Human Action

When men in dealing with the problems of their own actions, and when economic history, descriptive economics, and economic statistics in reporting other people’s actions, employ the terms entrepreneur, capitalist, landowner, worker, and consumer, they speak of ideal types. When economics employs the same terms it speaks of catallactic categories. The entrepreneurs, capitalists, landowners, workers, and consumers of economic theory are not living men as one meets them in the reality of life and history. They are the embodiment of distinct functions in the market operations. The fact that both acting [p. 252] men and historical sciences apply in their reasoning the results of economics and that they construct their ideal types on the basis of and with reference to the categories of praxeological theory, does not modify the radical logical distinction between ideal type and economic category. The economic categories we are concerned with refer to purely integrated functions, the ideal types refer to historical events. Living and acting man by necessity combines various functions. He is never merely a consumer. He is in addition either an entrepreneur, landowner, capitalist, or worker, or a person supported by the intake earned by such people. Moreover, the functions of the entrepreneur, the landowner, the capitalist, and the worker are very often combined in the same persons. History is intent upon classifying men according to the ends they aim at and the means they employ for the attainment of these ends. Economics, exploring the structure of acting in the market society without any regard to the ends people aim at and the means they employ, is intent upon discerning categories and functions. These are two different tasks. The difference can best be demonstrated in discussing the catallactic concept of the entrepreneur.

In the imaginary construction of the evenly rotating economy there is no room left for entrepreneurial activity, because this construction eliminates any change of data that could affect prices. As soon as one abandons this assumption of rigidity of data, one finds that action must needs be affected by every change in the data. As action necessarily is directed toward influencing a future state of affairs, even if sometimes only the immediate future of the next instant, it is affected by every incorrectly anticipated change in the data occurring in the period of time between its beginning and the end of the period for which it aimed to provide (period of provision13 ). Thus the outcome of action is always uncertain. Action is always speculation. This is valid not only with regard to a market economy but no less for Robinson Crusoe, the imaginary isolated actor, and for the conditions of a socialist economy. In the imaginary construction of an evenly rotating system nobody is an entrepreneur and speculator. In any real and living economy every actor is always an entrepreneur and speculator; the people taken care of by the actors--minor family members in the market society and the masses of a socialist society--are, although themselves not actors and therefore not speculators, affected by the outcome of the actors’ speculations.

Economics, in speaking of entrepreneurs, has in view not men, but a definite function. This function is not the particular feature of a [p. 253] special group or class of men; it is inherent in every action and burdens every actor. In embodying this function in an imaginary figure, we resort to a methodological makeshift. The term entrepreneur as used by catallactic theory means: acting man exclusively seen from the aspect of the uncertainty inherent in every action. In using this term one must never forget that every action is embedded in the flux of time and therefore involves a speculation. The capitalists, the landowners, and the laborers are by necessity speculators. So is the consumer in providing for anticipated future needs. There’s many a slip ‘twixt cup and lip.

Let us try to think the imaginary construction of a pure entrepreneur to its ultimate logical consequences. This entrepreneur does not own any capital. The capital required for his entrepreneurial activities is lent to him by the capitalists in the form of money loans. The law, it is true, considers him the proprietor of the various means of production purchased by expanding the sums borrowed. Nevertheless he remains propertyless as the amount of his assets is balanced by his liabilities. If he succeeds, the net profit is his. If he fails, the loss must fall upon the capitalists who have lent him the funds. Such an entrepreneur would, in fact, be an employee of the capitalists who speculates on their account and takes a 100 per cent share in the net profits without being concerned about the losses. But even if the entrepreneur is in a position to provide himself a part of the capital required and borrows only the rest, things are essentially not different. To the extent that the losses incurred cannot be borne out of the entrepreneur’s own funds, they fall upon the lending capitalists, whatever the terms of the contract may be. A capitalist is always also virtually an entrepreneur and speculator. He always runs the chance of losing his funds. There is no such thing as a perfectly safe investment.

The self-sufficient landowner who tills his estate only to supply his own household is affected by all changes influencing the fertility of his farm or his personal needs. Within a market economy the result of a farmer’s activities is affected by all changes regarding the importance of his piece of land for supplying the market. The farmer is clearly, even from the point of view of mundane terminology, an entrepreneur. No proprietor of any means of production, whether they are represented in tangible goods or in money, remains untouched by the uncertainty of the future. The employment of any tangible goods or money for production, i.e., the provision for later days, is in itself an entrepreneurial activity.

Things are essentially the same for the laborer. He is born the [p. 254] proprietor of certain abilities; his innate faculties are a means of production which is better fitted for some kinds of work, less fitted for others, and not at all fitted for still others14 . If he has acquired the skill needed for the performance of certain kinds of labor, he is, with regard to the time and the material outlays absorbed by this training in the position of an investor. He has made an input in the expectation of being compensated by an adequate output. The laborer is an entrepreneur in so far as his wages are determined by the price the market allows for the kind of work he can perform. This price varies according to the change in conditions in the same way in which the price of every other factor of production varies.

In the context of economic theory the meaning of the terms concerned is this: Entrepreneur means acting man in regard to the changes occurring in the data of the market. Capitalist and landowner mean acting man in regard to the changes in value and price which, even with all the market data remaining equal, are brought about by the mere passing of time as a consequence of the different valuation of present goods and of future goods. Worker means man in regard to the employment of the factor of production human labor. Thus every function is nicely integrated: the entrepreneur earns profit or suffers loss; the owners of means of production (capital goods or land) earn originary interest; the workers earn wages. In this sense we elaborate the imaginary construction of functional distribution as different from the actual historical distribution15 .

Economics, however, always did and still does use the term “entrepreneur” in a sense other than that attached to it in the imaginary construction of functional distribution. It also calls entrepreneurs those who are especially eager to profit from adjusting production to the [p. 255] expected changes in conditions, those who have more initiative, more venturesomeness, and a quicker eye than the crowd, the pushing and promoting pioneers of economic improvement. This notion is narrower than the concept of an entrepreneur as used in the construction of functional distribution; it does not include many instances which the latter includes. It is awkward that the same term should be used to signify two different notions. It would have been more expedient to employ another term for this second notion--for instance, the term “promoter.”

It is to be admitted that the notion of the entrepreneur-promoter cannot be defined with praxeological rigor. (In this it is like the notion of money which also defies--different from the notion of a medium of exchange--a rigid praxeological definition.16 ) However, economics cannot do without the promoter concept. For it refers to a datum that is a general characteristic of human nature, that is present in all market transactions and marks them profoundly. This is the fact that various individuals do not react to a change in conditions with the same quickness and in the same way. The inequality of men, which is due to differences both in their inborn qualities and in the vicissitudes of their lives, manifests itself in this way too. There are in the market pacemakers and others who only imitate the procedures of their more agile fellow citizens. The phenomenon of leadership is no less real on the market than in any other branch of human activities. The driving force of the market, the element tending toward unceasing innovation and improvement, is provided by the restlessness of the promoter and his eagerness to make profits as large as possible.

There is, however, no danger that the equivocal use of this term may result in any ambiguity in the exposition of the catallactic system. Wherever any doubts are likely to appear, they can be dispelled by the employment of the term promoter instead of entrepreneur.

The Entrepreneurial Function in the Stationary Economy

The futures market can relieve a promoter of a part of his entrepreneurial function. As far as an entrepreneur has hedged himself through suitable forward transactions against losses he may possibly suffer, he ceases tobe an entrepreneur and the entrepreneurial function devolves on the other party to the contract. The cotton spinner who, buying raw cotton for is mill, sells the same quantity forward has abandoned a part of his entrepreneurial function. He will neither profit nor lose from changes in the cotton price occurring in the period concerned. Of course, he does not entirely cease to serve in [p. 256] the entrepreneurial function. Those changes in the price of yarn in general or in the price of the special counts and kinds he produces which are not brought about by a change in the price of raw cotton affect him nonetheless. Even if he spins only as a contractor for a remuneration agreed upon, he is still in an entrepreneurial function with regard to the funds invested in his outfit.

We may construct the image of an economy in which the conditions required for the establishment of futures markets are realized for all kinds of goods and services. In such an imaginary construction the entrepreneurial function is fully separated from all other functions. There emerges a class of pure entrepreneurs. The prices determined on the futures markets direct the whole apparatus of production. The dealers in futures alone make profits and suffer losses. All other people are insured, as it were, against the possible adverse effects of the uncertainty of the future. They enjoy security in this regard. The heads of the various business units are virtually employees, as it were, with a fixed income.

If we further assume that this economy is a stationary economy and that all futures transactions are concentrated in one corporation, it is obvious that the total amount of this corporation’s losses precisely equals the total amount of its profits. We need only to nationalize this corporation in order to bring about a socialist state without profits and losses, a state of undisturbed security and stability. But this is so only becuase our definition of a stationary economy implies equality of the total sum of losses and that of profits. In a changing economy an excess either of profits or of losses must emerge.

It would be a waste of time to dwell longer upon such oversophisticated images which do not further the analysis of economic problems. The only reason for mentioning them is that they reflect ideas which are at the bottom of some criticisms made against the economic system of capitalism and of some delusive plans suggested for a socialist control of business. Now, it is true that a socialist scheme is logically compatible with the unrealizable imaginary constructions of an evenly rotating economy and of a stationary economy. The predilection with which mathematical economists almost exclusively deal with the conditions of these imaginary constructions and with the state of “equilibrium” implied in them, has made people oblivious of the fact that these are unreal, self-contradictory and imaginary expedients of thought and nothing else. They are certainly not suitable models for the construction of a living society of acting men. [p. 257

• 13Cf. below, p. 481.
• 14In what sense labor is to be seen as a nonspecific factor of production see above, pp. 133-135.
• 15Let us emphasize again that everybody, laymen included, in dealing with the problems of income determination always takes recourse to this imaginary construction. The economists did not invent it; they only purged it of the deficiencies peculiar to the popular notion. For an epistemological treatment of functional distribution cf. John Bates Clark, The Distribution of Wealth (New York, 1908), p. 5, and Eugen von Bohm-Bawerk, Gesammelte Schriften, ed. F. X. Weiss (Vienna, 1924), p. 299. The term “distribution” must not deceive anybody; its employment in this context is to be explained by the role played in the history of economic thought by the imaginary construction of a socialist state (cf. above, p. 240). There is in the operation of a market economy nothing which could properly be called distribution. Goods are not first produced and then distributed, as would be the case in a socialist state. The word “distribution” as applied in the term “functional distribution” complies with the meaning attached to “distribution” 150 years ago. In present-day English usage “distribution” signifies dispersal of goods among consumers as effected by commerce.
• 16Cf. below, p. 398.