The Entrepreneurship (1/3)
Human ability to recognize profit opportunities.
Welcome Austrian reader!
In today’s post we’ll be introducing The Entrepreneurship.
One of the main fundaments on The Austrian School of Economics.
Hope you enjoy it!
“The only source from which an entrepreneur's profit stems is his ability to anticipate better than other people the future demand of the consumers.”
― Ludwig Von Mises
Introduction
The most intimate and characteristic essence of the nature of every human is their capacity to act freely and creatively. From this perspective, we understand socialism as any system of institutional aggression against the free exercise of human action or entrepreneurial function.
Nature of every human being
In a general sense, we consider the concepts of entrepreneurial function and human action to be synonymous. In a more strict sense, the entrepreneurial function consists of the typically human ability to recognize profit opportunities that exist in the environment.
In a broad sense, the entrepreneurial function coincides with human action itself. In this sense, it could be said that anyone who acts to change the present and achieve their future goals exercises the entrepreneurial function. Although this definition might initially seem too broad and not in line with current linguistic usage, it is important to note that it reflects an increasingly developed and studied concept of entrepreneurship by economic science and is fully consistent with the original etymological meaning of the term "enterprise." Indeed, the Spanish term "empresa" as well as the French and English terms "entrepreneur" derive etymologically from the Latin verb "in prehendo-endi-ensum," which means to discover, see, perceive, realize, catch; and the Latin expression "in prehensa" clearly carries the idea of action, meaning to take, grasp, seize.
In short, enterprise is synonymous with action, and thus in France, the term "entrepreneur" has been used since the early Middle Ages to designate those responsible for carrying out significant actions, generally related to war or the construction of large cathedral projects. Now, the sense of enterprise as action is necessarily and inexorably linked to an entrepreneurial attitude, which consists of continually seeking, discovering, creating, or realizing new ends and means (all of this in line with the etymological meaning of "in prehendo" already discussed).
Human Action: Purpose, Value, Means, and Utility
Having defined the entrepreneurial function in reference to the concept of human action, requires us to clarify what we mean by it:
Human action is any deliberate behavior or conduct. Every person, in acting, aims to achieve certain ends they have discovered to be important to them.
We call value the subjective, more or less psychologically intense, appreciation that the actor gives to their goal.
A mean is anything that the actor subjectively believes is appropriate to achieve a goal.
We call utility the subjective appreciation that the actor gives to the means, based on the value of the goal they think that means will allow them to achieve.
In this sense, value and utility are two sides of the same coin, as the subjective value the actor gives to the goal they pursue is projected onto the means they believe useful to achieve it, precisely through the concept of utility.
Creativity, Surprise, and Uncertainty
The future is, therefore, always uncertain, in the sense that it is yet to be made, and the actor only has certain ideas, imaginations, or expectations about it, which they hope to realize through their personal action and interaction with other actors.
The future is also open to all of man's creative possibilities, so each actor faces it with an intractable uncertainty, which may be reduced through patterned behaviors of their own and others (institutions) and by acting and exercising the entrepreneurial function well, but which cannot be completely eliminated.
The open and unlimited nature of the uncertainty we are discussing means that traditional notions of objective and subjective probability, are not applicable to the field of human action.
This is so not only because not all alternatives or possible cases are known, but also because the actor only possesses certain subjective beliefs or convictions—what Mises calls "probabilities" of unique cases or events—which, as they change or expand, tend to radically and non-convergently alter their entire "map" of beliefs and knowledge. In this way, the actor continuously discovers completely new situations that they had not even been able to conceive before.
Cost as a Subjective Concept. Entrepreneurial Profit
We will call cost the subjective value that the actor gives to the ends they forgo when deciding to pursue and undertake a particular course of action.
At first, every human being acts because they subjectively consider that the proposed goal has a value higher than the cost they believe they will incur, that is, because they expect to obtain an entrepreneurial profit.
Profit is, therefore, the gain obtained from human action and constitutes the incentive that drives or motivates action.
As it is the incentive that motivates individuals to act, it pushes them to overcome challenges and pursue their goals. Without the prospect of profit—whether it be monetary, emotional, or otherwise—there would be little motivation to engage in action. Profit, in this sense, is not just a financial gain but the fulfillment of the actor’s subjective expectations, serving as the driving force behind human behavior.
Rationality & Irrationality: Entrepreneurial Error & Loss
Human action is by definition always rational, in the sense that, ex ante, the actor always seeks and selects the means they believe are most appropriate to achieve the ends they consider worthwhile.
This is undoubtedly compatible with the fact that, ex post, the actor may discover they made an entrepreneurial error, that is, incurred entrepreneurial losses, by choosing certain ends or means without realizing that others of greater value to them existed. But the external observer can never objectively qualify an action as irrational, given the essentially subjective nature of ends, costs, and means.
Marginal Utility and Time Preference
Finally, since means are by definition scarce, the actor will tend to achieve first those ends that have the most value to them and then those that are relatively less important to them. For this reason:
Each unit of means that is available and that is exchangeable and relevant in the context of their action will tend to be valued by the actor based on the least important end they believe they can achieve with any of them.
Law of marginal utility
Additionally, since action is undertaken to achieve a particular end and since all action takes place over time and, therefore, has a certain duration, the actor will, ceteris paribus, seek to achieve their goal as soon as possible. That is:
All other things being equal, the actor will always value temporally closer ends more and will only be willing to undertake actions of longer duration if they believe that by doing so, they will achieve ends that have greater value to them
Law of time preference
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