New Research by Turner College Economist Frank Mixon Formalizes Classical Approaches to Entrepreneurship

New research by Turner College economist Frank Mixon and his colleague Ricardo Faria of Florida Atlantic University addresses fragmentation of academic research on entrepreneurship that is borne out of an underrepresentation of some key figures in the history of economic thought. As these authors point out, much of the academic research on entrepreneurship relies heavily, as it should, on the work by late economist Joseph Schumpeter (1883-1950), particularly his 1934 and 1942 books respectively titled The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle and Capitalism, Socialism, and Democracy. However, Schumpeter's important work on entrepreneurship was preceded by that of the late Austrian School economist Ludwig von Mises (1881-1973), which is best represented by his 1920 and 1922 books respectively titled Socialism: An Economic and Sociological Analysis and Economic Calculation in the Socialist Commonwealth.

Most business and economic education professionals are familiar with Schumpeter's conceptualization of entrepreneurship. In his view, entrepreneurs are at the genesis of product and production methods innovations that challenge the status quo, leading to an economic development process that has come to be known today as “creative destruction.” To kickstart this process entrepreneurs are viewed by Schumpeter as being heavily endowed with the types of human capital one might refer to as imagination or intuition capital. In Mises' approach to entrepreneurship, consumers are sovereign, meaning that they dictate what gets produced and entrepreneurs respond by striving to serve consumers’ needs. The subsequent judgments made by entrepreneurs in the face of traditional uncertainty are disciplined, ex post, by profits and losses.

Faria and Mixon first provide a formal model of Mises' approach to entrepreneurship, wherein consumers are the leaders and entrepreneurs are the followers. This hypothesis involves two structural changes in dynamic models of consumption and investment. First, the consumer is the leader, and the entrepreneur is the follower. Second, consumption impacts the capital allocation of entrepreneurs. The block-recursive structure of their Mises model implies that optimal consumption is determined prior to optimal investment, with investment decisions contingent upon consumption choices – that is, consumption drives investment. Next, Schumpeter's approach to entrepreneurship is explored in a formal model wherein entrepreneurs are the leaders, meaning that they determine what gets produced and consumers follow their lead. The Schumpeter approach is solved by first addressing the consumer’s problem, which is to foresee the impact of innovations and to adjust his or her consumption patterns accordingly. In this approach, consumption and investment are determined simultaneously. Taken together, these classical perspectives suggest that entrepreneurship operates through distinct but perhaps complementary mechanisms, an infrequently recognized observation likely owing to the historically under theorized nature of the two classical approaches to the subject.

Faria and Mixon test the efficacy of the formal modeling of each approach to entrepreneurship using time-series data over the first quarter of this century from the 50 states in the U.S. In doing so they find that the patterns of consumption and investment in 19 of the 50 states are consistent with Schumpeter's view of entrepreneurship. Interestingly, the patterns of these two variables in five states resemble those predicted by the Mises model of entrepreneurship, representing a significant portion of the state-level business environment in the U.S. (Tests reported for the remaining 26 U.S. states were inconclusive.) Faria and Mixon conclude that this result suggests that Mises’ model of entrepreneurship is worthy of much more attention in the academic literature than it has heretofore received, particularly given that it can be considered as a complement to Schumpeter’s approach.