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Key Takeaways

  1. Entrepreneurship expands the possible uses of technologies and other innovations that are necessary for the success of evolving capitalist markets.
  2. Entrepreneurs can improve general welfare in democratic societies by promoting dynamic economic transformation that can prevent societies from becoming rigid and static rather than adapting to peoples’ changing valuations.

Entrepreneurship and Capitalism

Entrepreneurship is the act of creating new value within an economy. It usually includes undergoing some risk that introduces a new, and yet untested, good, service, or form of production into an economy. Entrepreneurs undergo short term costs with the goal of future profit, but often lose initial investments when they fail to find a market for their business. Many academics note the connection between entrepreneurship and economic development. They generally argue that entrepreneurship provides a disruptive function that, when successful, disrupts older markets in favor of new ideas that consumers find more valuable. As economists note, these new introductions have a destructive as well as generative effect because entrepreneurial innovation promotes competition between new and old firms. For this reason, successful entrepreneurship requires legal environments that do not suppress new entrants into markets so as to protect existing firms. New entrepreneurs combine resources and capital in ways without precedents in a form of experimentation that often fails. Such risks, as historians of economies and business have noted, makes successful entrepreneurs both important and rare.1

The decisions and actions of economizing individuals do not by themselves generate the market processes that one can observe in capitalist societies. For such market processes to emerge, as economist Israel M. Kirzner argues, there must be an additional decision-making element that involves new knowledge and technologies with which economic actors make choices.2 In other words, without entrepreneurship, individuals make choices only in response to given means and ends. Entrepreneurship expands these horizons for action and choice. It reveals new preferences and allows for people to more effectively make decisions that match their individual valuations. The alertness of the entrepreneur to changing conditions, including goals and available resources, allows for the proliferation of choices that many see as a positive characteristic of capitalism.

Entrepreneurship and Democracy

Democratic government serves to create forums in which large aggregates of individuals can express concerns and sentiments to a central authority. This expression, however, does not necessarily imply that what people purport to want at any one time will ultimately manifest in a society, or even should. This is partially because what people want, or believe they want, evolves over time in response to new information and opportunities. Consequently, entrepreneurship can improve democracies by anticipating such changes and acting to meet new demands. Entrepreneurs probe the frontiers of existing knowledge to find ways to create different futures of which most people are not as yet aware. Democratic expression can play an important role in this entrepreneurial process by expressing what the majority believes to be the proper course of entrepreneurial action. However, much of the entrepreneur’s role involves questioning what most think is proper in favor of untested alternatives.

Entrepreneurship is necessary for improvements in an economy given that people rarely recognize their society as having achieved a state of perfection and therefore require entrepreneurs to test traditional assumptions and find improvements most people have not considered. On this, the political economist Joseph A. Schumpeter wrote that “if we take account of the fact that, as higher standards of life are attained, these wants automatically expand and new wants emerge or are created, satiety becomes a flying goal…”3 To Schumpeter and others, entrepreneurial innovation serves a social function by preventing stagnation under strictly ordered polities and economies, introducing a degree of generative chaos that can prevent societies, including democratic states, from becoming depersonalized, automated, rigidly bureaucratic, and stagnant. Democratic governance can constrain this entrepreneurial “creative destruction” by imposing constitutional norms, or “rules of the game,” under which entrepreneurs compete.

Why it Matters

The proliferation and health of small and growing businesses are particularly important to the degree of entrepreneurial activity in an economy. As of 2022, about 65.3% of small businesses are currently profitable. Additionally, about 27.2% of small businesses are new independent businesses. These businesses, which often take high risks to cover costs and debts, are critical for introducing new products, services, and technologies. Recent years have seen the stability of businesses become increasingly precarious. This is especially true for the costs and availability of labor, with 39% of small business owners reporting that hiring was “very difficult” in the past year, 31.7% reporting it “somewhat difficult,” and only 3.4% describing it as either “somewhat easy” or “very easy.” Common implementations that small businesses report making include increasing compensation, improving employee retention, and expanding recruitment efforts. Interestingly, most small businesses self-report that they believe that the long-term survival of their business is probable. Nonetheless, increasing costs of operation, especially concerning labor, decrease the success of smaller businesses and the critical entrepreneurial functions they perform. Such economic condition will likely require attention among policymakers and potential entrepreneurs.4


1 Jonathan Hughes, The Vital Few: American Economic Progress and Its Protagonists (New York, NY: Bantam Books, 1965), 1-14; Joseph A. Schumpeter, Capitalism, Socialism and Democracy. 3rd ed. (1942; New York, NY: Harper Perennial, 2008), 81-106.

2 Israel M. Kirzner, Competition and Entrepreneurship. Eds. Peters J. Boettke and Frédéric Sautet. (1973; Carmel, IN: Liberty Fund, 2013), 25-7.

3 Schumpeter, Capitalism, Socialism, and Democracy, 131.

4 “Small Business Trends 2022,” Guidant Financial. https://www.guidantfinancial.com/small-business-trends/.