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Entrepreneurs Are the Key To Economic Development

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Questions of economic development have long been long held a prominent position in economics. How did the most advanced economies get to where they are? What can less-advanced economies do to catch up with the leading pack?

After World War II, a whole sub-field of economics emerged to focus on these questions. Today, we call it development economics. Instead of simply explaining historical trends, this field’s main focus lies on discovering what would help less-developed countries achieve more economic growth and join the predominantly Western countries at the top of the economic ladder.

Compared to mainstream economics, development economics is quite a heterodox discipline in which many theoretical approaches are pursued. This can be both a curse and a blessing. On the one hand, it means that development economics is a field where “every economic fallacy ever refuted is still alive and well” (to paraphrase economist GP Manish), but it also means that there is room for free-market approaches and different methodologies to make themselves heard.

As such, it is a field in which Austrian economists might fruitfully engage. To this author’s knowledge, however, such Austrian engagement has so far not been wide-spread. One reason for this might be that, ultimately, Austrian economics often boils down to “liberate markets” and “protect private property rights.” These are suggestions that are superficially similar to the neoliberal approach that has been popular since the 1980s and that have consequently been tarnished by neoliberalism’s mixed success in promoting economic development.

How, then, could Austrian economics engage on a more in-depth level with development economics? One course of action would be to refute, yet again, the fallacies at the heart of the theories of the latest generation of protectionists and interventionists.

The Austrians could point to Ludwig von Mises’ elaboration of the economic calculation problem, F.A. Hayek’s tracts on knowledge, and support market-friendly development economists by enumerating the benefits of free markets and free trade. What I would suggest, however, is to move one step further and build a framework for understanding economic development by focusing on a unique aspect of Austrian economics: a cutting-edge theory of entrepreneurship.

The Role of the Entrepreneur

The entrepreneur has all but disappeared from mainstream economic theories, and only makes rare appearances in contemporary literature on economic development. Instead, one usually encounters neoclassical market analysis in which an idealized “economic man” reacts mechanically to universal incentives. Or, the focus is on the state which takes the lead in combatting “market failures” or kick-starting economic development. In Austrian theory, however, the market is not a machine, but the outcome of purposeful human action. One of the most important actors is the entrepreneur, who is, in Mises’ words, the “driving force of the whole market system” and brings together the complementary factors of production, guided by profit and loss.

While this vision of the entrepreneur is perhaps somewhat more mundane than Schumpeter’s notion of the “creative destroyer,” it is no less heroic. In contrast to contemporary development economics, early pioneers in the field such as Albert O. Hirschman and Arthur Lewis recognised the important role of the entrepreneur in economic development. Hirschman, for example, argued against the (then and now) prevalent notion that less-developed countries face a lack of specific, objective "prerequisites for growth"." Rather, he diagnosed a lack of entrepreneurial skills and experience which would allow for a more productive combination of existing productive factors and further economic growth.

Besides working to combine different factors of production, entrepreneurial activity plays another crucial role. It is the foundation for competition in the market place, which, in turn, is an essential part of the “discovery process” Hayek regards as an important element of economic development. As he notes, in less-developed countries, “the major problem is still to find out what kinds of material and human productive forces are present.” Discovering those forces and combining them profitably can provide a pathway for those countries to shape their own prosperous future. It is a necessary process which cannot easily be replaced by central planners adapting a blueprint for development based on what some advanced country has taken in the past.

If one looks at countries across the globe and throughout history, one can find a staggering amount of entrepreneurial spirit and activity, which are not limited to the advanced economies and their respective industrialisation processes. Late nineteenth-century Russia, too, saw a rapid emergence of entrepreneurs after the emancipation of the serfs. In 1980s China, after economic reforms were implemented, entrepreneurs emerged at a pace which Deng Xiaoping likened to “a strange army appearing out of nowhere.” And in contemporary developing countries, there exist sprawling informal economies, underlining the fact that, in the words of Hernando de Soto, “markets are an ancient and universal tradition.”

Getting Government Out of the Way

If there is no general lack of entrepreneurial spirit and entrepreneurial activity, what is holding back the spread of economic development? As Mises notes, entrepreneurs are driven by profit and loss and base their judgements on economic calculation. Consequently, cronyism and patronage, as well as inflationary policies — which are widespread in the developing world — distort the signals and tools entrepreneurs depend on to make their judgements. Moreover, a lack of secure property rights increases the investment risk of entrepreneurs, who can never be sure whether their profits might be expropriated. This is compounded by obscure and, at times, arbitrarily enforced regulations, and serves to drive entrepreneurs into the informal economy, limiting the scope of their activities. Lastly, successful entrepreneurs do not only require spirit, but also skills, many of which can only be acquired through practice and experience.

Thus, to embark upon the path of economic growth, developing countries need to free their entrepreneurs and provide a framework to engage in their activities. They should secure their citizens property rights and free their markets from artificial barriers. Moreover, if both less-developed and advanced economies open up their markets to the free flow of goods, capital, and labour, they can increase competition and the international exchange of entrepreneurial skills and experience, which will allow developing countries to see their own classes of successful entrepreneurs emerge and further prosperity around the globe


Sascha Klocke is a PhD candidate in Economic History at Lund University in Sweden and is a member of the Austrian Economics Meeting Europe. Sascha hold a MA in African Studies from Copenhagen University and a BS in economics from Goethe University in Frankfurt, and he was a 2016 Mises Institute Fellow.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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