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Essential Reading on Entrepreneurship

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Austrian economics highlights the entrepreneur as the “driving force” of the economy. As a result, Austrian ideas are often at the cutting edge of new research exploring how entrepreneurs and innovators transform the world, and the many problems that result when public policy interferes with their work.

However, there is sometimes confusion about exactly what it means to study entrepreneurship. Most university entrepreneurship classes talk about the practical problems of starting a new business, with an emphasis on generating good business ideas and carrying them into the real world.

Austrians, however, tend to take a different approach: what economists like Mises stress are the social and economic functions of entrepreneurship. In other words, instead of simply looking at new businesses, Austrians study the special role entrepreneurs play in driving economic progress.

Yet even though such research is a bit different from the “practical” entrepreneurship often taught in business schools, it still has plenty of insight to offer professionals seeking to get into the world of innovation and new venture creation.

Unfortunately, the public and academic literatures on entrepreneurship have grown so large it can be difficult to know where to begin. To address this problem, and to begin to bridge the gap between entrepreneurship teaching and economics, I’ve written a paper exploring what classic economic texts can offer entrepreneurship students (here). In it, I suggest a reading list based on some important economic writings focusing on entrepreneurs and what they do for society. (For those who want the short version, I’ve also discussed this topic on the Tom Woods Show.)

Some of these works will be familiar to students of Austrian economics. For example, Mises’ essay “Profit and Loss,” Hayek’s paper on “Competition as a Discovery Procedure,” and Schumpeter’s ideas about “creative destruction” are well known.

However, some of the sources are more obscure, and have been unfairly overlooked.

A good example of the latter is Frank Fetter’s Economic Principles. Fetter is one of the great neglected economists of the Austrian tradition, although he was the preeminent Mengerian in the US prior to the Second World War. And even after a century, his ideas on entrepreneurship are still remarkably clear. He’s especially good at explaining the role of judgement in entrepreneurial success, and he goes out of his way to show that profit accrues to individuals who are especially skilled at bearing market uncertainty. Contrary to popular belief, luck only plays a small role in this process, though outsiders often attribute large profits to good fortune rather than good judgment.

Similarly, Frank Knight’s “Profit and Entrepreneurial Functions” is a nice introduction to his theory of entrepreneurship, especially for those who don’t have time to read all of Risk, Uncertainty, and Profit. Knight covers fundamental concepts like the distinction between risk and uncertainty, the importance of uncertainty-bearing, the need for entrepreneurial judgment, and innovation. But he also explains how to study historical entrepreneurship, a topic neglected by many early Austrians.

Other readings cover similarly overlooked topics. For instance, university entrepreneurship courses often fail to explain that not all forms of entrepreneurship are beneficial. This point is explained by William Baumol in his paper “Entrepreneurship: Productive, Unproductive, and Destructive.” Baumol argues that institutions, especially political institutions, channel entrepreneurial talent into occupations where it is relatively highly rewarded. And when government makes the most attractive offers, entrepreneurs end up in service to the state, rather than to consumers in the marketplace, which in turn undermines productivity and wastes or destroys resources.

I discuss these and many other points in the paper, which draws on writings from a wide range of authors, including Israel Kirzner, Deirdre McCloskey, Murray Rothbard, and even Sun Tzu. Of course, it was impossible to include every great economic discussion of entrepreneurship, so I’ve attempted to stick with the basics. I hope readers find these works as enjoyable and insightful as I have.

Matt McCaffrey, former Mises Research Fellow, is assistant professor of enterprise at the University of Manchester.

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