mainstream perspective on the
entrepreneur
• Mainstream—fourth factor of production----resource of infinite supply----scarce
resources.
• In the mainstream theory entrepreneurs are the founders, the owners and the
managers of the firm all rolled into one and are responsible for organizing the
other factors of production so that the firm can produce a good or service to sell
to customers. They reside in a world where economic agents have full
information about:
• the availability of factor inputs;
• the quality of factor inputs;
• the variety of ways in which factor inputs can be combined; and
• buyers’ demand for the firm’s product
A boundedly rational real world entrepreneur

11. • The first is the question of how the business opportunity which led to
the founding of the firm was recognized in the first place?
• Here mainstream economics simply assumes that business
opportunities will be automatically recognized and acted upon.
• The second is how entrepreneurs decide on the best way to organize
and use the productive resources under their control.

12. • Assumption---Two entrepreneurs ----same FOP--- utilize factors in identical
ways---rival firm will be as efficient moreover each firm will be producing at
its efficient level.
• No advice could be offered
• Strategic Management----Competative Advantage over rivals
• In other words, competitive advantage derives from the ownership of
unique physical assets rather than unique intellectual assets such as the
knowledge and the imagination of the entrepreneur.
• One economist who has taken this point seriously is Harvey Leibenstein,
who suggested that firms would not necessarily use resources as efficiently
as the mainstream theory of the firm implies.

13. The entrepreneur and the inefficient firm
• Leibenstein coined the phrase ‘X-inefficiency’ to describe the key
feature of his theory of the inefficient firm.
• X-inefficiency is defined as a state where the firm is underutilizing
its resources for some reason and as a result its costs per unit of
output are higher than they need to be.
• In other words, an X-inefficient firm is not fulfilling its productive
potential. This opens up scope for it to obtain an improvement in its
position, as it were, ‘for free’.

14. • One of the principal reasons why the firm may not be fulfilling its potential is the
nature of labour employment contracts.
• Labour employment contracts are incomplete-----level of effort
• Discretionary variable ----level of effort
• Entrepreneur----managers(labor force)----motivate labor force to produce at its
max. potential------Profit sharing (Branson).
• entrepreneurs have to possess the skill to motivate and inspire effort in others.
• Entrepreneurs should be aware of inefficiencies in rival firms
• 1970 WH Smith and John Menzies were inefficient----Branson was aware of that

15. The Austrian perspective on the entrepreneur
• Awareness of business opportunities is a feature of the entrepreneur that
has been discussed in great detail by a group of non-mainstream
economists who are known collectively as the Austrian school.
• Austrian economists take as their point of departure the notion that
market equilibrium is the end result of the economic process and as such
it is a relatively uninteresting phenomenon.
• The implication of their view is that economists ought to devote most of
their time and energy to developing a deeper understanding of the
disequilibrium processes that generate eventual equilibrium outcomes.

16. • Market is in disequilibrium----active decisions----suppliers and demanders.
• Equilibrium----nether has incentive to change their trading behavior---no profit
oppertunitites.
• Hayek describes the equilibrium state as one where
1. everyone has full information about potential trading opportunities
2. everyone has acted optimally in the light of this information.
• Disequilibrium behaviour is therefore exemplified firstly by the acquisition of useful
knowledge and, secondly, by its communication.
• Example
• For Hayek the disequilibrium market process can usefully be described as a process of
discovery
• Supplier----if asking prices and product quality are appropriate
• Consumer-----Value for money

17. • Kirzner picks up Hayek’s theme and points out that disequilibrium
situations can arise because of interspatial (geographical)
differences between suppliers and demanders.
• Example
• This process of buying cheap and selling on is generally given the
name arbitrage. And for that alertness is the key.-
• Another source of disequilibrium arises because of intertemporal
differences between supply and demand
• In this situation the entrepreneur must necessarily exercise some kind
of foresight

18. • Hayek’s and Kirzner’s ideas that Austrian economics is concerned with
explaining movements towards equilibrium in markets that already
exist as a result of the actions of individuals who are alert to profit
opportunities.
• This view contrasts that of Joseph Schumpeter who constructed an
entire theory of economic development around the contention that
the entrepreneur is a destroyer of equilibrium situations.