Entrepreneurship and Capital Theory
| Nicolai Foss |
Suppose all capital were what Robert Solow called “Shmoo” (after a Lil’ Abner cartoon; check this for some Shmoo info), that is, a homogenous substance. In such a world, the (intertemporal) coordination problem deals only with selecting the intensity of the input services that must be supplied over time to match consumer preferences. All capital assets are substitutes, so there is no path-dependence. Asset prices are presumably instantaneously equilibrated. In such a world, there are no coordination problems and no Misesian “calculation” problems. Many decision problems disappear as there are no costs of inspecting, measuring, and monitoring the attributes of capital assets. Decision makers do not reach the bounds of their rationality. In sum, a world of homogeneous capital is a world where there nothing (or very little) for entrepreneurs to do.
However, as Ludwig Lachmann stated in Capital and Its Structure (1956: 16): “We are living in a world of unexpected change; hence capital combinations . . . will be ever changing, will be dissolved and reformed. In this activity, we find the real function of the entrepreneur.” However, for the notion of “capital combinations” to be non-trivial, it must involve capital heterogeneity. In other words, entrepreneurship and capital heterogeneity are closely connected.
In a recent paper, imaginatively titled “Entrepreneurship and Heterogenous Capital,” Peter and I spell out this theme. The paper will appear (sufficiently revised) as a chapter in our forthcoming book, Organizing Entrepreneurship: Judgment and the Theory of the Firm (Cambridge University Press). We are grateful for comments! Here is the abstract:
Entrepreneurship is ultimately about the arrangement of resources into productive activities. Much of the entrepreneurship literature, however, has focused on the demand side of the market. While resource heterogeneity is a feature of many theories of the firm, such theories are not built on a systematic theory of capital. We show how the approach to capital developed by the Austrian school of economics provides a natural bridge between theory of entrepreneurship and the theory of the firm. We refine Austrian capital theory by defining capital heterogeneity in terms of subjectively perceived attributes, the functions, characteristics, and uses of capital assets. Such attributes are not given, but have to be created or discovered by means of entrepreneurial action.