The Entrepeneur Function in Economic Literature

The Entrepreneur Function in Economic Literature
Author(s): Charles A. Tuttle

Source: Journal of Political Economy, Vol. 35, No. 4 (Aug., 1927), pp. 501-521
Published by: University of Chicago Press
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THE
FUNCTION
ENTREPRENEUR
IN
ECONOMIC
LITERATURE
In the analysis
of the employer's
and
place in production
of practical
the distinctions
life should serve as a
distribution,
men have long distinguished,
truth. Business
guide to scientific
and
between
employer
though in a loose and general manner,
and capitalist,
and between
em?
between
employer
workman,
on the one hand, and, on the other, be?
ployer and landowner,
tween profit and wages, between
profit and interest on a money
There ap?
profit and the rent of instruments.
for a strong presump?
to be ample justification
pears, therefore,
have a scientific
tion that these distinctions
basis. It should ac?
loan,
and between
be the economist's
cordingly
of the varied
entific analysis
first task
to find that
basis.
A sci?
relations
which the employer
actu?
to a
to business
would appear to be prerequisite
ally sustains
The
method
of
traditional
reverses
this
scientific
profit.
theory
time
of
and
Adam
to
the
From
Smith
the
process.
Turgot
pres?
a theory of
have been vainly trying to formulate
ent, economists
of the basic function

a definite conception
upon
rest.
such a theory must logically
of this paper to sketch the gradual emer?
It is the purpose
in economic
of the func?
literature
gence and final differentiation
profit
which
without
tion of ownership
as the distinctive
of the business,
viewed as an organized
unit,
function
of the entrepreneur.
of the eighteenth
capital had come to
century,
By the close
be recognized
as an essential
factor of production,
and occupied,
in proportion
to labor, a relatively
more important
place than
unit. In the absence of credit facilities,
hitherto in the business
which
the borrowing
and loaning of capital easy,
the
into
hands of the capitalists,
rapidly passing
who alone possessed
the large amount of capital which for effi?
cient production
for combination
was then required
with land
would
business
and labor
render
was
in the business
unit.
The
independent
artisans,
their
501
CHARLES
502
A. TUTTLE
and tools
now obsolescent,
and, in Turgot's
quaint phrase,
but their arms," had become
a wage-earning
"having
nothing
their human energy at the disposal
of capitalist
class, placing
shops
employers,
could
who alone
machines.
power-driven
small, and was owned
build
The
factories
business
and equip them with

unit was still relatively
or landowners,
who also
by capitalists,
the
business
and
it as a going concern.
One
organized
managed
could scarcely expect under such conditions
that economic
writ?
ers of that period would differentiate
function
of
the composite
or landlord-employer,
into specifically
dis?
capitalist-employer,
tinct economic
and
into
their
income
functions,
analyze
general
distinct functional
shares. The economist
is depend?
specifically
ent upon
objective
realities
to awaken
his consciousness
of the
idea.
land ownership
and the cultivation
of the land
Originally
linked together.
in land was rec?
Before private property
of a field
ognized
by law, "a man could retain the ownership
were
to cultivate
only in the way he had acquired it and by continuing
it. It was private property
in land that
it," as Turgot1 expresses
made the differentiation
of the proprietor
of the land from the
of it?the
cultivator
and the sepa?
possible,
farmer?practically
ration actually
took place.
The ownership
of an agricultural
which had long been united
with the ownership
of
business,
became
from
now
divorced
it.
The
rich
farmer
land,
completely
was regarded no longer as a landowner,
or even, as Quesnay puts
it, "as a laborer who himself tills the soil, but as an entrepreneur
who manages
and makes his business
profitable
by his intelli?
and
wealth."2
in
has
mind
a capitalist
gence
Obviously
Quesnay
farmer
who owns
owned
by
and manages
an agricultural
business
on land
and is the first economist,
to the writer's
another,
to apply the term "entrepreneur"
to the independent
knowledge,
owner of a business.
out
work
on
the
The landowner
"revenue"?the
is thus enabled
physiocratic
to live with?
produit
net?
1
Reflections on the Formation and the Distribution of Riches, translated
and edited by W. J. Ashley (New York and London, 1898), p. 11, sec. 9.
2
Grains, 1757, in (Euvres Economiques et Philosophiques de F. Quesnay, par
Auguste Oncken (Paris, 1888), p. 219.
THE ENTREPRENEUR
the farmer
which
turns
over
IN ECONOMIC
to him
LITERATURE
for the usance
503
of his land.
to note that Turgot

calls the landowners
It is interesting
the
class" (classe disponible),
the only class in society
"disposable
which, not being bound by the need of subsistence to a particular labor,
can be employed for the general needs of the society, such as war and the
administration of justice, either by a personal service, or by the payment of
a part of their revenue with which the State or the Society may engage men
to discharge these functions.3
Turgot
carries
the analysis
a step
in economic
literature,
farther,
and, for the first

differentiates
the
time perhaps
clearly
in busi?
of capital as a separate
economic
function
ownership
ness. He was enabled
to do this by his conception
of capital.
The capitalist,
as the owner of an accumulated
fund of value
is represented
as having
to
(valeurs
by Turgot
accumulees),
either personally
choose between two alternatives:
to invest his
If he accepts
the first alterna?
capital, or to loan it to another.
to invest
himself
his capital,
he still has to
If
and business.
land, as a form of investment,
he purchases
he
then
is
both
and
landowner.
land,
If,
capitalist
he becomes
an entrepreneur,
he immediately
invests
however,
tive
and
choose
decides
between
his capital in the different

kinds of goods required
for his par?
ticular business,
and he is then both capitalist
and entrepreneur.
As capitalist
he is owner of the accumulated
fund of value which
and as entrepreneur
he, as entrepreneur,
invests;
specific goods in which he invests it. If, however,
and decides
to loan
accepts the other alternative
he owns
the
the capitalist
his capital in
the form of money, he remains capitalist

only; for he surrenders
his capital to another for investment
in goods to be selected and
owned by the borrower.
desires to have
Again, if the capitalist
an income
on his own part he possesses,

according
to Turgot, two alternatives:
he may either "purchase
lands" or
become a "lender of money."
In either case he would belong to
the so-called
so far as his person
is con?
"disposable
class,"
cerned.
without
labor
On the other
hand, to quote Turgot:

The capitalist who has become an entrepreneur either in agriculture or
in industry is no more disposable?either
as regards himself or his profits?
3
Op. cit., p. 15, sec. 15.
A. TUTTLE
CHARLES
504
than the mere workman of these two classes; both are set apart for the car?
rying on of their enterprises.4
From
it appears
that the capitalist
who
is bound, like the wage-earning
laborer,
this
preneur
labor."
he invests
As entrepreneur
in all sorts of enterprises?agricultural,
capital
becomes
entre?
to "a particular
laborers
and employs
and com?
manufaetural,
in
is actively
his
business
engaged
making
yield
him each year, "besides
the interest on his capital,"
a profit to recompense him for his care, his labor, his talents and his risks,
and to furnish him in addition with that wherewith he may replace the an?
nual wear and tear of his advances,?which
he is obliged to convert from the
very first into effects which are susceptible of change, and which are, more?
over, exposed to every kind of accident.5
mercial?and
the ownership
of capital is a qualification
the
but
two
functions
are distinct.
entrepreneur,
With Turgot,
becoming
for
then,
Tur-
is an employer
who invests capital in a busi?
got's entrepreneur
ness which he owns, organizes,
and manages.
Turgot,
however,
does not place the emphasis
the
of
the
upon
ownership
business;
in the
for, had he done so, he would have put the entrepreneur
class" as one who, like the landowner
and the capi?
"disposable
talist "lender of money,"
secures an income without
labor.
He
of
the
and
seems
to
take
business
expressly
says
opposite
this,
as a matter of course, or as a mere incident.
He does
ownership
put the emphasis,
rather, if the writer has correctly
interpreted
like the wagehim, upon labor, which binds the entrepreneur,
earning
neur,
ness.
"to a particular
labor."
workman,
Turgot's
and manager
then, is an independent
organizer
It remained
ferentiation
of the
for Adam
the Wealth
to take the next step in the dif?

of the entrepreneur.
The function
Smith
of the function
"undertaker"
is, to the writer's
in
nowhere
knowledge,
even
the
term
discussed;
rarely
from the discussion
of "profits
of Nations
directly
It is only by implication
of stock" that one is able to construct
occurs.
ception
of the
function
great work, however,

4
Ibid., p. 91, sec. 94.
entrepre?
of a busi?
to which
Adam
Smith
the great Scotchman's

profit attaches.
Early
takes
direct
issue
con?
in his
with
the
"Ibid., p. 83, sec. 87.
THE ENTREPRENEUR
IN ECONOMIC
LITERATURE
as clearly Turgot's,
view, which we have described
labor is the determining
element
ing and directive
tion with which profit is associated.
He says:
505
that organiz?
in the func?
The profits of stock, it may perhaps be thought, are only a different

name for the wages of a particular sort of labor, the labor of inspection and
direction. They are, however, altogether different, are regulated by quite
different principles, and bear no proportion to the quantity, the hardship, or
the ingenuity of this supposed labor of inspection and direction.6
After
he concludes
his position
as follows:
illustrating
In many great works, almost the whole labor of this kind is committed
to some principal clerk. His wages properly express the value of this labor of
inspection and direction. Though in settling them some regard is had com?
monly, not only to his labor and skill, but to the trust which is reposed in
him, yet they never bear any regular proportion to the capital of which he
oversees the management; and the owner of this capital, though he is thus
discharged of almost all labor,7 still expects that his profits should bear a
regular proportion to his capital. In the price of commodities, therefore,
the profits of stock constitute a component part altogether different from
the wages of labor, and regulated by quite different principles.8
this
From
function
which
made
it is evident
which
entitles
that
a man
Adam
Smith
had placed
Turgot
especial
a distinct contribution
to the cause
man labor
labor
and
in logical
comprises
logically
its share of the product,
eliminates
from
the
the very element

upon
and in so doing he
stress;
to profit
of sound
theory.
Hu?
of every
"particular
sort";
should
be
consistency,
called
wages.
But, while clearing up the error into which Turgot had fallen,
Adam Smith, unfortunately,
falls into an error from which ac?
with
should have saved him. He
quaintance
Turgot's
analysis
confounds
and conse?
evidently
production
goods and capital,
In so doing, through the
quently "profits of stock" and interest.
influence
of his great name, he gave the cause of sound theory
a serious backset.
To make clear, then, Adam Smith's notion of
the function which entitles
a person to profit,
this point to recall his conception
of capital.
6 Wealth
of Nations, Vol. I, Book I, chap. vi.
7The italics are the writer's.
8 Wealth
it is necessary
at
CHARLES
506
In an earlier
article9
A. TUTTLE
the writer
has shown
that Adam
Smith
the Turgot capital concept, and substituted

therefor
one which we may appropriately
a brand-new
call the "Adam
He characterizes
stock of con?
Smith concept."
an accumulated
sidetracked
of land and natural agents, from which a

goods, exclusive
man expects to derive a revenue, as "capital."
Only a portion of
this stock of goods is represented
as employed
"in setting
to
work industrious
and supplying
them with "materials
people,"
crete
and
subsistence
work."
in order
representing,
tial element
means
the
Adam
Smith
to make
a profit by the sale of their

In
is
to our inquiry.
portion
pertinent
the
of
as the essen?
therefore,
ownership
"capital"
to which profit attaches,
Adam Smith explicitly
It is this
which
of the so-called
"artificial"
ownership
production
in
a
as
from consump?
goods employed
business,
distinguished
tion goods.
The very phrase "profits of stock" seemingly
indi?
cates this. Here it should be observed
that in this specific point
is in accord
however,
consciously
tion goods rendered
with
Adam Smith's
Turgot.
failure,
to distinguish
between
capital and produc?
it impossible
for him to differentiate,
as
of capital from the ownership

Turgot had done, the ownership
of a business.
To him the two ownerships
were essentially
one,
and "profits of stock" was but another name for interest.
Yet Adam
fund
of value
Smith
invested
the accumulated
did, intuitively,
recognize
in his accumulated
stock of production
and its ownership

as a distinct mode
goods as a distinct element,
in production.
He says:
by which the individual
may participate
Whoever derives his revenue from a fund which is his own, must draw
it either from his labor, from his stock, or from his land. The revenue de?
rived from labor is called wages. That derived from stock, by the person
who manages or employs it, is called profit. That derived from it by the
person who does not employ it himself, but lends it to another, is called the
interest or the use of money. It is the compensation which the borrower
pays to the lender, for the profit which he has an opportunity of making by
the use of the money. Part of that profit naturally belongs to the borrower,
who runs the risk and takes the trouble of employing it; and part to the
lender, who affords him the opportunity of making this profit.The
revenue which proceeds altogether from land, is called rent, and belongs to
9 "The Real
Capital Concept," Quarterly Journal of Economics, XVIII,
69-74.
IN ECONOMIC
THE ENTREPRENEUR
LITERATURE
507
the landlord. The revenue of the farmer is derived partly from his labor,
and partly from his stock. To him, land is only the instrument which ena?
bles him to earn the wages of this labor, and to make the profits of this
stock.10
interest as "the
Smith, here, recognizes
the
borrower
[the
pays to the
employer]
compensation
for the profit which he [the employer]
lender [the capitalist]
of making by the use of the money [the capi?
has an opportunity
that
It is evident
Adam
which
And, strange as it may seem, he regards interest as an im?

portant element in profit; for he says later:
It may be laid down as a maxim, that wherever a great deal can be
made by the use of money, a great deal will commonly be given for the use
of it; and that wherever little can be made by it, less will commonly be
given for it.11
tal]."
The
conclusion
logical
loaning cease,
alone remain
interest
and
be that, should borrowing
of
stock"
would
and
"profits
vanish,
It seems
of the capitalist
employer.
must
would
as the share
the
that, had Adam Smith made consciously
"stock" and money-to-lend,
which he seem?
he would have grasped the capital con?
intuitively,
but a fair inference

distinction
between
made
ingly
as
and would have distinguished,
cept of the great Frenchman,
did the latter, between
as
accumulated
fund
of
an
capital
value,
in money,
and the accumulated
stock of concrete
expressible
"artificial"
He would,
owns and
production
then, have
loans
goods
in which
recognized
while
capital,
it.
the employer
invests
the
that
consciously
capitalist
he be
the employer,
whether
or borrower,
owns and employs
"stock"
that the capitalist,
as such, is entitled to the
as such, receives profit
capital, while the employer,
the ownership
of the buildings,
machines,
apparatus,
capitalist
(production
goods);
earnings
by virtue
als
("stock")
in which
that
he invests
and
He must
capital.
interest
are "altogether
of
of
and materi?
then
have
recognized
profit
different,"
and "regulated
The failure of
by quite different
principles."
Adam Smith consciously
to differentiate
the function of the capi?
talist
from that of the undertaker
must
be attributed
to the pre-
10Wealth
11Wealth
of Nations, Vol. I, Book I, chap. ix.
CHARLES
508
A. TUTTLE
In England,
vailing business practice with which he was familiar.
of capital was prerequisite
at this time, the ownership
to becom?
the
head
of
a
true in
the
same
was
ing
independent
business;
France.
Yet while Turgot stressed labor as the essential
element
in the function
emphasis,
tal"; and
of the entrepreneur,
that function
Adam
identified
both
took
Smith, with stronger

of "capi?
the ownership
of the business,
as a going
with
the ownership
of course.
concern, as a matter
After
of the
the publication
Smith's version of the entrepreneur
Wealth
became
of Nations,
traditional
A capitalist
employer?an
turer, or merchant?conveniently
all discussions
of distribution.
land.
comes
a sort
of blanket
though by magic, exactly

uct after all claims against
amount
Adam
in Eng?
manufac?
independent
farmer,
poses as residuary
legatee in
or
of
"Profit,"
"profit
stock," be?
which
or
as
term,
expands
contracts,
to cover the residue of the joint prod?
it have
been
met.
To ascertain
the
of "profit"
traction.
mination
a simple matter of sub?

becomes,
therefore,
when inquiry was directed toward the deter?
However,
of the rate of "profit," there was difficulty.
In attempt?
Adam
ing to solve this problem,
acts
in
different
ployer
capacities;
Smith
admitted
that
he owns
that
the
em?
stock, that he
or may not, own
was purchased.
It was his opin?
ion that, in ascertaining
the rate of "profit," attention
must be
elements.
there is
given to all of these variable
Consequently
discussion
as to whether this par?
frequent
among his followers
ticular item, or that, should be called "profit," just as there is as
labors, that he incurs
the money with which
to whether
"hazard,"
the stock
that
he may,
this
concrete
be
particular
good, or that, should
In all this discussion
the fundamental
"capital."
impor?
tance of the ownership
of the business
unit is successfully
cam?
in
while
the
business
world
the
of credit
ouflaged;
development
facilities
and the incorporation
of joint-stock
are cre?
companies
called
in law prior to their discovery

ating distinctions
by the econo?
mists.
Some fifty years after the publication
of the Wealth
of
an anonymous
writer in the Quarterly
Nations,
Review
says:
It is quite clear, that all the economists who have thus unwittingly com?
prehended under the term ''profits of capital or stock," the wages of all
THE ENTREPRENEUR
IN ECONOMIC
LITERATURE
509
those very numerous classes who work, as it is said, on their own account,
employing their own capital, must have wandered in a labyrinth of error
and contradictions, while attempting to ascertain the laws which determine
profits and wages, as distinguished from one another.12
The
same writer also says:

It seems sufficiently obvious, that nothing can be justly reckoned
profits of stock, but what can be got for it without the labor of personally
applying it or superintending its application to productive purposes; be?
cause all that is got by means of this labor is wages, and is as properly en?
titled to that denomination as that which is got by any other species of
labor whatever.13
of a note of warning intended to remind econ?
of the doctrine of their great teacher;
for the same writer
This has the sound

omists
to analyze
the residue "which
proceeds
of
of
as
and finds
stock,'"
'profits
speak
of
"interest
only one of which, namely,
got for its use without personal labor or
the economists
usually
of
four
parts,
up
capital, or what can be
risk," is regarded as dis?
it made
He thus emphasizes
to be called "profit."
the
of
or
in
as
the
element
a
essential
"stock,"
ownership
"capital,"
to business,
his
the employer's
relation
and clearly establishes
tinctively
orthodoxy.
entitled
Only
a few
anonymous
menclature
years prior
Nassau
William
to the
publication
of this
the no?
article,
Senior, explaining
of political
writes:
economy,
We have the words capital, capitalist, and profit. These terms express
the instrument, the person who employs or exercises it, and his remunera?
tion; but there is no familiar word to express the act, the conduct of which
profit is the reward and which bears the same relation to profit which labor
does to wages. To this conduct we have already given the name of ab?
stinence.14
further
No
evidence
is needed
it is for one who holds

ferentiate
to show
the Adam
how
utterly impossible
to dif?
capital concept
from that of the entrepreneur.
Smith
the capitalist
function
view is expressed
with unmistakable
clearness
by Professor
13"The Political Economists: T. R.
Malthus, J. R. McCulloch and Samuel
Read," Quarterly Review, XLIV, 19-20. (The writer may have been either Senior
or Read.)
13
Ibid., p. 19.
"Senior, An Outline of the Science of Political Economy (London, 1836),
pp.165-66.
This
CHARLES
510
A. TUTTLE
who writes, when he reaches the point, in his analy?

Edgeworth,
for distinguishing
the capitalist
sis of the parties to distribution,
"To determine
from the entrepreneur:
at what point the capi?
talist ends and the entrepreneur
begins, appears to defy analy?
sis."15
it may be observed,
writers generally,
follow the ex?
and
of
and
the
ample
Turgot,
emphasize
capacities
personal
the
in organizing
activities
of the entrepreneur
and directing
business.
Even Jean Baptiste
Say, who, in his Traite d'Economie
French
in 1803, became
Politique,
published
of the Wealth of Nations,
represents
the continental
interpreter
the personal
entrepreneur
as the pivot of the whole system of production
and distribution,
and accordingly
the
and
magnifies
perpetuates
Turgot view. It
to call the Turgot version of the entre?
seems fitting, therefore,
it
while early German economists,
preneur the French version;
should be noted, were perhaps evenly divided in their adherence
to the English and the French views of the function.
It is obvious
ed with
the
that John Stuart Mill must have

as well as with the English
French
function
of the
Political
Economy,
published
He retains the classical
entrepreneur;
been acquaint?
version
of the
yet we find in his Principles

of
in 1848, no fresh analysis
of the
phrase "profits of capital or

and describes
the activities
of the capitalist
stock,"
employer
which reveal his relationship
to the different elements
in "prof?
its." To Mill he is first a "capitalist"?"the
person who ad?
problem.
the expenses
of production?who,
from funds in his pos?
the
of
the
or
them during
session, pays
wages
laborers,
supports
the work; who supplies
the requisite
and
buildings,
materials,
tools or machines;
and to whom, by the usual terms of the con?
vances
tract, the produce

is also a business
belongs,
to be disposed of at his pleasure."

He
for he "embarks
in business
on his
owner;
and "exposes
his capital
to some and in many
account,"
cases to very great danger of partial or total loss." He is also a
for this same person is represented
as devoting
to the
worker;
business "his time and labor"; as "the control of the operations
own
of industry
usually
belongs
to the person
who supplies
the whole
"The Theory of Distribution," Quarterly Journal of Economics, XVII, 204.
IN ECONOMIC
THE ENTREPRENEUR
LITERATURE
511
or the greatest
part of the funds by which they are carried on,
to the ordinary
is either alone
and who, according
arrangement,
is
most
or
the
interested
least
interested,
person
(at
directly),
in the result."
he con?
"To exercise this control with efficiency,"
"if the concern is large and complicated,
requires great
skill. This assiduity
and often, no ordinary
and skill
assiduity,
"the
must be remunerated."
three
into
which
Accordingly
parts
as resolving
profit may be considered
itself, may be described
tinues,
as interest,
and wages of superintend?
respectively
insurance,
ence."16 It was apparently
Mill's intention
in the
to combine
distributed
all
of the
with
capitalist
employer,
equally
emphasis,
functions
which
had hitherto
been
attributed
to him.
The
own?
of the business
has no especial
to Mill, but
ership
significance
rather seems to be taken as a mere incident
of the ownership
of
capital.
it, cannot be determined
Profit, as Mill conceived
by a
definite law; its only unity rests in the fact that a single person
receives it. It is obvious,
that the law of interest
and
however,
the law of wages are not identical.
If ownership
of the business
unit is the distinctive
element in the varied relationships
which
the employer
to business,
sustains
make the discovery.
Had he done
wages
each,
and interest
it is certain
that
are altogether
by quite different principles."
version of the entrepreneur's
composite
Marshall17
and
apparently
adopted
by Alfred
"regulated
While Mill's
tion
was
Shield
Mill
Nicholson,18
George, with blunt
it is not surprising
should deny
straightforwardness,
among
others,
did not
so, he would have found that

different
from profit and are,
func?
by J.
that Henry
to "profit,"
to the entrepreneur,
and, by implication,
any distinctive
place
in distribution.
whatever
He says:
Of the three parts into which profits are divided by political economists
?namely, compensation for risk, wages of superintendence, and return for
the use of capital?the latter falls under the term interest, which includes
all the returns for the use of capital, and excludes everything else; wages of
superintendence falls under the term wages, which includes all returns for
16
Mill, Principles of Political Economy, Vol. I, Book II, chap, xv, sec. i.
17
Principles of Economics (4th ed.), Book VI, chapters vii and viii.
18
Principles of Political Economy, Vol. I, Book II, chap. xiii.
CHARLES
512
A. TUTTLE
human exertion, and excludes everything else; and compensation for risk
has no place whatever, as risk is eliminated when all the transactions of a
community are taken together.19
the
It may be added that Henry George expresses
substantially
in
taken
his
al?
avoids
position
by Roscher,
who,
Grundlagen,20
of
the
term
the
use
and
"profit"
together
represents
(Gewinn),
the entrepreneur
as a managerial
laborer who owns and directs
the business on his own responsibility.
His income, besides inter?
est and rent, he describes
as a "wage" (Unternehmerlohn)
which
constitutes
difference
We
thus
political
no exception
to the general law of wages, the only
being that it is never the direct result of bargaining.
find the founder
of the German
of
school
historical
entrepreneur.
On account
the
entrepreneur
seems advisable
late
to be an exponent
economy
Francis
of the prominence
has been given
of the Turgot
which
version
the French
by American
than a passing
of the
version
of
it
text-writers,
To the
notice.
to give it more
A. Walker,21
the entrepreneur
is pre-eminently
a
a "technical
a
"commander
of
the
armies
organizer,"
"master,"
of industry."
dent Walker
In his Political
gives
lems confronting
in 1884, Presi?
Economy,
published
the following
of the prob?
graphic description
the so-called
"entrepreneur":
When, however, the hand-loom gives way to the power-loom; when the
giant factory absorbs a thousand petty shops; when many persons, of all
degrees of skill and strength, are joined in labor, all contributing to a result
which perhaps not one of them understands perfectly or at all; when ma?
chinery is introduced which deals with the gauzy fabric more delicately than
the human hand, and crushes stone and iron with more than the force of
lightning; when costly materials require to be brought from the four quar?
ters of the globe, and the products are distributed by the agencies of
commerce through every land; when fashion enters, demanding incessant
changes in form or substance to meet the caprices of the market, the master
becomes a necessity of the situation. The work he is called on to perform
is not alone to enforce discipline through the body of laborers thus brought
under one roof; not alone to organize these parts into a whole and keep
every part in its place, at its proper work; not alone to furnish technical
*
Progress and Poverty (new ed.; New York, 1898), Book III, chap, i, p. 161.
}Die Grundlagen der Nationaloekonomie (nth ed.; 1874), sec. 195.
1Political
Economy (New York, 1884), sections 75, 76, 209, 250-53.
THE ENTREPRENEUR
IN ECONOMIC
LITERATURE
513
skill, and exercise a general care of the vast property involved; but beyond
these and far more than these, to assume the responsibilities of production,
to decide what shall be made, after what patterns, in what quantities, and at
what times; to whom the product shall be sold, at what prices, and on
what terms of payment.22
The problems
here so vividly described

and direction.
They make
are clearly problems

of
for
their
the
organization
appeal
high?
est types of economic
labor. President
Walker is at least logical
in describing
the nature of the function
to which, in his judg?
before he discusses
ment, profit attaches,
profit as a separate
share in distribution.
He has really given us, however,

a classifi?
cation of the workers in modern industry
into two groups, which
the organizing
and directive
laborers
from those who
separate
are organized
and directed.
Those in one group are called "en?
and receive "profit";
while those in the other are
trepreneurs,"
"laborers"
Walker's
so-called
the?
merely, and receive "wages."
ory of profit, then, proves to be in reality a theory of wages for
while his theory of wages applies to the
laborers;
managerial
in the other
laborers
group. It may be added that either theory

well to explain the shares of the members
of
the other group.
has
Walker
us
Accordingly,
given
virtually
what would appear to be two interchangeable
theories of wages.
A discussion
of these theories does not come within the scope of
would
serve
equally
this
to emphasize
the
paper;
they are here mentioned
merely
that organizing
and directive
labor cannot be made a dis?
tinctive
function
name.
The writer
by giving it a distinctive
fact
would
not be understood,
as at all minimizing
the tre?
however,
of
in
and
directive
labor
modern
importance
organizing
between
industry.
Organization
naturally
implies a distinction
the organizer
and the organized,
between
directive
and directed
mendous
to the other. But it

labor; and each is perhaps equally essential
is believed that economic
labor logically includes all human labor
in industry,
and that its share of the joint product
should be
called wages.
It is further the writer's judgment
that clearness
of analysis
would be served by the conscious
recognition
by
economists
of this fact. It should be noted, also, that the func22
Ibid., sec. 76, pp. 60, 61.
CHARLES
514
tion
A. TUTTLE
of the business
no attention
of ownership
unit receives
Walker's
analysis.
of the French version
Among the American
exponents23
in
President
the entrepreneur
mention
should
and Fetter,
like
President
who,
be made
of Professors
Walker,
characterize
of
Seager
the so-
called
as an organizing
and directive
laborer.
"entrepreneur"
the latter, however,
these writers
under the
comprise
term profit elements
which cannot properly be ascribed to labor.
Unlike
Professor
Seager writes:
Foremost among the world's workers are the so-called captains of in?
dustry or entrepreneurs who direct industrial processes. Their remunera?
tion comes to them as profits or balances left over from the sale of products
after all the expenses of production have been paid.24
He
then
differentiates
into three portions,25

"profits"
namely,
which "are governed
first, "wages of management,"
by the same
law that controls
and that for this reason re?
wages generally
quire no separate treatment";
second, "net or competitive
prof?
ascribed
to the frequent
occur?
its," which are directly
changes
and third, "monopoly
ring in actual industrial
society;
profits,"
which
exist
such
a control
From
"when
one firm or a combination
over
this it appears
called
"entrepreneur"
while
try" to wages;
but at least
phasized,
of firms
secures
the supply that it may regulate

the price."
that the function of directive labor?his
sofunction?entitles
some
other
recognized,
the "captain
of indus?
not specifically
em?
function,
entitles
his "entrepreneur"
to
profit.
Professor
the "enterFetter,26 on the other hand, describes

to the
prizer" as "the man who gives his name and energies
and guiding of a business,"
and then explicitly
states
launching
with all the emphasis
of a paragraph
eco?
heading:
"Typical
nomic
profits are thus a species of wages but are marked

by
features."27
He closes his discussion
with the statepeculiar
23To this
group belong Ely, Seligman, Irving Fisher, and more recently Bye,
Fairchild, Furniss, and Buck.
24Introduction to Economics (3d ed.; New York, 1906), p. 55.
25
Ibid., chapters x and xi.
26The
2T
Principles of Economics (New York, 1904).
Ibid., p. 284.
THE ENTREPRENEUR
ment:
"Profits
IN ECONOMIC
are the share,
his skill in directing industry

the complex influences,
they
to industry
According
"enterprizer
not logically
essentially
to Professor
function"
entitled
LITERATURE
515
for
or income, of the enterprizer
and in assuming
the risks. Despite
are determined
by his contribution
as is the value
of any
skilled
service."28
Fetter's
the
express statement,
therefore,
and "profits,"
as he conceives
them, are
to a distinctive
and co-ordinate
place in
and distribution.
In a later chapter,29 however,

an?
production
other sort of "profits,"
what he calls "monopoly
profits," is de?
scribed.
Professor
Fetter here shifts his emphasis,
perhaps un?
consciously;
but he explicitly
states that the "profits of monopo?
to be due not to the services
in
of the enterprizer
ly" "appear
but to his success in limiting it"?a
limi?
increasing
production,
tation born of "ownership
and control."
there
Here,
appears to
be an unconscious
reference30 to a distinctive
economic
function,
and to a distinctive
In the contention
share
in distribution.
that
and directive
labor" is
"organizing
not
constitute
an
basis on
and, therefore,
adequate
which to construct
a theory of profit, the writer finds himself in
accord with a decided trend in current opinion.
Professor
Tausin
answer
to
the
"Where
do
business
sig,
question,
profits cease
and mere wages begin?" says:
labor
does
Probably the best plan for the exposition of distribution at large is to

follow the tradition of describing all reward for exertion as wages.
Certainly for most purposes of classification, we should not be consistent if
we drew the line between wages and not wages according to the bare inde?
pendence of the workmen. The cobbler who works alone in his petty shop
gets in the main a return for labor as much as the workman in the shoe fac?
tory.31
Professor
of great practi?
Taussig goes on to make a distinction
cal moment, when he says:
The independent worker gets a primary and not a derivative share of
the total income of society ....
he is dependent on no fixed bargain for
3
9
Ibid., p. 291.
Ibid., chap, xxxiii.
30It should be noted that
Professor Fetter in his later work, Economic Prin?
ciples (1916), attaches more importance to ownership as an element in the enterprizer's function.
31"The
Employer's Place in Distribution," Quarterly Journal of Economics,
X,86.
A. TUTTLE
CHARLES
5i6
the money income which will serve him to procure a share in society's real
income of consumable goods. Herein his situation differs essentially from
hired laborer gets his money income
that of the hired laborer.The
as the result of a bargain by which he sells his working power for a space.
The independent workman gets his money income directly from the sale of
what he makes.32
that the present article is
be kept in mind, however,
distribu?
In economic
a theoretical
of
view.
point
tion bargaining
and contract have no place. For us the primary
is not, What does the laborer actually
therefore,
get?
question,
It should
from
written
is the product
of his labor? and what is he
to? According
to this view, the independ?
and the hired workman
stand on the same footing.
What
rather,
but,
entitled
economically
ent laborer
Professor
Carver
are the earnings

of the
earnings
"If wages
his position
as follows:
expresses
of all labor, they must, of course, include the
he runs a small
whether
independent
worker,
where hun?
shop where he works alone, or a large establishment
dreds are working
him."33
for stipulated
under
Professor
wages
Bates
Clark
function
of
the
the
of
John
explicitly
says
entrepre?
neur:
"The
Flux
says:
function
"The
in itself
distributive
includes
share
in practice,
had the remuneration
cut out of it."35 It would seem
illustrations.
The
general
no working."34
as profits,
known
Professor
then,
has,
of management
to multiply
necessary
of the services
trend
scarcely
of economic
opinion
had
been
indicated.
Professor
credit
neur's
The
Mithoff36
the
justly claims for German economists
the movement
to differentiate
entrepre?
for inaugurating
profit as a distinctive
earliest
functional
of such
share
in distribution.
a differentiation
is credited
to
suggestion
a fuller expression
of it to Riedel,38 1839, and
Hufeland,371807;
3The Distribution
Wealth
2Ibid.,p.Sj.
of
(New York, 1904), p. 259.
Z4The Distribution of Wealth (New York, 1899), P- 33 5 "Insurance and
Business Profits," Quarterly Journal of Economics, VII, 40-54.
35Economic Principles (London, 1904), p. 156.
36"Die Volkswirthschaftliche
Vertheilung," in Schoenberg's Handbuch der
Politischen Oekonomie (2d ed.; 1888), I, 674.
the money income which will serve him to procure a share in society's real
37Neue
Grundlage der Staatswirthschaftskunst (1807), I, 290.
3S
Nationaloekonomie, 2 vols. (1839), sections 466-77, 685-98.
THE ENTREPRENEUR
von Thiinen,39
goldt,
who,
mergewinn,
movement.
IN ECONOMIC
LITERATURE
and its complete

accomplishment
his Die Lehre vom
published
1842;
in 1855,
which deserves
517
to ManUnterneh-
as a landmark
in the
recognition
of
the
of
function
the
entre?
conception
Mangoldt's
in our inquiry.
of great importance
it clear, at the outset, that his investigation
with businesses
which produce for the market
preneur
is, therefore,
makes
Mangoldt
is concerned
only
(Verkehrsgeschaefte).
involves
necessarily
the responsibility
Such a business
He explains
that a business
of this sort
more or less uncertainty
of success, and that
for its success or failure rests upon its owner.
he calls
an enterprise
(Unternehmung),
he applies the term "entrepreneur"
and to
its responsible
owner
(UnThe entrepreneur
the responsible
ternehmer).
is, accordingly,
owner of an enterprise.
He explains,
at considerable
length, that
the ownership
of capital is not essential
to the conception.
Fur?
in a criticism
ther,
takes
goldt
of the views
exception
and
of Hermann
to the
proposition
directive
labor?are
that
and Riedel,
Man?
certain kinds of
from
inseparable
and expresses
himself
as
entrepreneur,
"All that is inseparable
follows:
from the conception
of the en?
of the product
trepreneur
is, on the one hand, the mere receiving
of the enterprise,
for what?
and, on the other, the responsibility
labor?organizing
the conception
ever
losses
means
occur."40
This is perhaps
what Professor
Clark
he speaks of the entrepreneur
as one "who simply
the aegis of his civil rights over the elements
of a
and then withdraws
it, in order that the product
may
when
extends
product
pass into
takes
of the
other
hands.
upon himself
evidently
The entrepreneur
or assumer
is he who
the responsibility
of ownership."41
Mangoldt
the emphasis
upon the element
which, to the
places
function
of the entrepreneur;
present writer, is the distinctive
and yet he was not able to differentiate
it altogether
from organ?
and
directive
labor and capital-owning.
This inconsistency
izing
is not revealed
until he turns to the analysis
of the several ele?
ments
of profit
which
the
entrepreneur
receives
as his
share.
'Der Isolirte Staat, Vol. II, Part I, sec. 7, pp. 80-86.

3Die Lehre
vom Unternehmergewinn, pp. 43-44.
1"Profits under
Modern Conditions," Political Science Quarterly, II, 607.
CHARLES
518
Here
it becomes
evident
A. TUTTLE
of responsible
owner?
of profit. If one were to
that the function
ship does not serve, solely, as the basis

of the entrepreneur
construct
function,
conception
Mangoldt's
in
the
involved
the
elements
of profit ascribed
implications
by
to it, the function would obviously
comprise,
sible ownership
of the business,
a modicum
directive
labor, as well as of capital-owning.
of the responsible
giving us the conception
the respon?
and
of organizing
in
Yet Mangoldt,
besides
ownership
of the
and in
function
of the entrepreneur,
for
in
its
the
as
a
basis
writer's
emphasizing
importance
profit,
made a notable
contribution
to the cause of sound
judgment,
After
the publication
economists
of his monograph,
theory.
could no longer consider the function as a mere incident to some
as the distinctive
business
other
or ignore it altogether,
as had been the case hith?
function,
erto. On the contrary,
have come to recognize
many economists
the responsible
of the business
unit as the predomi?
ownership
nant
if not the only one, in the function

of the entre?
Mithoff
in
and
and John
preneur?notably
Cohn,
Germany,
Bates Clark, F. M. Taylor, and A. S. Johnson in America;
while
element,
others,
still clinging to a broader view of the function,

element unmistakable
recognition.
give
this
specific
To Professor
John Bates Clark, pre-eminently,

belongs the
for giving the function of the entrepreneur,
as a distinctive
a permanent
He views the
place in economic
theory.
function,
credit
of distribution
as "primarily
functional
rather than per?
he conceives
of a person's income as com?
Accordingly,
of
"the
incomes
to
the functions
he performs."
posed
attaching
Professor
considered
it
in working
Clark, therefore,
essential,
problem
sonal."
to distinguish
out his theory of distribution,
clearly between
different functions
through which men draw an income from
in
product of socialized
industry.
Unfortunately,
however,
earlier
he
the
term
in
writing
employed
"entrepreneur"
broad
which
this
of an employer
he personally
owns.
sense
time
a person
who organizes
of several
Accordingly,
and directs
the
the
his
the
a business
his entrepreneur
is at
to
be
which,
sure, are
functions,
that of the owner?
carefully
distinguished.
Upon one function,
he places unmistakable
as the disship of the business,
emphasis
THE ENTREPRENEUR
tinctive
one;
IN ECONOMIC
519
for he says:
"Pure profit is the return of simple
It is free from all admixture
of wages and interest."42
ownership.
Here he clearly
connects
the distinctive
but he fails
tive
LITERATURE
to restrict
share
with
the distinc?
the
function;
specifically
personal
as such, to the performance
of the distinctive
entrepreneur,
This defect in his analysis,
in an
function.
he remedies
however,
article published
six years later. Here Professor
Clark uses the
term entrepreneur,
as he says:
in the unusually strict sense, to designate the man who co-ordinates labor
and capital, without in his own proper capacity furnishing either of them.
In performing this one function he contributes to industry nothing
....
but relations.He
connects labor and capital with each other in his
own establishment.43
Professor
Clark restricts
the per?
Here, it should be observed,
of a distinctive
sonal entrepreneur,
as such, to the performance
but
he
describes
the
in
function
terms not used
specific
function;
before.
It is now characterized,
but as the "co-ordination
ship,"
ness. The
not as "simple business

owner?
of labor and capital" in a busi?
arises whether
Professor
Clark is
question
naturally
here describing
a different
function
as that of the entrepreneur,
or is characterizing
the "function
of simple business
ownership"
in different and perhaps more analytical
terms. It is the writer's
that the latter is the correct answer;
but he recognizes
judgment
that the terms are susceptible
of an entirely
different
construc?
tion. This striking
characterization
of the entrepreneur's
func?
tion as that of "co-ordination
of the factors of production"
ap?
Clark's
pears again, after an interval of seven years, in Professor
volume The Distribution
In this work, which contains
of Wealth.
his complete
in 1899, Professor
Clark de?
theory,
published
scribes
the entrepreneur's
function
as "purely
co-ordinating
and
adds:
"The
function
in
itself
includes
no working
work,"
and no owning of capital;
it consists entirely in the establishing
and maintaining
of efficient relations
between the agents of pro?
duction."44
And finally in Professor
Clark's latest work, Essen42"Profits under Modern
Conditions," Political Science Quarterly, II, 606.
43"Insurance and Business
Profits," Quarterly Journal of Economics, VI,
45-46.
44
Page 3.
CHARLES
520
A. TUTTLE
function
the entrepreneur's
tials of Economic
Theory
(1907),
function
as "a special co-ordinating
again described
is
for
labor
and
"but
essential
labor,"
rendering
After
ductive."
stating
which
is
is not
capital
pro?
is quite distinct from
or manager
of a business,"
he
of hiring both labor and capital
that the "function
of the superintendent
of it as "the function
the work
speaks
and getting whatever
their joint product
of the elements
which enter into it."45
is worth
above
the cost
It is true that we commonly

owner, as
speak of the business
both
as
labor
and
as
labor
and capi?
hiring
such,
capital,
placing
tal in effective
to each other, and as doing everything
relations
in fact that is done; and yet he does no work. However,
there is
the "co-ordination
of the factors of production"
of organization
of the highest type?that
and di?
All that the entrepreneur,
rection.
in his true capacity,
does is to
choose and hire the organizing
and directive
who
creates
worker,
no doubt
calls
that
for labor
the organized
unit by placing the factors of production
business
in effective
relations
to each other, and directs it as a going con?
cern?and
all in the name of the entrepreneur
who owns it. This
is also Professor
Clark's
view, as he clearly shows in his illustra?

a man can be an entrepreneur
only."46 A. S. John?
influenced
Clark's analysis,
son, who was evidently
by Professor
confirms the writer's interpretation.
He speaks of the entrepre?
tion of "how
neur as "the man who performs

and capital
for the exploitation
the function
of combining
labor
of an opportunity,"
and then
his connection
with the business:
adds, by way of explaining
"He lends it his name, he assumes
for the
legal responsibility
conduct of the business,
and he reserves to himself the ultimate
or vetoing proposals
made by his staff. These
power of approving
are the only functions
that the enterpriser
must necessarily
re?
tain."47 All of these matters are obviously
involved
in the func?
tion of business
lor is seemingly
ownership.
in accord,
With
when
this view Professor

he writes:
"The
F. M. Tay?
funcpeculiar
46
Page 85.
46
John Bates Clark, Essentials of Economic Theory (1907), p. 86.
^Introduction to Economics (rev. ed.; Boston, 1922), p. 283.
THE ENTREPRENEUR
of the
tion
which
entrepreneur
he only can do."48
The
student
IN ECONOMIC
must
surely
be
LITERATURE
found
521
in something
of economic
can but regret Professor

theory
in all his writing his earliest characteri?
zation of the entrepreneur's
as that of "simple
specific function
business
The function,
thus characterized,
ownership."
clearly
Clark's
involves
failure
to retain
no labor, no capital-owning,
and no land-owning,
function to which profit attaches.
and is
the distinctive
Charles
A. Tuttle
Wesleyan University
8
Principles of Economics (5th ed.; Ann Arbor, 1918), p. 462.

The Entrepeneur Function in Economic Literature

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The Entrepreneur Function in Economic Literature

Author(s): Charles A. Tuttle

of the basic function

and equip them with

for the usance

to note that Turgot

and, for the first

his capital in the different

the form of money, he remains capitalist

on his own part he possesses,

hand, to quote Turgot:

to take the next step in the dif?

is, to the writer's

great work, however,

the great Scotchman's

"Ibid., p. 83, sec. 87.

The profits of stock, it may perhaps be thought, are only a different

the very element

of Nations, Vol. I, Book I, chap. vi.

the Turgot capital concept, and substituted

of land and natural agents, from which a

a profit by the sale of their

of capital from the ownership

and its ownership

And, strange as it may seem, he regards interest as an im?

but a fair inference

from that of the undertaker

Smith, with stronger

though by magic, exactly

a simple matter of sub?

in law prior to their discovery

same writer also says:

This has the sound

it is for one who holds

who writes, when he reaches the point, in his analy?

that John Stuart Mill must have

yet we find in his Principles

phrase "profits of capital or

tract, the produce

to be disposed of at his pleasure."

"The Theory of Distribution," Quarterly Journal of Economics, XVII, 204.

so, he would have found that

here so vividly described

are clearly problems

He has really given us, however,

group. It may be added that either theory

to the other. But it

into three portions,25

one firm or a combination

the supply that it may regulate

the "enterFetter,26 on the other hand, describes

profits are thus a species of wages but are marked

are the share,

his skill in directing industry

In a later chapter,29 however,

Probably the best plan for the exposition of distribution at large is to

are the earnings

and its complete

'Der Isolirte Staat, Vol. II, Part I, sec. 7, pp. 80-86.

that the function

ship does not serve, solely, as the basis

if not the only one, in the function

still clinging to a broader view of the function,

John Bates Clark, pre-eminently,