THE social process, which rationalises1 our life and thought, has led us away from the metaphysical treatment of social development and taught us to see the possibility of an empirical treatment; but it has done its work so imperfectly that we must be careful in dealing with the phenomenon itself, still more with the concept in which we comprehend it, and most of all with the word by which we designate the concept and whose associations might lead us astray in all manner of undesirable directions. Closely connected with the metaphysical preconception — more precisely with the ideas which grow out of metaphysical roots and become preconceptions if, neglecting unbridgeable gulfs, we make them do the work of empirical science — even if not itself such a meta-physical preconception, is every search for a “meaning” of history. The same is true of the postulate that a nation, a civilisation, or even the whole of mankind, must show some kind of uniform unilinear development, as even such a matter-of-fact mind as Roscher assumed and as the innumerable philosophers and theorists of history in the long brilliant line from Vico to Lamprecht took and still take for granted. Here, too, belong all kinds of evolutionary thought that centre in Darwin — at least if this means no more than reasoning by analogy — and also the psychological prejudice which consists in seeing more in motives and acts of volition than a reflex of the social process. But the evolutionary idea is now discredited in our field, especially with historians and ethnologists, for still another reason. To the reproach of unscientific and extra-scientific mysticism that now surrounds the “evolutionary” ideas, is added that of dilettantism. With all the hasty generalisations in which the word “evolution” plays a part, many of us have lost patience.
We must get away from such things. Then two facts still remain: first the fact of historical change, whereby social conditions become historical “individuals” in historical time. These changes constitute neither a circular process nor pendulum movements about a centre. The concept of social development is defined by these two circumstances, together with the other fact: that whenever we do not succeed in adequately explaining a given historical state of things from the preceding one, we do indeed recognise the existence of an unsolved but not insoluble problem. This holds good first of all for the individual case. For example, we understand Germany's internal political history in 1919 as one of the effects of the preceding war. It also holds good, however, for more general problems.
Economic development is so far simply the object of economic history, which in turn is merely a part of universal history, only separated from the rest for purposes of exposition. Because of this fundamental dependence of the economic aspect of things on everything else, it is not possible to explain economic change by previous economic conditions alone. For the economic state of a people does not emerge simply from the preceding economic conditions, but only from the preceding total situation. The expository and analytical difficulties which arise from this are very much diminished, practically if not in principle, by the facts which form the basis of economic interpretation of history; without being compelled to take a stand for or against this view, we can state that the economic world is relatively autonomous because it takes up such a great part of a nation's life, and forms or conditions a great part of the remainder; wherefore writing economic history by itself is obviously a different thing from writing, say, military history. To this must be added still another fact which facilitates the separate description of any of the divisions of the social process. Every sector of social life is, as it were, inhabited by a distinct set of people. The heteronomous elements generally do not affect the social process in any such sector directly as the bursting of a bomb “affects” all things which happen to be in the room in which it explodes, but only through its data and the conduct of its inhabitants; and even if an event occurs like the one suggested by our metaphor of a bursting bomb, the effects only occur in the particular garb with which those primarily concerned dress them. Therefore, just as describing the effects of the Counter Reformation upon Italian and Spanish painting always remains history of art, so describing the economic process remains economic history even where the true causation is largely non-economic.
The economic sector, again, is open to an endless variety of points of view and treatments, which one can array, for example, according to the breadth of their scope — or we might just as well say according to the degree of generalisation which they imply. From an exposition of the nature of the economic life of the Niederaltaich monastery in the thirteenth century to Sombart's exposition of the development of economic life in western Europe, there runs a continuous, logically uniform thread. Such an exposition as Sombart's is theory, and indeed theory of economic development in the sense in which we intend it for the moment. But it is not economic theory in the sense in which the contents of the first chapter of this book are economic theory, which is what has been understood by “economic theory” since Ricardo's day. Economic theory in the latter sense, it is true, plays a part in a theory like Sombart's, but a wholly subordinate one: namely, where the connection of historical facts is complicated enough to necessitate methods of interpretation which go beyond the analytic powers of the man in the street, the line of thought takes the form offered by that analytical apparatus. However, where it is simply a question of making development or the historical outcome of it intelligible, of working out the elements which characterise a situation or determine an issue, economic theory in the traditional sense contributes next to nothing.2
We are not concerned here with a theory of development in this sense. No historical evolutionary factors will be indicated — whether individual events like the appearance of American gold production in Europe in the sixteenth century, or “more general” circumstances like changes in the mentality of economic men, in the area of the civilised world, in social organisation, in political constellations, in productive technique, and so forth — nor will their effects be described for individual cases or for groups of cases.3 On the contrary, the economic theory the nature of which was sufficiently expounded to the reader in the first chapter will simply be improved for its own purposes, by building onto it. If this were also to enable this theory to perform better than hitherto its service to the other kind of theory of development, the fact would still remain that the two methods lie in different planes.
Our problem is as follows. The theory of the first chapter describes economic life from the standpoint of a “circular flow,” running on in channels essentially the same year after year — similar to the circulation of the blood in an animal organism. Now this circular flow and its channels do alter in time, and here we abandon the analogy with the circulation of the blood. For although the latter also changes in the course of the growth and decline of the organism, yet it only does so continuously, that is by steps which one can choose smaller than any assignable quantity, however small, and always within the same framework. Economic life experiences such changes too, but it also experiences others which do not appear continuously and which change the framework, the traditional course itself. They cannot be understood by means of any analysis of the circular flow, although they are purely economic and although their explanation is obviously among the tasks of pure theory. Now such changes and the phenomena which appear in their train are the object of our investigation. But we do not ask: what changes of this sort have actually made the modern economic system what it is? nor: what are the conditions of such changes? We only ask, and indeed in the same sense as theory always asks: how do such changes take place, and to what economic phenomena do they give rise?
The same thing may be put somewhat differently. The theory of the first chapter describes economic life from the standpoint of the economic system's tendency towards an equilibrium position, which tendency gives us the means of determining prices and quantities of goods, and may be described as an adaptation to data existing at any time. In contrast to the conditions of the circular flow this does not mean in itself that year after year “ the same” things happen; for it only means that we conceive the several processes in the economic system as partial phenomena of the tendency towards an equilibrium position, but not necessarily towards the same one. The position of the ideal state of equilibrium in the economic system, never attained, continually “striven after” (of course not consciously), changes, because the data change. And theory is not weaponless in the face of these changes in data. It is constructed so as to be able to deal with the consequences of such changes; it has special instruments for the purpose (for example the instrument called quasi-rent). If the change occurs in the non-social data (natural conditions) or in non-economic social data (here belong the effects of war, changes in commercial, social, or economic policy), or in consumers' tastes, then to this extent no fundamental overhaul of the theoretical tools seems to be required. These tools only fail — and here this argument joins the preceding — where economic life itself changes its own data by fits and starts. The building of a railway may serve as an example. Continuous changes, which may in time, by continual adaptation through innumerable small steps, make a great department store out of a small retail business, come under the “static” analysis. But “static” analysis is not only unable to predict the consequences of discontinuous changes in the traditional way of doing things; it can neither explain the occurrence of such productive revolutions nor the phenomena which accompany them. It can only investigate the new equilibrium position after the changes have occurred. It is just this occurrence of the “revolutionary” change that is our problem, the problem of economic development in a very narrow and formal sense. The reason why we so state the problem and turn aside from traditional theory lies not so much in the fact that economic changes, especially, if not solely, in the capitalist epoch, have actually occurred thus and not by continuous adaptation, but more in their fruitfulness.4
By “development,” therefore, we shall understand only such changes in economic life as are not forced upon it from without but arise by its own initiative, from within. Should it turn out that there are no such changes arising in the economic sphere itself, and that the phenomenon that we call economic development is in practice simply founded upon the fact that the data change and that the economy continuously adapts itself to them, then we should say that there is no economic development. By this we should mean that economic development is not a phenomenon to be explained economically, but that the economy, in itself without development, is dragged along by the changes in the surrounding world, that the causes and hence the explanation of the development must be sought outside the group of facts which are described by economic theory.
Nor will the mere growth of the economy, as shown by the growth of population and wealth, be designated here as a process of development. For it calls forth no qualitatively new phenomena, but only processes of adaptation of the same kind as the changes in the natural data. Since we wish to direct our attention to other phenomena, we shall regard such increases as changes in data.5
Every concrete process of development finally rests upon preceding development. But in order to see the essence of the thing clearly, we shall abstract from this and allow the development to arise out of a position without development. Every process of development creates the prerequisites for the following. Thereby the form of the latter is altered, and things will turn out differently from what they would have been if every concrete phase of development had been compelled first to create its own conditions. However, if we wish to get at the root of the matter, we may not include in the data of our explanation elements of what is to be explained. But if we do not do this, we shall create an apparent discrepancy between fact and theory, which may constitute an important difficulty for the reader.
If I have been more successful than in the first edition in concentrating the exposition upon essentials and in guarding against misunderstandings, then further special explanations of the words “static” and “dynamic,” with their innumerable meanings, are not necessary. Development in our sense is a distinct phenomenon, entirely foreign to what may be observed in the circular flow or in the tendency towards equilibrium. It is spontaneous and discontinuous change in the channels of the flow, disturbance of equilibrium, which forever alters and displaces the equilibrium state previously existing. Our theory of development is nothing but a treatment of this phenomenon and the processes incident to it.6
These spontaneous and discontinuous changes in the channel of the circular flow and these disturbances of the centre of equilibrium appear in the sphere of industrial and commercial life, not in the sphere of the wants of the consumers of final products. Where spontaneous and discontinuous changes in consumers' tastes appear, it is a question of a sudden change in data with which the businessman must cope, hence possibly a question of a motive or an opportunity for other than gradual adaptations of his conduct, but not of such other conduct itself. Therefore this case does not offer any other problems than a change in natural data or require any new method of treatment; wherefore we shall neglect any spontaneity of consumers' needs that may actually exist, and assume tastes as “given.” This is made easy for us by the fact that the spontaneity of wants is in general small. To be sure, we must always start from the satisfaction of wants, since they are the end of all production, and the given economic situation at any time must be understood from this aspect. Yet innovations in the economic system do not as a rule take place in such a way that first new wants arise spontaneously in consumers and then the productive apparatus swings round through their pressure. We do not deny the presence of this nexus. It is, however, the producer who as a rule initiates economic change, and consumers are educated by him if necessary; they are, as it were, taught to want new things, or things which differ in some respect or other from those which they have been in the habit of using. Therefore, while it is permissible and even necessary to consider consumers' wants as an independent and indeed the fundamental force in a theory of the circular flow, we must take a different attitude as soon as we analyse change.
To produce means to combine materials and forces within our reach (cf. supra, Chapter I). To produce other things, or the same things by a different method, means to combine these materials and forces differently. In so far as the “new combination” may in time grow out of the old by continuous adjustment in small steps, there is certainly change, possibly growth, but neither a new phenomenon nor development in our sense. In so far as this is not the case, and the new combinations appear discontinuously, then the phenomenon characterising development emerges. For reasons of expository convenience, henceforth, we shall only mean the latter case when we speak of new combinations of productive means. Development in our sense is then defined by the carrying out of new combinations.
This concept covers the following five cases: (1) The introduction of a new good — that is one with which consumers are not yet familiar — or of a new quality of a good. (2) The introduction of a new method of production, that is one not yet tested by experience in the branch of manufacture concerned, which need by no means be founded upon a discovery scientifically new, and can also exist in a new way of handling a commodity commercially. (3) The opening of a new market, that is a market into which the particular branch of manufacture of the country in question has not previously entered, whether or not this market has existed before. (4) The conquest of a new source of supply of raw materials or half-manufactured goods, again irrespective of whether this source already exists or whether it has first to be created. (5) The carrying out of the new organisation of any industry, like the creation of a monopoly position (for example through trustification) or the breaking up of a monopoly position.
Now two things are essential for the phenomena incident to the carrying out of such new combinations, and for the understanding of the problems involved. In the first place it is not essential to the matter — though it may happen — that the new combinations should be carried out by the same people who control the productive or commercial process which is to be displaced by the new. On the contrary, new combinations are, as a rule, embodied, as it were, in new firms which generally do not arise out of the old ones but start producing beside them; to keep to the example already chosen, in general it is not the owner of stage-coaches who builds railways. This fact not only puts the discontinuity which characterises the process we want to describe in a special light, and creates so to speak still another kind of discontinuity in addition to the one mentioned above, but it also explains important features of the course of events. Especially in a competitive economy, in which new combinations mean the competitive elimination of the old, it explains on the one hand the process by which individuals and families rise and fall economically and socially and which is peculiar to this form of organisation, as well as a whole series of other phenomena of the business cycle, of the mechanism of the formation of private fortunes, and so on. In a non-exchange economy, for example a socialist one, the new combinations would also frequently appear side by side with the old. But the economic consequences of this fact would be absent to some extent, and the social consequences would be wholly absent. And if the competitive economy is broken up by the growth of great combines, as is increasingly the case to-day in all countries, then this must become more and more true of real life, and the carrying out of new combinations must become in ever greater measure the internal concern of one and the same economic body. The difference so made is great enough to serve as the water-shed between two epochs in the social history of capitalism.
We must notice secondly, only partly in connection with this element, that whenever we are concerned with fundamental principles, we must never assume that the carrying out of new combinations takes place by employing means of production which happen to be unused. In practical life, this is very often the case. There are always unemployed workmen, unsold raw materials, unused productive capacity, and so forth. This certainly is a contributory circumstance, a favorable condition and even an incentive to the emergence of new combinations; but great unemployment is only the consequence of non-economic events — as for example the World War — or precisely of the development which we are investigating. In neither of the two cases can its existence play a fundamental rôle in the explanation, and it cannot occur in a well balanced circular flow from which we start. Nor would the normal yearly increment meet the case, as it would be small in the first place, and also because it would normally be absorbed by a corresponding expansion of production within the circular flow, which, if we admit such increments, we must think of as adjusted to this rate of growth.7 As a rule the new combinations must draw the necessary means of production from some old combinations — and for reasons already mentioned we shall assume that they always do so, in order to put in bold relief what we hold to be the essential contour line. The carrying out of new combinations means, therefore, simply the different employment of the economic system's existing supplies of productive means —which might provide a second definition of development in our sense. That rudiment of a pure economic theory of development which is implied in the traditional doctrine of the formation of capital always refers merely to saving and to the investment of the small yearly increase attributable to it. In this it asserts nothing false, but it entirely overlooks much more essential things. The slow and continuous increase in time of the national supply of productive means and of savings is obviously an important factor in explaining the course of economic history through the centuries, but it is completely overshadowed by the fact that development consists primarily in employing existing resources in a different way, in doing new things with them, irrespective of whether those resources increase or not. In the treatment of shorter epochs, moreover, this is even true in a more tangible sense. Different methods of employment, and not saving and increases in the available quantity of labor, have changed the face of the economic world in the last fifty years. The increase of population especially, but also of the sources from which savings can be made, was first made possible in large measure through the different employment of the then existing means.
The next step in our argument is also self-evident: command over means of production is necessary to the carrying out of new combinations. Procuring the means of production is one distinct problem for the established firms which work within the circular flow. For they have them already procured or else can procure them currently with the proceeds of previous production as was explained in the first chapter. There is no fundamental gap here between receipts and disbursements, which, on the contrary, necessarily correspond to one another just as both correspond to the means of production offered and to the products demanded. Once set in motion, this mechanism works automatically. Furthermore, the problem does not exist in a non-exchange economy even if new combinations are carried out in it; for the directing organ, for example a socialist economic ministry, is in a position to direct the productive resources of the society to new uses exactly as it can direct them to their previous employments. The new employment may, under certain circumstances, impose temporary sacrifices, privations, or increased efforts upon the members of the community; it may presuppose the solution of difficult problems, for example the question from which of the old combinations the necessary productive means should be withdrawn; but there is no question of procuring means of production not already at the disposal of the economic ministry. Finally, the problem also does not exist in a competitive economy in the case of the carrying out of new combinations, if those who carry them out have the necessary productive means or can get them in exchange for others which they have or for any other property which they may possess. This is not the privilege of the possession of property per se, but only the privilege of the possession of disposable property, that is such as is employable either immediately for carrying out the new combination or in exchange for the necessary goods and services.8 In the contrary case — and this is the rule as it is the fundamentally interesting case — the possessor of wealth, even if it is the greatest combine, must resort to credit if he wishes to carry out a new combination, which cannot like an established business be financed by returns from previous production. To provide this credit is clearly the function of that category of individuals which we call “capitalists.” It is obvious that this is the characteristic method of the capitalist type of society — and important enough to serve as its differentia specified — for forcing the economic system into new channels, for putting its means at the service of new ends, in contrast to the method of a non-exchange economy of the kind which simply consists in exercising the directing organ's power to command.
It does not appear to me possible to dispute in any way the foregoing statement. Emphasis upon the significance of credit is to be found in every textbook. That the structure of modern industry could not have been erected without it, that it makes the individual to a certain extent independent of inherited possessions, that talent in economic life “rides to success on its debts,” even the most conservative orthodoxy of the theorists cannot well deny. Nor is the connection established here between credit and the carrying out of innovations, a connection which will be worked out later, anything to take offence at. For it is as clear a priori as it is established historically that credit is primarily necessary to new combinations and that it is from these that it forces its way into the circular flow, on the one hand because it was originally necessary to the founding of what are now the old firms, on the other hand because its mechanism, once in existence, also seizes old combinations for obvious reasons.9 First, a priori: we saw in the first chapter that borrowing is not a necessary element of production in the normal circular flow within accustomed channels, is not an element without which we could not understand the essential phenomena of the latter. On the other hand, in carrying out new combinations, “financing” as a special act is fundamentally necessary, in practice as in theory. Second, historically: those who lend and borrow for industrial purposes do not appear early in history. The pre-capitalistic lender provided money for other than business purposes. And we all remember the type of industrialist who felt he was losing caste by borrowing and who therefore shunned banks and bills of exchange. The capitalistic credit system has grown out of and thrived on the financing of new combinations in all countries, even though in a different way in each (the origin of German joint stock banking is especially characteristic). Finally there can be no stumblingblock in our speaking of receiving credit in “money or money substitutes.” We certainly do not assert that one can produce with coins, notes, or bank balances, and do not deny that services of labor, raw materials, and tools are the things wanted. We are only speaking of a method of procuring them.
Nevertheless there is a point here in which, as has already been hinted, our theory diverges from the traditional view. The accepted theory sees a problem in the existence of the productive means, which are needed for new, or indeed any, productive processes, and this accumulation therefore becomes a distinct function or service. We do not recognise this problem at all; it appears to us to be created by faulty analysis. It does not exist in the circular flow, because the running of the latter presupposes given quantities of means of production. But neither does it exist for the carrying out of new combinations,10 because the productive means required in the latter are drawn from the circular flow whether they already exist there in the shape wanted or have first to be produced by other means of production existing there. Instead of this problem another exists for us: the problem of detaching productive means (already employed somewhere) from the circular flow and allotting them to new combinations. This is done by credit, by means of which one who wishes to carry out new combinations outbids the producers in the circular flow in the market for the required means of production. And although the meaning and object of this process lies in a movement of goods from their old towards new employments, it cannot be described entirely in terms of goods without overlooking something essential, which happens in the sphere of money and credit and upon which depends the explanation of important phenomena in the capitalist form of economic organisation, in contrast to other types.
Finally one more step in this direction: whence come the sums needed to purchase the means of production necessary for the new combinations if the individual concerned does not happen to have them? The conventional answer is simple: out of the annual growth of social savings plus that part of resources which may annually become free. Now the first quantity was indeed important enough before the war — it may perhaps be estimated as one-fifth of total private incomes in Europe and North America — so that together with the latter sum, which it is difficult to obtain statistically, it does not immediately give the lie quantitatively to this answer. At the same time a figure representing the range of all the business operations involved in carrying out new combinations is also not available at present. But we may not even start from total “savings.” For its magnitude is explicable only by the results of previous development. By far the greater part of it does not come from thrift in the strict sense, that is from abstaining from the consumption of part of one's regular income, but it consists of funds which are themselves the result of successful innovation and in which we shall later recognise entrepreneurial profit. In the circular flow there would be on the one hand no such rich source, out of which to save, and on the other hand essentially less incentive to save. The only big incomes known to it would be monopoly revenues and the rents of large land-owners; while provision for misfortunes and old age, perhaps also irrational motives, would be the only incentives. The most important incentive, the chance of participating in the gains of development, would be absent. Hence, in such an economic system there could be no great reservoirs of free purchasing power, to which one who wished to form new combinations could turn — and his own savings would only suffice in exceptional cases. All money would circulate, would be fixed in definite established channels.
Even though the conventional answer to our question is not obviously absurd, yet there is another method of obtaining money for this purpose, which claims our attention, because it, unlike the one referred to, does not presuppose the existence of accumulated results of previous development, and hence may be considered as the only one which is available in strict logic. This method of obtaining money is the creation of purchasing power by banks. The form it takes is immaterial. The issue of bank-notes not fully covered by specie withdrawn from circulation is an obvious instance, but methods of deposit banking render the same service, where they increase the sum total of possible expenditure. Or we may think of bank acceptances in so far as they serve as money to make payments in wholesale trade. It is always a question, not of transforming purchasing power which already exists in someone's possession, but of the creation of new purchasing power out of nothing — out of nothing even if the credit contract by which the new purchasing power is created is supported by securities which are not themselves circulating media — which is added to the existing circulation. And this is the source from which new combinations are often financed, and from which they would have to be financed always, if results of previous development did not actually exist at any moment.
These credit means of payment, that is means of payment which are created for the purpose and by the act of giving credit, serve just as ready money in trade, partly directly, partly because they can be converted immediately into ready money for small payments or payments to the non-banking classes — in particular to wage-earners. With their help, those who carry out new combinations can gain access to the existing stocks of productive means, or, as the case may be, enable those from whom they buy productive services to gain immediate access to the market for consumption goods. There is never, in this nexus, granting of credit in the sense that someone must wait for the equivalent of his service in goods, and content himself with a claim, thereby fulfilling a special function; not even in the sense that someone has to accumulate means of maintenance for laborers or land-owners, or produced means of production, all of which would only be paid for out of the final results of production. Economically, it is true, there is an essential difference between these means of payment, if they are created for new ends, and money or other means of payment of the circular flow. The latter may be conceived on the one hand as a kind of certificate for completed production and the increase in the social product effected through it, and on the other hand as a kind of order upon, or claim to, part of this social product. The former have not the first of these two characteristics. They too are orders, for which one can immediately procure consumption goods, but not certificates for previous production. Access to the national dividend is usually to be had only on condition of some productive service previously rendered or of some product previously sold. This condition is, in this case, not yet fulfilled. It will be fulfilled only after the successful completion of the new combinations. Hence this credit will in the meantime affect the price level.
The banker, therefore, is not so much primarily a middleman in the commodity “purchasing power” as a producer of this commodity. However, since all reserve funds and savings to-day usually flow to him, and the total demand for free purchasing power, whether existing or to be created, concentrates on him, he has either replaced private capitalists or become their agent; he has himself become the capitalist par excellence. He stands between those who wish to form new combinations and the possessors of productive means. He is essentially a phenomenon of development, though only when no central authority directs the social process. He makes possible the carrying out of new combinations, authorises people, in the name of society as it were, to form them. He is the ephor of the exchange economy.
We now come to the third of the elements with which our analysis works, namely the “new combination of means of production,”and credit. Although all three elements form a whole, the third may be described as the fundamental phenomenon of economic development. The carrying out of new combinations we call “enterprise”; the individuals whose function it is to carry them out we call “entrepreneurs.” These concepts are at once broader and narrower than the usual. Broader, because in the first place we call entrepreneurs not only those “independent” businessmen in an exchange economy who are usually so designated, but all who actually fulfil the function by which we define the concept, even if they are, as is becoming the rule, “dependent” employees of a company, like managers, members of boards of directors, and so forth, or even if their actual power to perform the entrepreneurial function has any other foundations, such as the control of a majority of shares. As it is the carrying out of new combinations that constitutes the entrepreneur, it is not necessary that he should be permanently connected with an individual firm; many “financiers,” “promotors,” and so forth are not, and still they may be entrepreneurs in our sense. On the other hand, our concept is narrower than the traditional one in that it does not include all heads of firms or managers or industrialists who merely may operate an established business, but only those who actually perform that function. Nevertheless I maintain that the above definition does no more than formulate with greater precision what the traditional doctrine really means to convey. In the first place our definition agrees with the usual one on the fundamental point of distinguishing between “entrepreneurs” and “capitalists” — irrespective of whether the latter are regarded as owners of money, claims to money, or material goods. This distinction is common property to-day and has been so for a considerable time. It also settles the question whether the ordinary shareholder as such is an entrepreneur, and disposes of the conception of the entrepreneur as risk bearer.11 Furthermore, the ordinary characterisation of the entrepreneur type by such expressions as “initiative,” “authority,” or “foresight” points entirely in our direction. For there is little scope for such qualities within the routine of the circular flow, and if this had been sharply separated from the occurrence of changes in this routine itself, the emphasis in the definition of the function of entrepreneurs would have been shifted automatically to the latter. Finally there are definitions which we could simply accept. There is in particular the well known one that goes back to J. B. Say: the entrepreneur's function is to combine the productive factors, to bring them together. Since this is a performance of a special kind only when the factors are combined for the first time — while it is merely routine work if done in the course of running a business — this definition coincides with ours. When Mataja (in Unternehmergewinn) defines the entrepreneur as one who receives profit, we have only to add the conclusion of the first chapter, that there is no profit in the circular flow, in order to trace this formulation too back to ours.12 And this view is not foreign to traditional theory, as is shown by the construction of the entrepreneur faisant ni bénéfice ni perte, which has been worked out rigorously by Walras, but is the property of many other authors. The tendency is for the entrepreneur to make neither profit nor loss in the circular flow — that is he has no function of a special kind there, he simply does not exist; but in his stead, there are heads of firms or business managers of a different type which we had better not designate by the same term.
It is a prejudice to believe that the knowledge of the historical origin of an institution or of a type immediately shows us its sociological or economic nature. Such knowledge often leads us to understand it, but it does not directly yield a theory of it. Still more false is the belief that “primitive” forms of a type are also ipso facto the “simpler” or the “more original” in the sense that they show their nature more purely and with fewer complications than later ones. Very frequently the opposite is the case, amongst other reasons because increasing specialisation may allow functions and qualities to stand out sharply, which are more difficult to recognise in more primitive conditions when mixed with others. So it is in our case. In the general position of the chief of a primitive horde it is difficult to separate the entrepreneurial element from the others. For the same reason most economists up to the time of the younger Mill failed to keep capitalist and entrepreneur distinct because the manufacturer of a hundred years ago was both; and certainly the course of events since then has facilitated the making of this distinction, as the system of land tenure in England has facilitated the distinction between farmer and landowner, while on the Continent this distinction is still occasionally neglected, especially in the case of the peasant who tills his own soil.13 But in our case there are still more of such difficulties. The entrepreneur of earlier times was not only as a rule the capitalist too, he was also often — as he still is to-day in the case of small concerns — his own technical expert, in so far as a professional specialist was not called in for special cases. Likewise he was (and is) often his own buying and selling agent, the head of his office, his own personnel manager, and sometimes, even though as a rule he of course employed solicitors, his own legal adviser in current affairs. And it was performing some or all of these functions that regularly filled his days. The carrying out of new combinations can no more be a vocation than the making and execution of strategical decisions, although it is this function and not his routine work that characterises the military leader. Therefore the entrepreneur's essential function must always appear mixed up with other kinds of activity, which as a rule must be much more conspicuous than the essential one. Hence the Marshallian definition of the enterpreneur, which simply treats the entrepreneurial function as “management” in the widest meaning, will naturally appeal to most of us. We do not accept it, simply because it does not bring out what we consider to be the salient point and the only one which specifically distinguishes entrepreneurial from other activities.
Nevertheless there are types — the course of events has evolved them by degrees — which exhibit the entrepreneurial function with particular purity. The “promoter,” to be sure, belongs to them only with qualifications. For, neglecting the associations relative to social and moral status which are attached to this type, the promoter is frequently only an agent intervening on commission, who does the work of financial technique in floating the new enterprise. In this case he is not its creator nor the driving power in the process. However, he may be the latter also, and then he is something like an “entrepreneur by profession.” But the modern type of “captain of industry”14 corresponds more closely to what is meant here, especially if one recognises his identity on the one hand with, say, the commercial entrepreneur of twelfth-century Venice — or, among later types, with John Law — and on the other hand with the village potentate who combines with his agriculture and his cattle trade, say, a rural brewery, an hotel, and a store. But whatever the type, everyone is an entrepreneur only when he actually “carries out new combinations,” and loses that character as soon as he has built up his business, when he settles down to running it as other people run their businesses. This is the rule, of course, and hence it is just as rare for anyone always to remain an entrepreneur throughout the decades of his active life as it is for a businessman never to have a moment in which he is an entrepreneur, to however modest a degree.
Because being an entrepreneur is not a profession and as a rule not a lasting condition, entrepreneurs do not form a social class in the technical sense, as, for example, landowners or capitalists or workmen do. Of course the entrepreneurial function will lead to certain class positions for the successful entrepreneur and his family. It can also put its stamp on an epoch of social history, can form a style of life, or systems of moral and aesthetic values; but in itself it signifies a class position no more than it presupposes one. And the class position which may be attained is not as such an entrepreneurial position, but is characterised as landowning or capitalist, according to how the proceeds of the enterprise are used. Inheritance of the pecuniary result and of personal qualities may then both keep up this position for more than one generation and make further enterprise easier for descendants, but the function of the entrepreneur itself cannot be inherited, as is shown well enough by the history of manufacturing families.15
But now the decisive question arises: why then is the carrying out of new combinations a special process and the object of a special kind of “function”? Every individual carries on his economic affairs as well as he can. To be sure, his own intentions are never realised with ideal perfection, but ultimately his behavior is moulded by the influence on him of the results of his conduct, so as to fit circumstances which do not as a rule change suddenly. If a business can never be absolutely perfect in any sense, yet it in time approaches a relative perfection having regard to the surrounding world, the social conditions, the knowledge of the time, and the horizon of each individual or each group. New possibilities are continuously being offered by the surrounding world, in particular new discoveries are continuously being added to the existing store of knowledge. Why should not the individual make just as much use of the new possibilities as of the old, and, according to the market position as he understands it, keep pigs instead of cows, or even choose a new crop rotation, if this can be seen to be more advantageous? And what kind of special new phenomena or problems, not to be found in the established circular flow, can arise there?
While in the accustomed circular flow every individual can act promptly and rationally because he is sure of his ground and is supported by the conduct, as adjusted to this circular flow, of all other individuals, who in turn expect the accustomed activity from him, he cannot simply do this when he is confronted by a new task. While in the accustomed channels his own ability and experience suffice for the normal individual, when confronted with innovations he needs guidance. While he swims with the stream in the circular flow which is familiar to him, he swims against the stream if he wishes to change its channel. What was formerly a help becomes a hindrance. What was a familiar datum becomes an unknown. Where the boundaries of routine stop, many people can go no further, and the rest can only do so in a highly variable manner. The assumption that conduct is prompt and rational is in all cases a fiction. But it proves to be sufficiently near to reality, if things have time to hammer logic into men. Where this has happened, and within the limits in which it has happened, one may rest content with this fiction and build theories upon it. It is then not true that habit or custom or non-economic ways of thinking cause a hopeless difference between the individuals of different classes, times, or cultures, and that, for example, the “economics of the stock exchange” would be inapplicable say to the peasants of to-day or to the craftsmen of the Middle Ages. On the contrary the same theoretical picture16 in its broadest contour lines fits the individuals of quite different cultures, whatever their degree of intelligence and of economic rationality, and we can depend upon it that the peasant sells his calf just as cunningly and egotistically as the stock exchange member his portfolio of shares. But this holds good only where precedents without number have formed conduct through decades and, in fundamentals, through hundreds and thousands of years, and have eliminated unadapted behavior. Outside of these limits our fiction loses its closeness to reality.17 To cling to it there also, as the traditional theory does, is to hide an essential thing and to ignore a fact which, in contrast with other deviations of our assumptions from reality, is theoretically important and the source of the explanation of phenomena which would not exist without it.
Therefore, in describing the circular flow one must treat combinations of means of production (the production-functions) as data, like natural possibilities, and admit only small18 variations at the margins, such as every individual can accomplish by adapting himself to changes in his economic environment, without materially deviating from familiar lines. Therefore, too, the carrying out of new combinations is a special function, and the privilege of a type of people who are much less numerous than all those who have the “objective” possibility of doing it. Therefore, finally, entrepreneurs are a special type,19 and their behavior a special problem, the motive power of a great number of significant phenomena. Hence, our position may be characterised by three corresponding pairs of opposites. First, by the opposition of two real processes: the circular flow or the tendency towards equilibrium on the one hand, a change in the channels of economic routine or a spontaneous change in the economic data arising from within the system on the other. Secondly, by the opposition of two theoretical apparatuses: statics and dynamics.20 Thirdly, by the opposition of two types of conduct, which, following reality, we can picture as two types of individuals: mere managers and entrepreneurs. And therefore the “best method” of producing in the theoretical sense is to be conceived as “the most advantageous among the methods which have been empirically tested and become familiar.” But it is not the “best” of the methods “possible” at the time. If one does not make this distinction, the concept becomes meaningless and precisely those problems remain unsolved which our interpretation is meant to provide for.
Let us now formulate precisely the characteristic feature of the conduct and type under discussion. The smallest daily action embodies a huge mental effort. Every schoolboy would have to be a mental giant, if he himself had to create all he knows and uses by his own individual activity. And every man would have to be a giant of wisdom and will, if he had in every case to create anew all the rules by which he guides his everyday conduct. This is true not only of those decisions and actions of individual and social life the principles of which are the product of tens of thousands of years, but also of those products of shorter periods and of a more special nature which constitute the particular instrument for performing vocational tasks. But precisely the things the performance of which according to this should involve a supreme effort, in general demand no special individual effort at all; those which should be especially difficult are in reality especially easy; what should demand superhuman capacity is accessible to the least gifted, given mental health. In particular within the ordinary routine there is no need for leadership. Of course it is still necessary to set people their tasks, to keep up discipline, and so forth; but this is easy and a function any normal person can learn to fulfil. Within the lines familiar to all, even the function of directing other people, though still necessary, is mere “work” like any other, comparable to the service of tending a machine. All people get to know, and are able to do, their daily tasks in the customary way and ordinarily perform them by themselves; the “director” has his routine as they have theirs; and his directive function serves merely to correct individual aberrations.
This is so because all knowledge and habit once acquired becomes as firmly rooted in ourselves as a railway embankment in the earth. It does not require to be continually renewed and consciously reproduced, but sinks into the strata of subconsciousness. It is normally transmitted almost without friction by inheritance, teaching, upbringing, pressure of environment. Everything we think, feel, or do often enough becomes automatic and our conscious life is unburdened of it. The enormous economy of force, in the race and the individual, here involved is not great enough, however, to make daily life a light burden and to prevent its demands from exhausting the average energy all the same. But it is great enough to make it possible to meet the ordinary claims. This holds good likewise for economic daily life. And from this it follows also for economic life that every step outside the boundary of routine has difficulties and involves a new element. It is this element that constitutes the phenomenon of leadership.
The nature of these difficulties may be focussed in the following three points. First, outside these accustomed channels the individual is without those data for his decisions and those rules of conduct which are usually very accurately known to him within them. Of course he must still foresee and estimate on the basis of his experience. But many things must remain uncertain, still others are only ascertainable within wide limits, some can perhaps only be “guessed.” In particular this is true of those data which the individual strives to alter and of those which he wants to create. Now he must really to some extent do what tradition does for him in everyday life, viz. consciously plan his conduct in every particular. There will be much more conscious rationality in this than in customary action, which as such does not need to be reflected upon at all; but this plan must necessarily be open not only to errors greater in degree, but also to other kinds of errors than those occurring in customary action. What has been done already has the sharp-edged reality of all the things which we have seen and experienced; the new is only the figment of our imagination. Carrying out a new plan and acting according to a customary one are things as different as making a road and walking along it.
How different a thing this is becomes clearer if one bears in mind the impossibility of surveying exhaustively all the effects and counter-effects of the projected enterprise. Even as many of them as could in theory be ascertained if one had unlimited time and means must practically remain in the dark. As military action must be taken in a given strategic position even if all the data potentially procurable are not available, so also in economic life action must be taken without working out all the details of what is to be done. Here the success of everything depends upon intuition, the capacity of seeing things in a way which afterwards proves to be true, even though it cannot be established at the moment, and of grasping the essential fact, discarding the unessential, even though one can give no account of the principles by which this is done. Thorough preparatory work, and special knowledge, breadth of intellectual understanding, talent for logical analysis, may under certain circumstances be sources of failure. The more accurately, however, we learn to know the natural and social world, the more perfect our control of facts becomes; and the greater the extent, with time and progressive rationalisation, within which things can be simply calculated, and indeed quickly and reliably calculated, the more the significance of this function decreases. Therefore the importance of the entrepreneur type must diminish just as the importance of the military commander has already diminished. Nevertheless a part of the very essence of each type is bound up with this function.
As this first point lies in the task, so the second lies in the psyche of the businessman himself. It is not only objectively more difficult to do something new than what is familiar and tested by experience, but the individual feels reluctance to it and would do so even if the objective difficulties did not exist. This is so in all fields. The history of science is one great confirmation of the fact that we find it exceedingly difficult to adopt a new scientific point of view or method. Thought turns again and again into the accustomed track even if it has become unsuitable and the more suitable innovation in itself presents no particular difficulties. The very nature of fixed habits of thinking, their energy-saving function, is founded upon the fact that they have become subconscious, that they yield their results automatically and are proof against criticism and even against contradiction by individual facts. But precisely because of this they become dragchains when they have outlived their usefulness. So it is also in the economic world. In the breast of one who wishes to do something new, the forces of habit rise up and bear witness against the embryonic project. A new and another kind of effort of will is therefore necessary in order to wrest, amidst the work and care of the daily round, scope and time for conceiving and working out the new combination and to bring oneself to look upon it as a real possibility and not merely as a day-dream. This mental freedom presupposes a great surplus force over the everyday demand and is something peculiar and by nature rare.
The third point consists in the reaction of the social environment against one who wishes to do something new. This reaction may manifest itself first of all in the existence of legal or political impediments. But neglecting this, any deviating conduct by a member of a social group is condemned, though in greatly varying degrees according as the social group is used to such conduct or not. Even a deviation from social custom in such things as dress or manners arouses opposition, and of course all the more so in the graver cases. This opposition is stronger in primitive stages of culture than in others, but it is never absent. Even mere astonishment at the deviation, even merely noticing it, exercises a pressure on the individual. The manifestation of condemnation may at once bring noticeable consequences in its train. It may even come to social ostracism and finally to physical prevention or to direct attack. Neither the fact that progressive differentiation weakens this opposition — especially as the most important cause of the weakening is the very development which we wish to explain — nor the further fact that the social opposition operates under certain circumstances and upon many individuals as a stimulus, changes anything in principle in the significance of it. Surmounting this opposition is always a special kind of task which does not exist in the customary course of life, a task which also requires a special kind of conduct. In matters economic this resistance manifests itself first of all in the groups threatened by the innovation, then in the difficulty in finding the necessary cooperation, finally in the difficulty in winning over consumers. Even though these elements are still effective to-day, despite the fact that a period of turbulent development has accustomed us to the appearance and the carrying out of innovations, they can be best studied in the beginnings of capitalism. But they are so obvious there that it would be time lost for our purposes to dwell upon them.
There is leadership only for these reasons — leadership, that is, as a special kind of function and in contrast to a mere difference in rank, which would exist in every social body, in the smallest as in the largest, and in combination with which it generally appears. The facts alluded to create a boundary beyond which the majority of people do not function promptly by themselves and require help from a minority. If social life had in all respects the relative immutability of, for example, the astronomical world, or if mutable this mutability were yet incapable of being influenced by human action, or finally if capable of being so influenced this type of action were yet equally open to everyone, then there would be no special function of leadership as distinguished from routine work.
The specific problem of leadership arises and the leader type appears only where new possibilities present themselves. That is why it is so strongly marked among the Normans at the time of their conquests and so feebly among the Slavs in the centuries of their unchanging and relatively protected life in the marshes of the Pripet. Our three points characterise the nature of the function as well as the conduct or behavior which constitutes the leader type. It is no part of his function to “find” or to “create” new possibilities. They are always present, abundantly accumulated by all sorts of people. Often they are also generally known and being discussed by scientific or literary writers. In other cases, there is nothing to discover about them, because they are quite obvious. To take an example from political life, it was not at all difficult to see how the social and political conditions of France at the time of Louis XVI could have been improved so as to avoid a breakdown of the ancien régime. Plenty of people as a matter of fact did see it. But nobody was in a position to do it. Now, it is this “doing the thing,” without which possibilities are dead, of which the leader's function consists. This holds good of all kinds of leadership, ephemeral as well as more enduring ones. The former may serve as an instance. What is to be done in a casual emergency is as a rule quite simple. Most or all people may see it, yet they want someone to speak out, to lead, and to organise. Even leadership which influences merely by example, as artistic or scientific leadership, does not consist simply in finding or creating the new thing but in so impressing the social group with it as to draw it on in its wake. It is, therefore, more by will than by intellect that the leaders fulfil their function, more by “authority,” “personal weight,” and so forth than by original ideas.
Economic leadership in particular must hence be distinguished from “invention.” As long as they are not carried into practice, inventions are economically irrelevant. And to carry any improvement into effect is a task entirely different from the inventing of it, and a task, moreover, requiring entirely different kinds of aptitudes. Although entrepreneurs of course may be inventors just as they may be capitalists, they are inventors not by nature of their function but by coincidence and vice versa. Besides, the innovations which it is the function of entrepreneurs to carry out need not necessarily be any inventions at all. It is, therefore, not advisable, and it may be downright misleading, to stress the element of invention as much as many writers do.
The entrepreneurial kind of leadership, as distinguished from other kinds of economic leadership such as we should expect to find in a primitive tribe or a communist society, is of course colored by the conditions peculiar to it. It has none of that glamour which characterises other kinds of leadership. It consists in fulfilling a very special task which only in rare cases appeals to the imagination of the public. For its success, keenness and vigor are not more essential than a certain narrowness which seizes the immediate chance and nothing else. “Personal weight” is, to be sure, not without importance. Yet the personality of the capitalistic entrepreneur need not, and generally does not, answer to the idea most of us have of what a “leader” looks like, so much so that there is some difficulty in realizing that he comes within the sociological category of leader at all. He “leads” the means of production into new channels. But this he does, not by convincing people of the desirability of carrying out his plan or by creating confidence in his leading in the manner of a political leader — the only man he has to convince or to impress is the banker who is to finance him — but by buying them or their services, and then using them as he sees fit. He also leads in the sense that he draws other producers in his branch after him. But as they are his competitors, who first reduce and then annihilate his profit, this is, as it were, leadership against one's own will. Finally, he renders a service, the full appreciation of which takes a specialist's knowledge of the case. It is not so easily understood by the public at large as a politician's successful speech or a general's victory in the field, not to insist on the fact that he seems to act — and often harshly — in his individual interest alone. We shall understand, therefore, that we do not observe, in this case, the emergence of all those affective values which are the glory of all other kinds of social leadership. Add to this the precariousness of the economic position both of the individual entrepreneur and of entrepreneurs as a group, and the fact that when his economic success raises him socially he has no cultural tradition or attitude to fall back upon, but moves about in society as an upstart, whose ways are readily laughed at, and we shall understand why this type has never been popular, and why even scientific critique often makes short work of it.21
We shall finally try to round off our picture of the entrepreneur in the same manner in which we always, in science as well as in practical life, try to understand human behavior, viz. by analysing the characteristic motives of his conduct. Any attempt to do this must of course meet with all those objections against the economist's intrusion into “psychology” which have been made familiar by a long series of writers. We cannot here enter into the fundamental question of the relation between psychology and economics. It is enough to state that those who on principle object to any psychological considerations in an economic argument may leave out what we are about to say without thereby losing contact with the argument of the following chapters. For none of the results to which our analysis is intended to lead stands or falls with our “psychology of the entrepreneur,” or could be vitiated by any errors in it. Nowhere is there, as the reader will easily satisfy himself, any necessity for us to overstep the frontiers of observable behavior. Those who do not object to all psychology but only to the kind of psychology which we know from the traditional textbook, will see that we do not adopt any part of the time-honored picture of the motivation of the “economic man.”
In the theory of the circular flow, the importance of examining motives is very much reduced by the fact that the equations of the system of equilibrium may be so interpreted as not to imply any psychic magnitudes at all, as shown by the analysis of Pareto and of Barone. This is the reason why even very defective psychology interferes much less with results than one would expect. There may be rational conduct even in the absence of rational motive. But as soon as we really wish to penetrate into motivation, the problem proves by no means simple. Within given social circumstances and habits, most of what people do every day will appear to them primarily from the point of view of duty carrying a social or a superhuman sanction. There is very little of conscious rationality, still less of hedonism and of individual egoism about it, and so much of it as may safely be said to exist is of comparatively recent growth. Nevertheless, as long as we confine ourselves to the great outlines of constantly repeated economic action, we may link it up with wants and the desire to satisfy them, on condition that we are careful to recognise that economic motive so defined varies in intensity very much in time; that it is society that shapes the particular desires we observe; that wants must be taken with reference to the group which the individual thinks of when deciding his course of action — the family or any other group, smaller or larger than the family; that action does not promptly follow upon desire but only more or less imperfectly corresponds to it; that the field of individual choice is always, though in very different ways and to very different degrees, fenced in by social habits or conventions and the like: it still remains broadly true that, within the circular flow, everyone adapts himself to his environment so as to satisfy certain given wants — of himself or others — as best he can. In all cases, the meaning of economic action is the satisfaction of wants in the sense that there would be no economic action if there were no wants. In the case of the circular flow, we may also think of satisfaction of wants as the normal motive.
The latter is not true for our type. In one sense, he may indeed be called the most rational and the most egotistical of all. For, as we have seen, conscious rationality enters much more into the carrying out of new plans, which themselves have to be worked out before they can be acted upon, than into the mere running of an established business, which is largely a matter of routine. And the typical entrepreneur is more self-centred than other types, because he relies less than they do on tradition and connection and because his characteristic task — theoretically as well as historically — consists precisely in breaking up old, and creating new, tradition. Although this applies primarily to his economic action, it also extends to the moral, cultural, and social consequences of it. It is, of course, no mere coincidence that the period of the rise of the entrepreneur type also gave birth to Utilitarianism.
But his conduct and his motive are “rational” in no other sense. And in no sense is his characteristic motivation of the hedonist kind. If we define hedonist motive of action as the wish to satisfy one's wants, we may indeed make “wants” include any impulse whatsoever, just as we may define egoism so as to include all altruistic values too, on the strength of the fact that they also mean something in the way of self-gratification. But this would reduce our definition to tautology. If we wish to give it meaning, we must restrict it to such wants as are capable of being satisfied by the consumption of goods, and to that kind of satisfaction which is expected from it. Then it is no longer true that our type is acting on a wish to satisfy his wants.
For unless we assume that individuals of our type are driven along by an insatiable craving for hedonist satisfaction, the operations of Gossen's law would in the case of business leaders soon put a stop to further effort. Experience teaches, however, that typical entrepreneurs retire from the arena only when and because their strength is spent and they feel no longer equal to their task. This does not seem to verify the picture of the economic man, balancing probable results against disutility of effort and reaching in due course a point of equilibrium beyond which he is not willing to go. Effort, in our case, does not seem to weigh at all in the sense of being felt as a reason to stop. And activity of the entrepreneurial type is obviously an obstacle to hedonist enjoyment of those kinds of commodity which are usually acquired by incomes beyond a certain size, because their “consumption” presupposes leisure. Hedonistically, therefore, the conduct which we usually observe in individuals of our type would be irrational.
This would not, of course, prove the absence of hedonistic motive. Yet it points to another psychology of non-hedonist character, especially if we take into account the indifference to hedonist enjoyment which is often conspicuous in outstanding specimens of the type and which is not difficult to understand.
First of all, there is the dream and the will to found a private kingdom, usually, though not necessarily, also a dynasty. The modern world really does not know any such positions, but what may be attained by industrial or commercial success is still the nearest approach to medieval lordship possible to modern man. Its fascination is specially strong for people who have no other chance of achieving social distinction. The sensation of power and independence loses nothing by the fact that both are largely illusions. Closer analysis would lead to discovering an endless variety within this group of motives, from spiritual ambition down to mere snobbery. But this need not detain us. Let it suffice to point out that motives of this kind, although they stand nearest to consumers' satisfaction, do not coincide with it.
Then there is the will to conquer: the impulse to fight, to prove oneself superior to others, to succeed for the sake, not of the fruits of success, but of success itself. From this aspect, economic action becomes akin to sport — there are financial races, or rather boxing-matches. The financial result is a secondary consideration, or, at all events, mainly valued as an index of success and as a symptom of victory, the displaying of which very often is more important as a motive of large expenditure than the wish for the consumers' goods themselves. Again we should find countless nuances, some of which, like social ambition, shade into the first group of motives. And again we are faced with a motivation characteristically different from that of “satisfaction of wants” in the sense defined above, or from, to put the same thing into other words, “hedonistic adaptation.”
Finally, there is the joy of creating, of getting things done, or simply of exercising one's energy and ingenuity. This is akin to a ubiquitous motive, but nowhere else does it stand out as an independent factor of behavior with anything like the clearness with which it obtrudes itself in our case. Our type seeks out difficulties, changes in order to change, delights in ventures. This group of motives is the most distinctly anti-hedonist of the three.
Only with the first groups of motives is private property as the result of entrepreneurial activity an essential factor in making it operative. With the other two it is not. Pecuniary gain is indeed a very accurate expression of success, especially of relative success, and from the standpoint of the man who strives for it, it has the additional advantage of being an objective fact and largely independent of the opinion of others. These and other peculiarities incident to the mechanism of “acquisitive” society make it very difficult to replace it as a motor of industrial development, even if we would discard the importance it has for creating a fund ready for investment. Nevertheless it is true that the second and third groups of entrepreneurial motives may in principle be taken care of by other social arrangements not involving private gain from economic innovation. What other stimuli could be provided, and how they could be made to work as well as the “capitalistic” ones do, are questions which are beyond our theme. They are taken too lightly by social reformers, and are altogether ignored by fiscal radicalism. But they are not insoluble, and may be answered by detailed observation of the psychology of entrepreneurial activity, at least for given times and places.
1 This is used here in Max Weber's sense. As the reader will see, “rational” and “empirical” here mean, if not identical, yet cognate, things. They are equally different from, and opposed to, “metaphysical,” which implies going beyond the reach of both “reason” and “facts,” beyond the realm, that is, of science. With some it has become a habit to use the word “rational” in much the same sense as we do “metaphysical.” Hence some warning against misunderstanding may not be out of place.
2 If economists, nevertheless, have always had something to say on this theme, this is only because they did not restrict themselves to economic theory, but — and indeed quite superficially as a rule — studied historical sociology or made assumptions about the economic future. Division of labor, the origin of private property in land, increasing control over nature, economic freedom, and legal security — these are the most important elements constituting the “economic sociology” of Adam Smith. They clearly relate to the social framework of the economic course of events, not to any immanent spontaneity of the latter. One can also consider this as Ricardo's theory of development (say in Bücher's sense), which, moreover, exhibits the line of thought which earned the characterisation of “pessimist” for him: namely the “hypothetical prognosis” that in consequence of the progressive increase of population together with the progressive exhaustion of the powers of the soil (which can according to him only temporarily be interrupted by improvements in production) a position of rest would eventually appear — to be distinguished toto coelo from the ideal momentary position of rest of the equilibrium of modern theory — in which the economic situation would be characterised by an hypertrophy of rent, which is something totally different from what is understood above by a theory of development, and still more different from what we shall understand by it in this book. Mill worked out the same line of thought more carefully, and also distributed color and tone differently. In essence, however, his Book IV, “Influence of the Progress of Society on Production and Distribution,” is just the same thing. Even this title expresses how much “progress” is considered as something non-economic, as something rooted in the data that only “ exercises an influence “ upon production and distribution. In particular his treatment of improvements in the “ arts of production” is strictly “static.” Improvement, according to this traditional view, is something which just happens and the effects of which we have to investigate, while we have nothing to say about its occurrence per se. What is thereby passed over is the subject matter of this book, or rather the foundation stone of its construction. J. B. Clark (Essentials of Economic Theory), whose merit is in having consciously separated “statics” and “dynamics,” saw in the dynamic elements a disturbance of the static equilibrium. This is likewise our view, and also from our standpoint an essential task is to investigate the effect of this disturbance and the new equilibrium which then emerges. But while he confines himself to this and just like Mill sees therein the meaning of dynamics, we shall first of all give a theory of these causes of disturbances in so far as they are more than mere disturbances for us and in so far as it seems to us that essential economic phenomena depend upon their appearance. In particular: two of the causes of disturbance enumerated by him (increase of capital and population) are for us, as for him, merely causes of disturbance, however important as “factors of change” they may be for another kind of problem just indicated in the text. The same is true of a third (changes in the direction of consumers' tastes) which will later be substantiated in the text. But the other two (changes in technique and in productive organisation) require special analysis and evoke something different again from disturbances in the theoretical sense. The non-recognition of this is the most important single reason for what appears unsatisfactory to us in economic theory. From this insignificant-looking source flows, as we shall see, a new conception of the economic process, which overcomes a series of fundamental difficulties and thus justifies the new statement of the problem in the text. This statement of the problem is more nearly parallel to that of Marx. For according to him there is an internal economic development and no mere adaptation of economic life to changing data. But my structure covers only a small part of his ground.
3 Therefore one of the most annoying misunderstandings that arose out of the first edition of this book was that this theory of development neglects all historical factors of change except one, namely the individuality of entrepreneurs. If my representation were intended to be as this objection assumes, it would obviously be nonsense. But it is not at all concerned with the concrete factors of change, but with the method by which these work, with the mechanism of change. The “entrepreneur” is merely the bearer of the mechanism of change. And I have taken account not of one factor of historical change, but of none. We have still less to do here with the factors which in particular explain the changes in the economic organisation, economic custom, and so on. This is still another problem, and although there are points at which all these methods of treatment collide, it means spoiling the fruit of all if they are not kept apart and if each is not allowed the right to grow by itself.
4 The problems of capital, credit, entrepreneurial profit, interest on capital, and crises (or business cycles) are the ones in which this fruitfulness will be demonstrated here. Yet it is not thereby exhausted. For the expert theorist I point, for example, to the difficulties which surround the problem of increasing return, the question of multiple points of intersection between supply and demand curves, and the element of time, which even Marshall's analysis has not overcome.
5 We do this because these changes are small per annum and therefore do not stand in the way of the applicability of the “static” method. Nevertheless, their appearance is frequently a condition of development in our sense. But even though they often make the latter possible, yet they do not create it out of themselves.
6 In the first edition of this book, I called it “dynamics.” But it is preferable to avoid this expression here, since it so easily leads us astray because of the associations which attach themselves to its various meanings. Better, then, to say simply what we mean: economic life changes; it changes partly because of changes in the data, to which it tends to adapt itself. But this is not the only kind of economic change; there is another which is not accounted for by influence on the data from without, but which arises from within the system, and this kind of change is the cause of so many important economic phenomena that it seems worth while to build a theory for it, and, in order to do so, to isolate it from all the other factors of change. The author begs to add another more exact definition, which he is in the habit of using: what we are about to consider is that kind of change arising from within the system which so displaces its equilibrium point that the new one cannot be reached from the old one by infinitesimal steps. Add successively as many mail coaches as you please, you will never get a railway thereby.
7 On the whole it is much more correct to say that population grows slowly up to the possibilities of any economic environment than that it has any tendency to outgrow it and to become thereby an independent cause of change.
8 A privilege which the individual can also achieve through saving. In an economy of the handicraft type this element would have to be emphasised more. Manufacturers' “reserve funds” assume an existing development.
9 The most important of which is the appearance of productive interest, as we shall see in Chapter V. As soon as interest emerges somewhere in the system, it expands over the whole of it.
10 Of course the productive means do not fall from heaven. In so far as they are not given by nature or non-economically, they were and are created at some time by the individual waves of development in our sense, and henceforth incorporated in the circular flow. But every individual wave of development and every individual new combination itself proceeds again from the supply of productive means of the existing circular flow — a case of the hen and the egg.
11 Risk obviously always falls on the owner of the means of production or of the money-capital which was paid for them, hence never on the entrepreneur as such (see Chapter IV). A shareholder may be an entrepreneur. He may even owe to his holding a controlling interest the power to act as an entrepreneur. Shareholders per se, however, are never entrepreneurs, but merely capitalists, who in consideration of their submitting to certain risks participate in profits. That this is no reason to look upon them as anything but capitalists is shown by the facts, first, that the average shareholder has normally no power to influence the management of his company, and secondly, that participation in profits is frequent in cases in which everyone recognises the presence of a loan contract. Compare, for example, the Graeco-Roman foenus nauticum. Surely this interpretation is more true to life than the other one, which, following the lead of a faulty legal construction — which can only be explained historically — attributes functions to the average shareholder which he hardly ever thinks of discharging.
12 The definition of the entrepreneur in terms of entrepreneurial profit instead of in terms of the function the performance of which creates the entrepreneurial profit is obviously not brilliant. But we have still another objection to it: we shall see that entrepreneurial profit does not fall to the entrepreneur by “necessity” in the same sense as the marginal product of labor does to the worker.
13 Only this neglect explains the attitude of many socialistic theorists towards peasant property. For smallness of the individual possession makes a difference only for the petit-bourgeois, not for the socialist. The criterion of the employment of labor other than that of the owner and his family is economically relevant only from the standpoint of a kind of exploitation theory which is hardly tenable any longer.
14 Cf. for example the good description in Wiedenfeld, Das Persönliche im modernen Unternehmertum. Although it appeared in Schmoller's Jahrbuch in 1910 this work was not known to me when the first edition of this book was published.
15 On the nature of the entrepreneurial function also compare my statement in the article “Unternehmer” in the Handwörterbuch der Staatswissenschaften.
16 The same theoretical picture, obviously not the same sociological, cultural, and so forth.
17 How much this is the case is best seen to-day in the economic life of those nations, and within our civilisation in the economics of those individuals, whom the development of the last century has not yet completely drawn into its stream, for example, in the economy of the Central European peasant. This peasant “calculates”; there is no deficiency of the “economic way of thinking” (Wirtschaftsgesinnung) in him. Yet he cannot take a step out of the beaten path; his economy has not changed at all for centuries, except perhaps through the exercise of external force and influence. Why? Because the choice of new methods is not simply an element in the concept of rational economic action, nor a matter of course, but a distinct process which stands in need of special explanation.
18 Small disturbances which may indeed, as mentioned earlier, in time add up to great amounts. The decisive point is that the businessman, if he makes them, never alters his routine. The usual case is one of small, the exception one of great (uno actu great), disturbances. Only in this sense is emphasis put upon “smallness” here. The objection that there can be no difference in principle between small and large disturbances is not effective. For it is false in itself, in so far as it is based upon the disregard of the principle of the infinitesimal method, the essence of which lies in the fact that one can assert of “small quantities” under certain circumstances what one cannot assert of “large quantities.” But the reader who takes umbrage at the large-small contrast may, if he wishes, substitute for it the contrast adapting-spontaneous. Personally I am not willing to do this because the latter method of expression is much easier to misunderstand than the former and really would demand still longer explanations.
19 In the first place it is a question of a type of conduct and of a type of person in so far as this conduct is accessible in very unequal measure and to relatively few people, so that it constitutes their outstanding characteristic. Because the exposition of the first edition was reproached with exaggerating and mistaking the peculiarity of this conduct, and with overlooking the fact that it is more or less open to every businessman, and because the exposition in a later paper (“Wellenbewegung des Wirtschaftslebens,” Archiv für Sozialwissenschaft) was charged with introducing an intermediate type (“half-static” businessmen), the following may be submitted. The conduct in question is peculiar in two ways. First, because it is directed towards something different and signifies doing something different from other conduct. One may indeed in this connection include it with the latter in a higher unity, but this does not alter the fact that a theoretically relevant difference exists between the two, and that only one of them is adequately described by traditional theory. Secondly, the type of conduct in question not only differs from the other in its object, “innovation” being peculiar to it, but also in that it presupposes aptitudes differing in kind and not only in degree from those of mere rational economic behavior.
Now these aptitudes are presumably distributed in an ethically homogeneous population just like others, that is the curve of their distribution has a maximum ordinate, deviations on either side of which become rarer the greater they are. Similarly we can assume that every healthy man can sing if he will. Perhaps half the individuals in an ethically homogeneous group have the capacity for it to an average degree, a quarter in progressively diminishing measure, and, let us say, a quarter in a measure above the average; and within this quarter, through a series of continually increasing singing ability and continually diminishing number of people who possess it, we come finally to the Carusos. Only in this quarter are we struck in general by the singing ability, and only in the supreme instances can it become the characterising mark of the person. Although practically all men can sing, singing ability does not cease to be a distinguishable characteristic and attribute of a minority, indeed not exactly of a type, because this characteristic — unlike ours — affects the total personality relatively little.
Let us apply this: Again, a quarter of the population may be so poor in those qualities, let us say here provisionally, of economic initiative that the deficiency makes itself felt by poverty of their moral personality, and they play a wretched part in the smallest affairs of private and professional life in which this element is called for. We recognise this type and know that many of the best clerks, distinguished by devotion to duty, expert knowledge, and exactitude, belong to it. Then comes the “half,” the “normal.” These prove themselves to be better in the things which even within the established channels cannot simply be “dispatched” (erledigen) but must also be “decided” (entscheiden) and “carried out” (durchsetzen). Practically all business people belong here, otherwise they would never have attained their positions; most represent a selection — individually or hereditarily tested. A textile manufacturer travels no “new” road when he goes to a wool auction. But the situations there are never the same, and the success of the business depends so much upon skill and initiative in buying wool that the fact that the textile industry has so far exhibited no trustification comparable with that in heavy manufacturing is undoubtedly partly explicable by the reluctance of the cleverer manufacturers to renounce the advantage of their own skill in buying wool. From there, rising in the scale we come finally into the highest quarter, to people who are a type characterised by super-normal qualities of intellect and will. Within this type there are not only many varieties (merchants, manufacturers, financiers, etc.) but also a continuous variety of degrees of intensity in “ initiative.” In our argument types of every intensity occur. Many a one can steer a safe course, where no one has yet been; others follow where first another went before; still others only in the crowd, but in this among the first. So also the great political leader of every kind and time is a type, yet not a thing unique, but only the apex of a pyramid from which there is a continuous variation down to the average and from it to the sub-normal values. And yet not only is “leading” a special function, but the leader also something special, distinguishable — wherefore there is no sense in our case in asking: “Where does that type begin then?” and then to exclaim: “This is no type at all!”
20 It has been objected against the first edition that it sometimes defines “statics” as a theoretical construction, sometimes as the picture of an actual state of economic life. I believe that the present exposition gives no ground for this opinion. “Static” theory does not assume a stationary economy; it also treats of the effects of changes in data. In itself, therefore, there is no necessary connection between static theory and stationary reality. Only in so far as one can exhibit the fundamental form of the economic course of events with the maximum simplicity in an unchanging economy does this assumption recommend itself to theory. The stationary economy is for uncounted thousands of years, and also in historical times in many places for centuries, an incontrovertible fact, apart from the fact, moreover, which Sombart emphasised, that there is a tendency towards a stationary state in every period of depression. Hence it is readily understood how this historical fact and that theoretical construction have allied themselves in a way which led to some confusion. The words “statics” and “dynamics” the author would not now use in the meaning they carry above, where they are simply short expressions for “theory of the circular flow” and “theory of development.” One more thing: theory employs two methods of interpretation, which may perhaps make difficulties. If it is to be shown how all the elements of the economic system are determined in equilibrium by one another, this equilibrium system is considered as not yet existing and is built up before our eyes ab ovo. This does not mean that its coming into being is genetically explained thereby. Only its existence and functioning are made logically clear by mental dissection. And the experiences and habits of individuals are assumed as existing. How just these productive combinations have come about is not thereby explained. Further, if two contiguous equilibrium positions are to be investigated, then sometimes (not always), as in Pigou's Economics of Welfare, the “best” productive combination in the first is compared with the “best” in the second. And this again need not, but may, mean that the two combinations in the sense meant here differ not only by small variations in quantity but in their whole technical and commercial structure. Here too the coming into being of the second combination and the problems connected with it are not investigated, but only the functioning and the outcome of the already existing combination. Even though justified as far as it goes, this method of treatment passes over our problem. If the assertion were implied that this is also settled by it, it would be false.
21 It may, therefore, not be superfluous to point out that our analysis of the rôle of the entrepreneur does not involve any “glorification” of the type, as some readers of the first edition of this book seemed to think. We do hold that entrepreneurs have an economic function as distinguished from, say, robbers. But we neither style every entrepreneur a genius or a benefactor to humanity, nor do we wish to express any opinion about the comparative merits of the social organisation in which he plays his rôle, or about the question whether what he does could not be effected more cheaply or efficiently in other ways.