The real economic life is about people and the relationships between them motivated by their aims and actions. We must understand human motives and interactions before we understand economics. This understanding gives the idea of why people choose one thing over another in the market and how individual choices of scarce resources impact the overall production, distribution, and consumption. Given the limited resources, human wants are unlimited, so the role of the entrepreneur is to find a more productive use for resources.
As we often take for granted the contribution of entrepreneurship in our lives, it has been playing a crucial role in economic growth and development. Classical economics, which emerged in the late 18th century and early 19th century in Britain, primarily advocates for free market ideas and limited government intervention. This laid the foundation for liberal economic thought, even though it only acknowledges land, labor, and capital as the factors of production, ignoring the role of entrepreneurship in economic growth and employment generation. They fail to recognize that it was entrepreneurs who brought most out of these three factors of production (land, labor, and capital). Key figure of classical economics Adam Smith acknowledges self-interest and invisible hands as self-interest being the natural tendency of an individual to pursue his/her interest to maximize its own satisfaction. When individuals act based on self-interest, society gets unintended benefits, which is coined as invisible hands. Smith explicitly didn’t consider the role of entrepreneurs who coordinate and innovate in the market. Ricardo’s theory of comparative advantage talks about the benefits of trade and specialization; however, it rarely talks about entrepreneurial activities that drive market expansion. John Stuart Mill, in his book “Principles of Political Economy,” talks about the distribution of wealth and functioning of markets but still falls short on recognizing entrepreneurial processes. It wasn’t until Jean-Baptiste Say who recognized entrepreneurs, According to him, “an entrepreneur is someone who shifts economic resources out of an area of lower productivity and into an area of higher productivity and greater yield.” As the economics developed into the neoclassical period, the focus was around optimal resource allocation and market equilibrium. Joseph Schumpeter, who recognized entrepreneurs as the key drivers of economic growth and development through the process of creative destruction.
Entrepreneurship is very essential in today’s fast-evolving global economy as it addresses the economic challenges with innovation. Entrepreneurs create new businesses, which in turn create employment opportunities that help reduce the unemployment rate; simultaneously, they also increase the aggregate consumer spending that boosts economic growth. Entrepreneurs can be viewed in three different ways: as disrupters, innovators, and coordinators. As disrupters, entrepreneurs always challenge the status quo by introducing new and innovating products or services that disrupt the existing market, which is referred to as creative destruction. This process removes or replaces the outdated or unproductive firms, giving the space for new and innovative firms to emerge, which ultimately increases the productivity in the economy. As innovators, entrepreneurs bring in new technology, processes, and solutions to address the unfulfilled need in the market. Their capacity for thinking outside the box and taking the risk of starting the venture helps to improve the overall quality of life. As coordinators, entrepreneurs are the ones who coordinate the other factors of production like land, labor, and capital to create value. At first, they identify the opportunities, and to capitalize on those opportunities, they mobilize the resources. Then, they bring other required stakeholders to grasp those opportunities and generate greater wealth. This coordination also helps to bring efficiency to the market by allocating the resources to the most required ones. Therefore, there is no doubt that entrepreneurs are crucial for economic adaptation and growth.
More than Profits
Entrepreneurship not only creates economic benefits but also creates social benefits by providing the goods or services that make people’s lives easier. They provide the opportunities for upward social mobility, as anyone can create wealth just by tapping the opportunities or finding the solution to a problem and creating a venture around it. With entrepreneurship in place, anyone coming from any background can improve their economic status if they build a business that meets the needs of customers. As the economic shocks and disruptions in the market arise, entrepreneurs quickly adapt to the changing market. For instance, during the COVID-19 pandemic, many restaurants pivoted to delivery services, and many startups came up with telemedicine and other remote work tools. This flexibility encourages communities and economies to become more resilient and maintain social well-being. There are social entrepreneurs who uplift society by solving social issues and problems without a primary profit motive. Muhammad Yunus, a Nobel laureate and social entrepreneur from Bangladesh, found Grameen Bank in the 1970s to help women entrepreneurs with microloans by focusing on social trustees rather than collateral.
Government and Entrepreneurship
The role of government in entrepreneurship can be facilitator by providing a supportive environment through policy and infrastructure or regulatory by imposing restrictions and standards. Classical and Austrian schools of thought advocate for minimal government intervention, whereas Keynesian and developmental state theories advocate for the active role of government, especially in economic downturns or in developing economics. While neoclassical economics finds the middle ground for only selective intervention to correct market failure. To boost entrepreneurship, the government comes with different subsidies for new business ventures. However, as all new businesses are not entrepreneurial and most new businesses fail. Picking winners early by the government has failed, which leads to a waste of taxpayer money. Government intervention comes by citing the market being imperfect. It is true that the market is imperfect, and it is very imperfection that encourages people to take productive action; it is where entrepreneurs come from to take corrective action by building over many failures. Therefore, the role of government in economic activities must only be the facilitator by creating a policy environment that supports entrepreneurship.
Where Does Regulation Hurt?
In highly regulated economies, innovation is more likely to come from the intrapreneurship within large companies. Large companies have more resources in terms of finance, skilled labor, research, and development, and this helps them to easily navigate the regulation compared to small firms. They also have a dedicated legal and compliance team to efficiently adhere to the regulatory requirements. On the other hand, lightly regulated economies have a growing number of entrepreneurs. Fewer regulations means fewer hurdles while starting the venture. This pushes entrepreneurs to innovate and experiment with their ideas, which ultimately brings new and innovative products into the market. Regulation often pushes startups into trouble than the large company in three different ways: increased cost, economics of scale in compliance, and entry barrier. Firstly, regulations like the minimum wage law increase the cost for startups as they are on a tight budget, which decreases the survival rate because they have more minimum wage workers but no to less profit. Economist Xiaohui Gao found out that “a 1% increase in the minimum wage is associated with a 3.5% decline in the survival rates of startups.” Secondly, to start a startup, an entrepreneur must know a series of regulations in general and within their specific industry. They don’t have experts to guide them like they have in big companies. Large companies can spread their regulation costs across large sales volumes. Thirdly, regulations like certificates or licensing can block the entry of new businesses. Established firms often lobby with the government to put themselves in a favorable position at the expense of smaller firms. A study across 85 countries by Simeon Djankov and colleagues found that countries with high regulation in entry are associated with a high level of corruption and a lower quality product. Such regulation often serves the interests of big business and politicians, not the end consumer.
Looking to the Future
As we moved into the era defined by climate change and resource constraints, we required more entrepreneurship to solve these issues. Many innovations in the energy sector and technology are in rapid growth as the world is quickly adapting to the new transition. Technology like AI and the transition to renewable energy enable entrepreneurs to create smarter and more efficient solutions to our everyday problems. Sustainability will be kept a top priority as businesses will focus on finding efficient use of limited resources and reducing waste. Entrepreneurship is set to become the game changer in years to come, but only if there is a favorable environment. Government policy will play a crucial role in shaping the future of entrepreneurship. By reducing the regulatory barriers, a state can boost its entrepreneurial venture. Social entrepreneurship is also being raised to solve the global issues of poverty and equality, creating opportunities for upward social mobility. This will create more opportunities for people from all backgrounds to improve their lives.
The article was previously published in ‘karobar national daily’.
