Schumpeter

The Theory of Economic Development, English edition, Internet Library (1934).

The Entrepreneur

Chapter 2: The Fundamental Problem of Economic Development

While in the accustomed circular flow every individual can act promptly and rationally because he is sure of his ground and is supported by the conduct, as adjusted to this circular flow, of all other individuals, who in turn expect the accustomed activity from him, he cannot simply do this when he is confronted by a new task.

While in the accustomed channels his own ability and experience suffice for the normal individual, when confronted with innovations he needs guidance. While he swims with the stream in the circular flow which is familiar to him, he swims against the stream if he wishes to change its channel. What was formerly a help becomes a hindrance. What was a familiar datum becomes an unknown. Where the boundaries of routine stop, many people can go no further, and the rest can only do, so in a highly variable manner. The assumption that conduct is prompt and rational is in all cases a fiction. But it proves to be sufficiently near to reality, if things have time to hammer logic into men. Where this has happened, and within the limits in which it has happened, one may rest content with this fiction and build theories upon it. It is then not true that habit or custom or non-economic ways of thinking cause a hopeless difference between the individuals of different, classes, times, or cultures, and that, for example, the 'economics of the stock exchange’ would be inapplicable say to the peasants of today or to the craftsmen of the Middle Ages. On the contrary the same theoretical picture in its broadest contour lines fits the individuals of quite different cultures, whatever their degree of intelligence and of economic rationality, and we can depend upon it that the peasant sells his calf just as cunningly and egotistically as the stock exchange member his portfolio of shares. But this holds good only where precedents without number have formed conduct through decades and, in fundamentals, through hundreds and thousands of years, and have eliminated unadapted behavior. Outside of these limits our fiction loses its closeness to reality...

We can assume that every healthy man can sing if he will. Perhaps half the individuals in an ethically homogeneous group have the capacity for it to an average degree, a quarter in progressively diminishing measure, and, let us say, a quarter in a measure above the average; and within this quarter, through a series of continually increasing singing ability and continually diminishing number of people problem, the motive power of a great number of significant phenomena... We come finally to the Carusos. Only in this quarter are we struck in general by the singing ability, and only in the supreme instances can it become the characterising mark of the person. Although practically ail men can sing, singing ability does not cease to be a distinguishable characteristic and attribute of a minority, indeed not exactly of a type, because this characteristic — unlike ours — affects the total personality relatively little.

Let us apply this; Again, a quarter of the population may be so poor in those qualities, let us say here provisionally, of economic initiative that the deficiency makes itself felt by poverty of their moral personality, and they play a wretched part in the smallest affairs of private and professional life in which this element is called for. We recognise this type and know that many of the best clerks, distinguished by devotion to duty, expert knowledge, and exactitude, belong to it. Then comes the "half,” the “normal.” These prove themselves to be better in the things which even within the established channels cannot simply be “dispatched” (erledigen) but must also be “decided” (entscheiden) and “carried out” (durchsetzen), Practically all business people belong here, otherwise they would never have attained their positions; most represent a selection — individually or hereditarily tested. A textile manufacturer travels no “new” road when he goes to a wool auction. But the situations there are never the same, and the success of the business depends so much upon skill and initiative in buying wool that the fact that the textile industry has so far exhibited no trustification comparable with that in heavy manufacturing is undoubtedly partly explicable by the reluctance of the cleverer manufacturers to renounce the advantage of their own skill in buying wool. From there, rising in the scale we come finally into the highest quarter, to people who are a type characterised by supernormal qualities of intellect and will. Within this type there are not only many varieties (merchants, manufacturers, financiers, etc.) but also a continuous variety of degrees of intensity in “initiative.” In our argument types of every intensity occur. Many a one can steer a safe course, where no one has yet been; others follow where first another went before; still others only in the crowd, but in this among the first. So also the great political leader of every kind and time is a type, yet not a thing unique, but only the apex of a pyramid from which there is a con- tinuous variation down to the average and from it to the subnormal values. And yet not only is “leading” a special function, but the leader also something special, distinguishable — wherefore there is no sense in our case in asking: “Where does that type begin then?” and then to exclaim: “This is no type at alll”

tion of two types of conduct, which, following reality, we can picture as two types of individuals: mere managers and entrepreneurs.

Let us now formulate precisely the characteristic feature of the conduct and type under discussion. The smallest daily action embodies a huge mental effort. Every schoolboy would have to be a mental giant, if he himself had to create all he knows and uses by his own individual activity. And every man would have to be a giant of wisdom and will, if he had in every case to create anew all the rules by which he guides his everyday conduct. This is true not only of those decisions and actions of individual and social life the principles of which are the product of tens of thousands of years, but also of those products of shorter periods and of a more special nature which constitute the particular instrument for performing vocational tasks. But precisely the things the performance of which according to this should involve a supreme effort, in general demand no special individual effort at all; those which should be especially difficult are in reality especially easy; what should demand superhuman capacity is accessible to the least gifted, given mental health. In particular within the ordinary routine there is no need for leadership. Of course it is still necessary to set people their tasks, to keep up discipline, and so forth; but this is easy and a function any normal person can learn to fulfil. Within the lines familiar to all, even the function of directing other people, though still necessary, is mere Vork” like any other, comparable to the service of tending a machine. All people get to know, and are able to do, their daily tasks in the customary way and ordinarily perform them by themselves; the ^ director’’ has his routine as they have theirs; and his directive function serves merely to correct individual aberrations.

This is so because all knowledge and habit once acquired becomes as firmly rooted in ourselves as a railway embankment in the earth. It does not require to be continually renewed and consciously reproduced, but sinks into the strata of subconsciousness. It is normally transmitted almost without friction by inheritance, teaching, upbringing, pressure of environment. Everything we think, feel, or do often enough becomes automatic and our con- scious life is unburdened of it. The enormous economy of force, in the race and the individual, here involved is not great enough, however, to make daily life a light burden and to prevent its de- mands from exhausting the average energy all the same. But it is great enough to make it possible to meet the ordinary claims. This holds good likewise for economic daily life. And from this it follows also for economic life that every step outside the bound- ary of routine has difficulties and involves a new element. It is this element that constitutes the phenomenon of leadership.

The nature of these difficulties may be focussed in the following three points. First, outside these accustomed channels the individual is without those data for his decisions and those rules of conduct which are usually very accurately known to him within them. Of course he must still foresee and estimate on the basis of his experience. But many things must remain uncertain, still others are only ascertainable within wide limits, some can perhaps only be “guessed.” In particular this is true of those data which the individual strives to alter and of those which he wants to create. Now he must really to some extent do what tradition does for him in everyday life, viz. consciously plan his conduct in every particular. There will be much more conscious rationality in this than in customary action, which as such does not need to be reflected upon at all; but this plan must necessarily be open not only to errors greater in degree, but also to other kinds of errors than those occurring in customary action. What has been done already has the sharp-edged reality of all the things which we have seen and experienced; the new is only the figment of our imagination. Carrying out a new plan and acting according to a customary one are things as different as making a road and walking along it.

How different a thing this is becomes clearer if one bears in mind the impossibility of surveying exhaustively all the effects and countereffects of the projected enterprise. Even as many of them as could in theory be ascertained if one had unlimited time and means must practically remain in the dark. As military action must be taken in a given strategic position even if all tfie data potentially procurable are not available, so also in economic life aHlon must be taken without working out aU the details of what is to be done. Here the success of everything depends upon intuition,” the capacity of seeing things in a way which afterwards proves to be true, even though it cannot be established at the moment, and of grasping the essential fact, discarding the unessential, even though one can give no account of the principles by which this is done. Thorough preparatory work, and special knowledge, breadth of intellectual understanding, talent for logical analysis, may under certain circumstances be sources of failure. The more accurately, however, we learn to know the natural and social world, the more perfect our control of facts becomes; and the greater the extent, with time and progressive rationalisation, within which things can be simply calculated, and indeed quickly and reliably calculated, the more the significance of this function decreases. Therefore the importance of the en- trepreneur type must diminish just as the importance of the military commander has already diminished. Nevertheless a part of the very essence of each type is bound up with this function.

As this first point lies in the task, so the second lies in the psyche of the businessman himself. It is not only objectively more difficult to do something new than what is familiar and tested by experience, but the individual feels reluctance to it and would do so even if the objective difficulties did not exist. This is so in all fields. The history of science is one great confirmation of the fact that we find it exceedingly difficult to adopt a new scientific point of view or method. Thought turns again and again into the accustomed track even if it has become unsuitable and the more suitable innovation in itself presents no particular difficulties. The very nature of fixed habits of thinking, their energy-saving function, is founded upon the fact that they have become sub- conscious, that they yield their results automatically and are proof against criticism and even against contradiction by individual facts. But precisely because of this they become drag-chains when they have outlived their usefulness. So it is also in the economic world. In the breast of one who wishes to do some- thing new, the forces of habit rise up and bear witness against the embryonic project. A new and another kind of effort of will is therefore necessary in order to wrest, amidst the work and care of the daily round, scope and time for conceiving and working out the new combination and to bring oneself to look upon it as a real possibility and not merely as a day-dream. This mental freedom presupposes a great surplus force over the everyday demand and is something peculiar and by nature rare.

The third point consists in the reaction of the social environment against one who wishes to do something new. This reaction may manifest itself first of all in the existence of legal or political impediments. But neglecting this, any deviating conduct by a member of a social group is condemned, though in greatly varying degrees according as the social group is used to such conduct or not. Even a deviation from social custom in such things as dress or manners arouses opposition, and of course all the more so in the graver cases. This opposition is stronger in primitive stages of culture than in others, but it is never absent. Even mere astonishment at the deviation, even merely noticing it, exercises a pressure on the individual. The manifestation of condemnation may at once bring noticeable consequences in its train. It may even come to social ostracism and finally to physical prevention or to direct attack. Neither the fact that progressive differentiation weakens this opposition — especially as the most important cause of the weakening is the very development which we wish to ex- plain — nor the further fact that the social opposition operates under certain circumstances and upon many individuals as a stimulus, changes anything in principle in the significance of it. Surmounting this opposition is always a special kind of task which does not exist in the customary course of life, a task which also requires a special kind of conduct. In matters economic this resistance manifests itself first of all in the groups threatened by the innovation, then in the difficulty in finding the necessary cooperation, finally in the difficulty in winning over consumers. Even though these elements are still effective to-day, despite the fact that a period of turbulent development has accustomed us to the appearance and the carrying out of innovations, they can be best studied in the beginnings of capitalism. But they are so obvious there that it would be time lost for our purposes to dwell upon them...

The specific problem of leadership arises and the leader type appears only where new possibilities present themselves. That is why it is so strongly marked among the Normans at the time of their conquests and so feebly among the Slavs in the centuries of their unchanging and relatively protected life in the marshes of the Pripet. Our three points characterise the nature of the function as well as the cmditci or behavior which constitutes the leader type. It is no part of his function to “find” or to “create” new possibilities. They are always present, abundantly accumulated by all sorts of people. Often they are also generally known and being discussed by scientific or literary writers. In other cases, there is nothing to discover about them, because they are quite obvious. To take an example from political life, it was not at all difficult to see how the social and political conditions of France at the time of Louis XVI could have been improved so as to avoid a breakdown of the ancien regime. Plenty of people as a matter of fact did see it. But nobody was in a position to do it. Now, it is this “doing the thing,” without which possibilities are dead, of which the leader’s function consists. This holds good of all kinds of leadership, ephemeral as well as more enduring ones. The former may serve as an instance. What is to be done in a casual emergency is as a rule quite simple. Most or all people may see it, yet they want someone to speak out, to lead, and to organise. Even leadership which influences merely by example, as artistic or scientific leadership, does not consist simply in finding or creating the new thing but in so impressing the social group with it as to draw it on in its wake. It is, therefore, more by will than by intellect that the leaders fulfil their function, more by “authority,” “personal weight,” and so forth than by original ideas.

Economic leadership in particular must hence be distinguished from “invention.” As long as they are not carried into practice, inventions are economically irrelevant. And to carry any improvement into effect is a task entirely different from the inventing of it, and a task, moreover, requiring entirely different kinds of aptitudes. Although entrepreneurs of course may be inventors just as they may be capitalists, they are inventors not by nature of their function but by coincidence and vice versa. Besides, the innovations which it is the function of entrepreneurs to carry out need not necessarily be any inventions at all. It is, therefore, not advisable, and it may be downright misleading, to stress the element of invention as much as many writers do.

... It has none of that glamour which characterises other kinds of leadership. It consists in fulfilling a very special task which only in rare cases appeals to the imagination of the public. For its success, keenness and vigor are not more essential than a certain narrowness which seizes the immediate chance and nothing else. ‘Personal weight’ is, to be sure, not without importance. Yet the personality of the capitalistic entrepreneur need not, and generally does not, answer to the idea most of us have of what a ‘Teader looks like, so much so that there is some difficulty in realizing that he comes within the sociological category of leader at all. He Teads ” the means of production into new channels. But this he does, not by convincing people of the desirability of carrying out his plan or by creating confidence in his leading in the manner of a political leader — the only man he has to convince or to impress is the banker who is to finance him — but by buying them or their services, and then using them as he sees fit. He also leads in the sense that he draws other producers in his branch after him. But as they are his competitors, who first reduce and then annihilate his profit, this is, as it were, leadership against one’s own will. [ Finally , he ren- ders a service, the full appreciation of which takes a specialist’s knowledge of the case. It is not so easily understood by the public at large as a politician’s successful speech or a general’s victory in the field, not to insist on the fact that he seems to act — and often harshly — in his individual interest alone. We -shall under- stand, therefore, that we do not observe, in this case, the emer- gence of all those affective values which are the glory of all other kinds of social leadership. Add to this the precariousness of the economic position both of the individual entrepreneur and of entrepreneurs as a group, and the fact that when his economic success raises him socially he has no cultural tradition or attitude to fall back upon, but moves about in society as an upstart, whose ways are readily laughed at, and we shall understand why this type has never been popular, and why even scientific critique often makes short work of it.

... Within given social circumstances and habits, most of what people do every day will appear to them primarily from the point of view of duty carrying a social or a superhuman sanction. There is very little of conscious rationality, still less of hedonism and of individual egoism about it, and so much of it as may safely be said to exist is of comparatively recent growth. Nevertheless, as long as we confine ourselves to the great outlines of constantly repeated economic action, we may link it up with wants and the desire to satisfy them, on condition that we are careful to recognise that economic motive so defined varies in intensity very much in time; that it is society that shapes the particular desires we observe; that wants must be taken with reference to the group which the individual thinks of when deciding his course of action — the family or any other group, smaller or larger than the family; that action does not promptly follow upon desire but only more or less imperfectly cor- responds to it; that the field of individual choice is always, though in very different ways and to very different degrees, fenced in by social habits or conventions and the like: it still remains broadly true that, within the circular flow, everyone adapts himself to his environment so as to satisfy certain given wants — of himself or others — as best he can. In all cases, the meaning pi economic action is the satisfaction of wants in. the sense that there would be no economic action if there were no wants. In the case of the circular flow, we may also think of satisfaction of wants as the noi-

" The latter is not true for our type. In one sense, he may indeed be called the most rational and the most egotistical of all. For, as we have seen, conscious rationality enters much more into the carrying out of new plans, which themselves have to be worked out before they can be acted upon, than into the mere running of an established business, which is largely a matter of routine. And the typical entrepreneur is more self-centred than other types, because he relies less, than they do on tradition and connection and because his characteristic task — theoretically as well as his- torically — consists precisely in breaking up old, and creating new, tradition. Although this applies primarily to his economic action, it also extends to the moral, cultural, and social consequences of it. It is, of course, no mere coincidence that the period of the rise of the entrepreneur type also gave birth to Utilita- rianism.

But his conduct and his motive are rational’ in no other sense. And in no sense is his characteristic motivation of the hedonist kind. If we define hedonist motive of action as the wish to satisfy one’s wants, we may indeed make wants’’ include any impulse whatsoever, just as we may define egoism so as to include all altruistic values too, on the strength of the fact that they also mean something in the way of self-gratification. But this would reduce our definition to tautology. If we wish to give it meaning, we must restrict it to such wants as are capable of being satisfied by the consumption of goods, and to that kind of satisfaction which is expected from it. Then it is no longer true that our type is acting on a wish to satisfy his wants.

For unless we assume that individuals of our type are driven along by an insatiable craving for hedonist satisfaction, the operations of Gossen’s law would in the case of business leaders soon put a stop to further effort. Experience teaches, however, that typical entrepreneurs retire from the arena only when and be- cause their strength is spent and they feel no longer equal to their task. This does not seem to verify the picture of the economic man, balancing probable results against disutility of effort and reaching in due course a point of equilibrium beyond which he is not willing to go. Effort, in our case, does not seem to weigh at all in the sense of being felt as a reason to stop. And activity of the entrepreneurial type is obviously an obstacle to hedonist enjoyment of those kinds of commodity which are usually acquired by incomes beyond a certain size, because their consump- tion” presupposes leisure. Hedonistically, therefore, the conduct which we usually observe in individuals of our type would be irrational.

This would not, of course, prove the absence of hedonistic motive. Yet it points to another psychology of non-hedonist char- acter, especially if we take into account the indifference to hedonist enjoyment which is often conspicuous in outstanding specimens of the type and which is not difficult to understand.

First of all, there is the dream and the will to found a private kingdom, usually, though not necessarily, also a dynasty. The modem world really does not know any such positions, but what may be attained by industrial or commercial success is still the nearest approach to medieval lordship possible to modem man. Its fascination is specially strong for people who have no other chance of achieving social distinction. The sensation of power and independence loses nothing by the fact that both are largely illusions. Closer analysis would lead to discovering an endless variety within this group of motives, from spiritual ambition down to mere snobbery. But this need not detain us. Let it suf- fice to point out that motives of this kind, although they stand nearest to consumers’ satisfaction, do not coincide with it.

Then there is the will to conquer: the imtpulse to fight, to prove oneself superior to others, to succeed for the sake, not of the fruits of success, but of success itself. From this aspect, economic action f becomes akin to sport — there are financial races, or rather boxing-matches. The financial result is a secondary consideration, or, at all events, mainly valued as an index of success and as a symmptom of victory, the displaying of which very often is more important as a motive of large expenditure than the wish for the consumers’ goods themselves. Again we should find countless nuances, some of which, like social ambition, shade into the first group of motives. And again we are faced with a motivation characteristically different from that of “satisfaction of wants” in the sense defined above, or from, to put the same thing into other words, “hedonistic adaptation.”

Finally, there is the joy of creatinj, of getting tHngs done, or simply of exercising bhe^s raergy and ingenuity. This is akin to a ubiqui dfgdg stand out as an independent factor of behavior with anything like the clearness with which it obtmdes itself in our case. Our type seeks out difficulties.

changes in order to change, delights in ventures. This group of motives is the most distinctly anti-hedonist of the three.

Only with the first groups of motives is private property as the result of entrepreneurial activity an essential factor in making it operative. With the other two it is not. Pecuniary gain is indeed a very accurate expression of success, especially of relative success, and from the standpoint of the man who strives for it, it has the additional advantage of being an objective fact and largely inde- pendent of the opinion of others. These and other peculiarities incident to the mechanism of ‘acquisitive” society make it very difficult to replace it as a motor of industrial development, even if we would discard the importance it has for creating a fund ready for investment. Nevertheless it is true that the second and third groups of entrepreneurial motives may in principle be taken care of by other social arrangements not involving private gain from economic innovation. What other stimuli could be provided, and how they could be made to work as well as the “capitalistic” ones do, are questions which are beyond our theme. They are taken too lightly by social reformers, and are altogether ignored by fiscal radicalism. But they are not insoluble, and may be answered by detailed observation of the psychology of entrepreneurial activity, at least for given times and places.