The idea of entrepreneurship has a long and protracted history that can be traced as far back as the 1600s. Over the years, the entrepreneurship concept has evolved in terms of both scope and meaning. Many people describe entrepreneurship as simply starting one’s own business. However, most economists argue that entrepreneurship is more than a business. In the 20th century, many economists tried to establish the real meaning of entrepreneurship, one of them being Joseph Schumpeter. Schumpeter viewed entrepreneurship as a power of “creative destruction”. He went on to explain that an entrepreneur creates innovative ways in business and industries, thereby rendering older companies obsolete. Drucker (2000) endevoured to further explain this idea by describing an entrepreneur as a person who looks for change, adjust to it and takes advantage of the change as an opportunity. An example of a significant change that has revolutionized business is computers and the internet. Today, most economists are of the opinion that entrepreneurship stimulates economic growth and increases employment opportunities by creating more jobs (Atman et al., 2013). In the current world, new small business is the primary engines of poverty reduction and job creation. Therefore the government's support for entrepreneurship is crucial for economic development. The aim of this essay is to explain how entrepreneurship can either be beneficial or unbeneficial.
Joseph A. Schumpeter described a theory of entrepreneurship which stated that an entrepreneur is both an innovator and a change agent. This drives the capitalist economy. For Schumpeter, an entrepreneur’s actions are the leading cause of business change and economic development. He further explained the theory of economic development which has been praised by Schneider (2012) as the most persuasive of the available analyses of the process of development and in particular, the capitalist free market (Autio et al., 2014). Schumpeter argued that the static allocation theorem and repeated solicitation of the optimization concept in a stable environment would not lead to further awareness. There was hence a need to change the process of problem orientation, seeing as the change process contained exciting challenges.
Schumpeter believed that entrepreneurs play a crucial role in bringing change to a market because they create the change and explore it as an opportunity. Entrepreneurship is beneficial because there is an inherent tendency for the market towards change and the diverse aspects of capitalism are its most useful characteristics. Schumpeter studies the concept of economic development by comparing an undeveloped and developed economy (Coyne et al., 2016). He presents the theory in a non-mathematical and circular flow that relates to a Walrasian over-all equilibrium. He also includes an extra dimension namely, the movement through time (that is, a dynamic general equilibrium) which helps to compare a vibrant and static economy.
The static model involves the exchange of goods between producers and consumers for productive services. All the products and services are categorized by conferring on their request or order. Every good is ranked according to how it appears in the orders, and Schumpeter states that the value of a product is directly proportional to the productive services; an individual factor receives income based on the products value and its marginal productivity (Drucker, 2014). Furthermore, he states that there are full returns to the value of a product. In other words, element price costs equal overall revenues.
To understand Schumpeter’s concept of circular flow, it is important first to comprehend the typical ways of production and decision making. Producers make the same goods in the same way, and consumers buy the same products at the same prices time after time. This repetition presents an opportunity to entrepreneurs to change the usual way of doing business and introduce new and innovative ways of producing products. As a result, they acquire customers fast leading to their development (Galindo et al., 2016. For Schumpeter, development is brought about by some internal changes. These changes include: introduction of new goods or a new quality of a particular right, introducing new methods of production that is more efficient and increases the quality of goods, adding a new market in which the company had never exploited before and got a new source of supply for raw materials needed by the industry (Schumpeter et al., 2014). The theory revolves around the introduction and innovation of new goods and services and sources; these changes happen from a radical break from how things were done in the past. Thus, the entrepreneur’s innovative role causes a change in business cycles and economic development in general.
Entrepreneurs contribute positively to society by introducing creative ways of business and goods. However, their contribution is heavily influenced by the policies and relative payoffs the organization offers to their activities (Ekeland et al., 2013). Policies can affect the allocation of entrepreneurship more efficiently than it can affect its supply. According to Hobsbawm (2010) “it is often assumed that an economy of private enterprise has an automatic bias towards innovation, but this is not so. It has a bias only towards profit.” (p. 40). When people are trying to explain some historical economic setbacks, some individuals are usually held suspect, among them are the entrepreneurs. Growth is directly related to entrepreneurship, where growth has slowed down, it is implied that the reduction of entrepreneurs is to blame (Gohmann et al., 2016). Entrepreneurs play a crucial role in the development of an economy; they increase productivity in a country that sets policies in their favor.
Baumol (2013) states that entrepreneurship is often inspired by profits and various forms of self-fulfillment (p.120). He also went on to add that entrepreneurs innovate and they generate profits and contribute positively to the economy (Baumol et al., 2013). Their activities lead to job generation and innovativeness which are mainly associated with a ‘productive value’ on economic levels. In contrast, Baumol also added that rent seeking in the form of tax evasion, avoidance efforts, illegal and shadow activities including prostitution, blackmailing and different forms of corruption and mentioned as unproductive entrepreneurship activities. In reality, a few activities like rent seeking add no value to the economy output.
The environment in which a firm operates to transform skills and ambitions of individuals into tangible results are explored in literature as the framework within which entrepreneurial activities takes place, hence showing the influence of the environment on entrepreneurial processes (Fisch et al., 2017). Contextual factors affect the role of entrepreneurship and their performance, to echo on this discussion, research carried out by the Transition Countries of Central and Eastern Europe (CEE), and the former Soviet Union (FSU) revealed that environmental factors have a direct influence on either the productivity or non-productivity of an entrepreneur.
A visit to a vibrant, growing economy will immediately show the crucial role that entrepreneurship plays to develop the economy (Hmieleski et al., 2016). However, formal economic theory leaves little room for the entrepreneur, because entrepreneurship does not present itself easily to mathematical manipulation and modeling. Hence it is often left out of both micro and macroeconomic theory, as Herbert (2010) puts it, “Walrus expunged all to the things from his model that give force and range to entrepreneurial action.” (p.120). they argue further that innovative nature of entrepreneurship remains outside the formal modeling.
A major study carried out by Kirzner (2009) emphasized the importance of an entrepreneur. In this study, Kirzner (2009) argued that an entrepreneur is the equilibrium force in the market. He further explained that an entrepreneur acts on previous unnoticed profit making opportunities and corrects the market process, hence driving it towards equilibrium (Krizner , 2015). The entrepreneur is a picture of a person that drives change and generates new employment opportunities. Krizner’s theory shows how entrepreneurship brings into shared change those different components which resulted from preceding market ignorance and brings about a market's equilibrium.
Holcombe (2000) argues that most entrepreneurial acts generate profit that is mostly seized by entrepreneurs. Thus, this very acting of taking opportunities creates more opportunities for other people, serving as an endogenous engine of economic growth. A countries business environment influences entrepreneurial activities, Baumol (2009) points out that seizing of opportunities that generate profit can be productive or unproductive, depending on the countries business environment (Aparicio et al., 2016). When it is directing towards activities such as creating new employment opportunities and innovating new production processes, entrepreneurship is socially productive and assists in the market process of coordinating new behavior. However, when it is directed towards rent-seeking activities, it can be unproductive and destructive for the society as a whole. Baumol’s key point is that they respond to incentives, entrepreneurs seek profits and explore the available opportunities, whether they are socially profitable or not. For Holcombe’s theory, entrepreneurs rely on the environmental factors to generate endogenous growth.
Productive entrepreneurship depends on the economic freedom of a country or business environment, countries with more economic freedom perform better. The countries that open their institutional environment to allow for more economic freedom realize new profit opportunities that were previously unavailable due to institutional barriers. As productive entrepreneurship takes advantage of these opportunities, economic growth rates improve (Nunes 2016 p,14-20). In most cases, entrepreneurial activities increase competition, and with technological changes, it can enhance productivity as well.
In the United States, small companies generate around 75% of new jobs added to the economy each year. Self-employed entrepreneurs often create the small jobs, “entrepreneurs give security to other people; they are the generators of social welfare,” Carl J. Schramm, the president and chief executive officer of Ewing Marion Kauffman Foundation said in February 2007 (Shepherd et al., 2015). Schramm is one of the world’s best experts in entrepreneurship. Benefits of small businesses go beyond monetary profit, Hector (2014) explains that entrepreneurship broadens and encourage participation in the society, generates new job opportunities, decentralizes economic power and gives people a stake in their future.
Entrepreneurs innovation activities play a central role in economic growth. According to Drucker (2016), “the entrepreneur always searches for change, responds to it and exploits it as an opportunity.” (cited by Smart, 2016, p. 13). They are responsible for the commercial introduction of different new products and opening new markets, a look at history shows that entrepreneurs were essential in many significant innovations (Naude, 2013). Most of these innovations revolutionized how people lived and how governments ruled. From the automobile to personal computers to airplanes, people with vision and willpower developed these changes.
According to Schramm (2016), small firms are likely to produce custom-demand items compared to large enterprises; entrepreneurs provide clients with goods and services for wants they didn’t even know they had (Foss, 2016). Entrepreneurs create innovations that improve the quality of life by giving consumers some options to choose from; they make people's lives easier by bringing advancement in communications and health that enhances healthcare (Axel et al., 2014). Studies by the Small Business Administration in the United States revealed that small technological companies produce 15 times more Rights per worker than Great ones. Barrett (2010) opines that “regardless of the level of development and firm size, entrepreneurial behaviour remains a crucial engine of innovation and growth for the economy and for individual companies since, by definition, it implies attention and willingness to take advantage of unexploited opportunities.” (p. 79)
Joseph Schumpeter helped to revolutionalise entrepreneurship by explaining it as a form of 'creative destruction', further arguing that the creative nature of entrepreneurs enables them to turn business challenges into opportunities. The ensuing social changes leads to development through the introduction of efficient methods of production. Entrepreneurship can either be productive or unproductive, depending on the business environment and policies regarding business in a country. However, it is largely productive, since it leads to the creation of new job opportunities and the creation of new markets that generate profit leading to the growth of an economy.
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