LYCEUM OF THE PHILIPPINES UNIVERSITY

COLLEGE OF INTERNATIONAL TOURISM AND HOSPITALITY MANAGEMENT

GRADUATE SCHOOL
DOCTORAL LEVEL

PhD IHM 610 Advance Entrepreneurial Management

REPORT
On
ENTRENEURSHIP THEORY
RICHARD CANTILLON
JOSEPH A. SCHUMPETERS

Submitted by:
MR. IAN Q. GUILLERMO
PhD IHM Student

Submitted to:
DR. MARK CELIS
Professor, PhD-IHM 610
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ENTRENEURSHIP THEORY
RICHARD CANTILLON

Richard Cantillon is widely considered the father of economic theory for providing the
first theoretical analysis of commerce in his Essay sur la Nature du Commerce en
General, posthumously and anonymously published in 1755.2 The Essay was the
springboard for the first-generation of economists, including David Hume, Adam Smith
and the Physiocrats. However, Cantillon and the Essay were soon forgotten, only to be
rediscovered by economist William Stanley Jevons in the late 19th century. He dubbed
the book, more emphatically than any other single work, the cradle of political economy
(1931 [1881], p. 342). His assessment comes from the recognition of Cantillons myriad
theoretical contributions, ranging from basic methodology to complex macroeconomic
models that include the circular-flow model and the price-specie flow mechanism.
To understand the role that Cantillons theory of the entrepreneur plays in the
development of his theoretical contributions to economics. We give an overview of
Cantillons contributions to economic and entrepreneurship theory, followed by an
examination of a sample of five cases from the Essay that illustrate how Cantillon used
his theory of entrepreneurship to construct economic theory. We provide evidence that
Cantillons theory of entrepreneurship is not merely an isolated brick in his system of
economics, but in fact is better understood as the tool used to build a brick wall. Not only
is the entrepreneur critical for building his economic models, but in the absence of the
entrepreneur, none of Cantillons theoretical constructions would work. Therefore, his
theory of the entrepreneur should not be viewed simply as one aspect among many, but
rather as the foundation for understanding economic phenomena. This point, we believe,
is not currently recognized in either the economics or entrepreneurship literatures.
At first this might seem like a chicken and egg circular argument in that you cannot
separate his view of entrepreneurship from his perspective on the economy. However,
we show that our central finding is a matter of cause and effect, and thus it is more like a
lock and key proposition. It is his theory of the entrepreneur that unlocks the mystery of
how Cantillon created so much of the foundation of economic theory.

CANTILLONS CONTRIBUTIONS
Historians of economic thought have dusted off an important and long neglected year on
the historical timeline1730that is just as crucial as 1776 (Adam Smith), 1871 (the
Marginal Revolution), 1936 (Keynes), and 1947 (Samuelson). Before 1730, when
Richard Cantillon is thought to have completed his Essai sur la Nature du Commerce en
Gnral, there was precious little in the economics literature that could be described as
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economic theory; after 1730, there was a burgeoning output of economic writings that
became increasingly more theoretical and systematic. During this ensuing progress, the
Physiocratic, French Liberal, and British Classical schools developed, all having
acknowledged roots in Cantillons influential work.

Prior to Cantillon, the economics literature consisted largely of the reflections of religious
thinkers and philosophers. Noteworthy among them were the Spanish Scholastics. They
were among the first to systematically incorporate economic issues into their
philosophical and religious paradigms. Also noteworthy were the Mercantilists, but they
suffered from a dearth of theory and organizing principles. The Mercantilist writings are
generally thought to have been motivated by their self-interest in business and trade and
they did not produce a systematic approach for understanding and describing the nature
of commerce. Anti-mercantilists also made contributions to economics, most notably in
France, but they also lacked theory and a systematic approach for explaining economic
phenomena. The anti-mercantilists galvanizing force was their opposition to the
mercantilist policies of the ruling elite. They were like the Scholastics in that they were
motivated by the fairness of things, such as taxes, rather than with economic questions,
such as the efficiency of different tax systems.
Cantillons Essay represents a deep reflection on and rejection of existing economic
knowledge. In Part 1 of the Essay, he began by discarding the mercantilist notion that
money was wealth and then began to build his analysis of commerce from the ground up
with an analysis of the property rights of landowners and the establishment of villages,
market towns, and cities. Next, he provided an analysis of labor and wage rate
differentials that concludes with the remarkable finding that the true cost or intrinsic
value of something is its opportunity cost. He showed that there was a mutual
interdependence among the economic classes and that the economy would be self-
regulating because entrepreneurs would obey the command of price signals. He then
provided a population theory that predates and exceeds that of Malthus and integrated it
into his theory of wealth. In Part 2 he analyzed barter, market prices, money and its
velocity, and changes in the quantity of money and its relation to changes in the interest
rate. Part 3 explains foreign trade, exchange rates, banking, inflation, and the business
cycle.
Cantillon is credited with many contributions, including location theory, population theory,
the price-specie flow mechanism, the circular-flow model, business cycle theory,
methodological individualism and subjectivism, abstraction, the ceteris paribus
assumption, closed- and open-economy models, as well as methodological innovations
like the separation of positive and normative economics. We argue that Cantillons wide-
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ranging experience as an entrepreneur led him to a theory of the entrepreneur that he

then used to construct economic theory. It is in his theory of entrepreneurship that
Cantillon seems to have had no prior influence (Brown and Thornton, 2013).
There are three main actors in Cantillons economy. Property owners are the main
consumers and all production in the economy (supply) is an attempt to meet their
desires (demand). The two remaining actors are primarily distinguished by the nature of
their income, which leads to the major characteristic of Cantillons entrepreneur: living on
uncertain income, rather than on fixed income. While wage laborers are on fixed wages,
entrepreneurs have no guaranteed income. In addition to this feature, the entrepreneur
is responsible for the production, circulation, and exchange of goods in the economy as
they attempt to meet the demands of property owners and other consumers.
Cantillons theory of entrepreneurship is that entrepreneurs function by bearing risk
under uncertainty. They buy goods at known (fixed) prices in the present to sell at
unknown prices in the future. According to Hebert and Link (1988, p. 21):

An important aspect of Cantillons theory is that it stresses the function, not the
personality of the entrepreneur. His idea is sweeping in its application, embracing many
different occupations and cutting across production, distribution, and exchange.
Cantillons theory of entrepreneurship is therefore narrowly defined but broadly
applicable. Anyone who invests (in the sense of acquiring and employing resources) with
the purpose of selling goods in the future at an uncertain price is an entrepreneur.
Therefore, his theory is in the same lineage as Knight and Misses, but differs greatly with
Schumpeter and others.
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ENTRENEURSHIP THEORY
JOSEPH A. SCHUMPETERS

Carrying out innovations is the only function which is fundamental in his-tory. He also
accented that it is entrepreneurship that replaces todays Pareto optimum with
tomorrows different new thing. Schumpeter's words that entrepreneurship is innovation
have never seemed as appropriate as the nowadays, when modern capitalism is
experiencing a serious crisis and lost his strength during last subprime and euro debt
crises. The purpose of this paper is the analysis of the Schumpeters innovation concept
in a context of first and second Entrepreneurship theory. Innovation,
entrepreneurship, Schumpeters economy
According to Joseph Alois Schumpeter

Joseph Alois Schumpeter is regarded as one of the greatest economists of the first
half of the twentieth century. At that time he took part in the most important economic
de-bates. After his death, he had been (more or less) forgotten for around three
decades. In the early 1980s Schumpeterian economics were considered extremely
broad after a period when traditional economic approaches were increasingly criticized.
Nowadays when economies struggles with banking and debt crises, parallel they are
knowledge based economies with globalization and increasingly importance of
intangible resources. The concepts of innovation and entrepreneurship are probably
Schumpeters most distinctive contributions to economics. One of the most common
themes in Schumpeters writings was the role of innovation new combinations and
entrepreneurship in economic growth. Despite the fact that Schumpeter was among the
first who lay out the clear concept of innovation his views on the topic changed over
time. In his earlier view emphasized in The Theory of Economic Development,
originally published in 1912, Schumpeter highlighted the function of entrepreneurs who
is carrying out new combinations. He viewed the occurrence of discontinuous and
revolutionary change as the core of economic development which breaks the
economy out of its static mode circular flow and sets it on a dynamic path of fits and
starts. Three decades later, in his Capital-ism, Socialism, and Democracy 1942,
Schumpeter took the view that dynamic capital ism was executed to fail because the
very efficiency of capitalist enterprise would lead to monopolistic structures and the
disappearance of the entrepreneur. What is interesting Schumpeter's words have never
seemed so appropriate as nowadays, when modern capitalism is experiencing a serious
crisis and has lost his strength during last subprime and euro debt crises.
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Schumpeter described development as historical process of structural changes,

substantially driven by innovation which was divided by him into five types 4

1. Launch of a new product or a new species of already known product;

2. Application of new methods of production or sales of a product (not yet proven in the
industry
3. Opening of a new market (the market for which a branch of the industry was not yet
represented
4. Acquiring of new sources of supply of raw material or semi-finished goods
5. New industry structure such as the creation or destruction of a monopoly position.

Schumpeter argued that anyone seeking profits must innovate. That will cause the
different employment of economic systems existing supplies of productive means
Schumpeter believed that innovation is considered as an essential driver of
competitiveness and economic dynamics He also believed that innovation is the center
of economic change causing gales of creative destruction, which is a term created by
Schumpeter in Capitalism, Socialism and Democracy According to Schumpeter
innovation is a "process of industrial mutation, that incessantly revolutionizes the
economic structure from within, incessantly destroying the old one, incessantly creating
a new one". Schumpeter described development as historical process of structural cha
changes, substantially driven by innovation. He divided the innovation process into four
dimensions invention, innovation, diffusion and imitation. Then he puts the dynamic
entrepreneur in the middle of his analysis. In Schumpeters theory, the possibility and
activity of the entrepreneurs, drawing upon the discoveries of scientists and inventors,
create completely new opportunities for investment, growth and employment. In
Schumpeters analysis, the invention phase or the basic innovation have less of an
impact, while the diffusion and imitation process have a much greater influence on
the state of an economy.