Economic Role of the Entrepreneur

An entrepreneur is an individual who establishes a firm. Because of their importance in the modern economy, entrepreneurs should be at the heart of microeconomics. Entrepreneurs set up firms in response to economic incentives. In turn, firms create and operate markets that provide mechanisms of exchange for consumers. Firms also create and manage organizations that provide internal coordination and market interactions. The actions of entrepreneurs are the essential force that helps to drive the economy towards equilibrium.

Entrepreneurs are endogenous to the economy in the general theory of the firm. The entrepreneur is, before anything, a consumer. The consumer becomes an entrepreneur by choosing to establish a firm. Consumers bring to the task of entrepreneurship their judgment, knowledge, and technology. Consumers decide to become entrepreneurs based on their personal characteristics and their judgment of available market opportunities. Entrepreneurs act rationally and purposefully based on maximizing their net benefits.

A firm is defined to be a transaction institution whose objectives are separate from those of its owners. All firms involve some combination of market mechanisms and organizational structures. A market is a transaction mechanism that brings buyers and sellers together. A market can be a store, a web site, a matchmaker, or an auction. An organization is a mechanism for managing nonmarket transactions inside the firm, including those between owners and managers, between managers and employees, and between employees, and for managing the firm’s market transactions. An organization can involve hierarchies, bureaucracies, groups, teams, and networks.

Entrepreneurs establish firms. Firms create and manage markets and organizations. Consumers and firms interact through market mechanisms and organizations.

Individual members of the society establish firms to facilitate, formalize, and enhance economic relationships. The social and economic origins of the firm should be reflected in the structure of the economic theory of the firm. Rather than being given exogenously, firms arise endogenously because consumers choose to become entrepreneurs. Consumer characteristics are the givens and firms are the result of consumer decisions. The existence of firms, their purpose, and their organizational structure depend on the decisions of the entrepreneur.