Entrepreneurship and the Economic Theory of the Firm: Any Gains from Trade?
Abstract
Though they developed in isolation, the theory of entrepreneurship and the
economic theory of the firm can be usefully integrated. In particular, the concept of entrepreneurship
as judgment associated with Knight (1921) and some Austrian school
economists aligns naturally with the theory of the firm. Because judgment cannot be
purchased on the market, the entrepreneur needs a firm — a set of alienable assets he
controls — to carry out his function. We show how this notion of judgment illuminates
key themes in the modern theory of the firm (existence, boundaries, and internal organization).
In our approach, resource uses are not data, but are created as entrepreneurs
envision new ways of using assets to produce final goods. The entrepreneur's problem
is aggravated by the fact that capital assets are heterogeneous. Asset ownership allows
the entrepreneur to experiment with novel combinations of heterogeneous assets. The
boundaries of the firm, as well as aspects of internal organization, may also be understood
as responses to entrepreneurial processes of experimentation.
Citation
Contracting and Organizations Research Institute (CORI), Working Paper No.2004-09 (August 2004).