Theories of Entrepreneurship (Blog Post)
|Theories of Entrepreneurship (Blog Post)
|© edegan.com, 2016
Low-quality blog post on theories in relation to entrepreneurship from Nash to Schumpeter to Engelhardt
As defined by the father of the theory himself, John Nash, a game theory bargaining situation occurs in many forms, generally involving two actors who have the opportunity to collaborate for mutual benefit in more than one way(1). Game theory, the overarching economic postulation concerning how rational actors interact in a given scenario has been used for years to both analyze and predict various elements of the United States economy. From business culture to stakeholder investments, international finance to domestic tax laws(2), game theory has been lauded in its usage throughout economics. One area where it may falter is in the area of entrepreneurship. Dr. Lucas Engelhardt makes the argument that game theory sometimes fails to predict entrepreneurial actions because entrepreneurs don't play the game, they change it to better suit their needs(3). His argument, as delivered orally in a lecture at the Mises Institute for Austrian Economics, Freedom, and Peace starts with the quintessential prisoner's dilemma. As formalized in academia, The prisoner's dilemma consists of two members of a criminal gang who are arrested and imprisoned. Each prisoner is in solitary confinement with no means of communicating with the other. The prosecutors lack sufficient evidence to convict the pair on the principal charge. They hope to get both sentenced to a year in prison on a lesser charge. Simultaneously, the prosecutors offer each prisoner a bargain. Each prisoner is given the opportunity either to: betray the other by testifying that the other committed the crime, or to cooperate with the other by remaining silent. The outcomes then read as: If A and B each betray the other, each of them serves 2 years in prison, if A betrays B but B remains silent, A will be set free and B will serve 3 years in prison and vice versa, and if A and B both remain silent, both of them will only serve 1 year in prison on the lesser charge. Classical game theory suggests that the prisoners, each acting in rational self-preservation, will individually chose betray the other, leading to the collectively worst outcome. Engelhardt suggests that an "entrepreneurial" criminal would approach this game in a different way, by changing the rules through foresight. An entrepreneurial criminal, in Englehardt's words, would have foreseen the possibility of getting caught, and, before the crime had hired a third gang member to stand outside the police station and break the knees of any individual who left free. This third gang member, and the understanding of additional consequences among the two original gang members changes the game and provides a stronger force to work towards the best outcome. While this definition of an entrepreneur through game theory may be dubious at best, it reflects a trend in entrepreneurship that has been around since the early 20th century and Harvard economist Joseph Shumpeter. Schumpeterians define entrepreneurs as innovators: people who come up with ideas and embody those ideas in high-growth companies. This is essentially the same definition in non-game terms, entrepreneurs are individuals who bring something new to the table. Schumpeterians further distinguish between “replicative” entrepreneurs who set up small businesses which resemble already existing small businesses, and “innovative” entrepreneurs who upset and disorganize the existing way of doing things. They also distinguish between “small businesses” and “high-growth businesses”. Both sorts have an important role in a successful economy. But they are nevertheless very different sorts of organisations(5). These formal definitions of an entrepreneur are key to keep in mind whether one is crafting policies related to entrepreneurs, attempting to start their own business, or merely wants to know more. Form the early theories of John Nash and Joseph Shumpeter to the modern lectures of Lucas Engelhardt show some of the evolution and range of broad economic theory towards entrepreneurs. Once common theme runs throughout however, entrepreneurs bring something new to the stage. They innovate, create, and shake up the status quo, and are a driving force in the economy of the future.