----------------- HES POSTING ----------------- Schumpeter was standing on a very uncertain and undefined fault line with his theory of entrepreneurship which would feed into a theory of development. His work did not inspire the mainstream neoclassical readers because he did not provide much formal analysis. Nor did he reach the high level of logical abstraction favored by verbalizers of the Austrian School tradition, which Schumpeter knew well. He did not expose the inherent antagonism, nor did he make peace between one camp that had the form without substance (Solow, Lucas), and the other that had the substance without the form (Mises). The facts of entrepreneurship were never in doubt, and the classical authors, especially J B Say looked keenly at entrepreneurship. Why then did Baumol (AER 1968) lament that entrepreneurship had disappeared from neoclassical economics? The contribution of Mises (Human Action 1949) and Kirzner (Competition and Entrepreneurship 1973) do not provide the kind of formal treatment required by the mainstream. Despite Baumol's own formal contribution, entrepreneurship still remains theoretically unknown to economics in formal models. Nobody has shown how to formally derive pure profit in equilibrium by busting the budget constraint, how to get something for nothing. It is easy to do so in an input- output model. Here is the problem. Mainstream neoclassical economics studies the allocation of existing wealth (budget, endowment) and has just no room for entrepreneurship. Entrepreneurship essentially consists of creation of new wealth that does not already exist, and it does so by breaking the budget constraints. An entrepreneur is most absolutely not an optimizer, and no concept of budget can apply to it. How may one study entrepreneurship? One can, if one takes a Leontief-type input-output model, permits sellers to sell at prices above marginal cost of production, and introduce new knowledge and turn it into value-added. For such a model to succeed, it is necessary to explain not just why self-appointed intermediaries appear in the market (who do not produce, but sell, and who do not consume but buy), but also why ordinary people (producers. consumers) sell to and buy from middlemen. One must show that transaction cost is the other side of entrepreneurship; that the entrepreneurs cut down transaction costs which ordinary producers and consumers cannot achieve. This role is far more complex than innovation and creative destruction. It involves the creation of market institutions (legitimization), organizations (Coase), use of dispersed information (Hayek) and innovation/discovery (Schumpeter, Mises, Kirzner). A creative destruction of the empty mathematics and some analytical innovation is needed to take economics to the next advanced state. Mohammad Gani ------------ FOOTER TO HES POSTING ------------ For information, send the message "info HES" to [log in to unmask]