Phelps on Entrepreneurship

9 October 2006 at 5:26 pm Peter G. Klein Leave a comment

| Peter Klein |

Here is a short piece by Edmund Phelps on entrepreneurship (scroll down to page 26 of the pdf). Snippet:

In real-life entrepreneurial economies . . . entrepreneurs are like fighter pilots: they cannot explain completely their thinking and the decisions they make; the financiers can understand even less. In the modern theory, the entrepreneur-creators of projects and the financiers weighing the projects face radical uncertainty, and therefore do not all make the same valuations.

A usefully structured model would portray each financier as seeking to back the idea of an entrepreneur whose “thinking,” or model, seems like his — thinking with regard to which industry is the best bet, swinging for the fences or not, etc. The insight here, which originates with Hayek and M. Polanyi, is that everyone in a capitalist system carries around a sort of personal model of the economy — at any rate, some piece of it. Thus, the “capital market” is a sort of matching process that mates a financier to an entrepreneur, whom the former sees as having a model compatible with his own model. In such a theory, the heart of the capitalist system is a profusion of ideas represented as competing models of the economy (or a piece of it).