Davenport’s Theory of Enterprise

16 October 2013 at 8:30 am 3 comments

| Peter Klein |

Kudos to Richard Ebeling for a nice piece on Herbert J. Davenport, one of the most American economists of the early twentieth century, mostly forgotten today. (One exception: Daveport was the founding Dean of the University of Missouri’s business school, which named its donor society after him.) Davenport, one of Frank Knight’s teachers, was an early adopter of the subjective theory of value introduced by Carl Menger and, along with Philip Wicksteed and Frank Fetter, helped to spread the marginal revolution in the English-speaking world.

Davenport was also a contributor to the economic theory of entrepreneurship, as noted by Ebeling:

Here was the mechanism by which the logical causality between demands and supplies was brought into actual implementation in the complexity of market activities. The entrepreneur stood, Davenport argued, “as the intermediary in the case, representing in his hiring and buying of productive factors, the demand of the purchasing public, and representing in his cost computations, the degree of scarcity of the productive factors relative to the demand for their products.”

On the one hand, it was “the entrepreneurs who furnished the demand for all . . . the things which are called production goods,” he explained. On the other hand, it was “the competition of the entrepreneurs of each industry with the other entrepreneurs of the same industry, and the competition of the entrepreneurs of each industry with those of other industries” that brought about the emergence of factor prices. All the money outlays, the objectified market “costs” that an entrepreneur had to incur, all traced back to the demand for other things as reflected in the bids of competing entrepreneurs. . . .

“The various markets in which he [the entrepreneur] must hire and buy are fluctuating in their prices,” he said. “And the price at which he will finally market his product is uncertain . . . His alternative lines of activities, also, are subject to uncertainties.” All of the entrepreneur’s calculations, therefore, were expectiational.

His computations of “costs of production,” Davenport went on, “appears to be backward-looking computation,” but in reality was “only a basis for a further and forward-looking computation.” The entrepreneur’s glance was turned towards those future – uncertain – opportunities that still lie before him, and from which he would have to choose the one that he believed offered the greatest net advantages.

Ultimately, then, the entrepreneur’s “cost” of production was reducible to his individual judgments,

Ebeling is quoting Davenport’s 1913 book The Economics of Enterprise, which hints at the “judgment-based view” of entrepreneurship elucidated more fully by Knight.

Entry filed under: - Klein -, Austrian Economics, Entrepreneurship, People, Recommended Reading. Tags: .

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3 Comments Add your own

  • 1. Richard Ebeling  |  16 October 2013 at 12:48 pm

    Peter,
    Thanks for the kind words about my history of thought piece about Herbert Davenport.

    One correction, if I may. His “Economics of Enterprise” was first published in 1913, not 1939. He had been died by then for eight years.

    I’m very fond of drawing upon the “ghosts of Austrians past” for inspiration and ideas, but in this case he wrote and published the book before he went to that entrepreneurially uncertain market “beyond.”

  • 2. Klein, Peter G.  |  16 October 2013 at 12:56 pm

    Richard, thanks for pointing out the error, now fixed. Not sure how that got in there!

  • 3. Chad Howland  |  18 October 2013 at 10:10 am

    Down with extremists! Love it. I’m enjoying your Organizing Entrepreneurial Judgment right now. Thanks for sharing.

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