Within the disciplines of economics, management, finance and law, the study of entrepreneurship has become increasingly popular and is quickly becoming one of the most rapidly growing sub-disciplines. Courses and concentrations in entrepreneurship have begun popping up in colleges and universities globally, especially in fields of study outside of business such as engineering, the liberal arts, science, education, social work and even the fine arts.

Surprisingly, however, this recent trend of increased interest in entrepreneurship highlights a fundamental flaw in modern economic theory. Despite the fact that entrepreneurs are economic agents that drive innovation and growth in an economy, modern economic theory maintains an ambivalent relationship with entrepreneurship. Although it is widely recognized that entrepreneurship is somehow important, there is little consensus about its place within economic theory.

As a result, the vast majority of economic models fail to include the effects of entrepreneurship in their calculations whatsoever. Some of the most important and groundbreaking works in the limited economic literature on entrepreneurship — Schumpeter’s account of the role of innovation in the economy, Knight’s theory of profit and Kirzner’s analysis of entrepreneurial discovery and its subsequent economic implications — are viewed as interesting but irrelevant branches of theory rather than crucial aspects of economics as they should be.

This same phenomenon exists in businesses and strategic management literature as well. Modern theories of firm strategy and organization recognize that entrepreneurship is important but neglect to factor the effects of entrepreneurs into the standard models.

This neglect stems, I argue, from flaws in Neoclassical theories of production and firms. The approach to modeling market and firm behavior through general-equilibrium theory presents firms as passive agents, which renders the model of the firm as stylized and anonymous. This approach serves to eliminate the differentiating and dynamic aspect of markets that embodies the value of entrepreneurial agents; if we assume all firms to be able to do what any other firm does, then firms operate exclusively on their production-possibility frontiers. Since firms then always make optimal choices of input and output levels, this view eliminates the entrepreneur’s role.

The Neoclassical approach to the theory of production and the firm highlights a key weakness of the modern general-equilibrium approach to economics. The approach strips firms of their individual abilities or inabilities to innovate by giving too little credit to the firms and individual agents that drive this innovation. As a result, this approach assumes that entrepreneurship is innately ingrained in the capitalist economy. This view assumes all firms to be entrepreneurial, or at least the role of entrepreneurship to be negligible.

This approach could not be further from the truth.

The simple accumulation of the factors of production necessary for the prosperity of the firm and resulting economic drive for technological advancement is, I argue, an insufficient condition to explain the phenomenon of entrepreneurship and its economic effects. The distinction lies between necessary and sufficient economic conditions for growth. The former term describes those inputs needed for production such as technology and material inputs. The later term encompasses the social and political influences of economic growth. Sufficient conditions for growth require human creativity and productive entrepreneurship. These factors serve to combine necessary inputs in profitable ways that create an institutional and economic environment conducive with promoting innovation and economic development.

The entrepreneur and entrepreneurship should therefore take a central role in theories of development and firm behavior. As illustrated previously, this is not currently the case.

The fact of entrepreneurship as a driving force of economic growth is not a temporary phenomenon but an important element of the economy. The continuing failure of economic theory to account for the role of entrepreneurship indicates that the underlying assumptions and principles of the field require re-evaluation. Although this new approach requires a significant deviation from the modern equilibrium-based approach to economic reasoning, such an exploration of the relationship between entrepreneurship and growth holds the potential to provide a great deal of economic insight. It can create a foundation for social and political change conducive to fostering an innovation-based economy and reinvigorated economic growth.

Makai McClintock is a Collegian columnist and can be reached at [email protected].