June 12, 2006

The Nature and Role of Entrepreneurship in Markets: Implications for Policy

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Policy makers and others often associate entrepreneurship with the creation of new businesses. While this is an accurate description of one of the many outcomes of entrepreneurial activity, entrepreneurship encompasses far more than business start-ups. It derives from the creative power of the human mind and consists of the discovery of profitable ideas that enable market actors to exploit new, socially beneficial gains from trade. As such, entrepreneurship is the driving force of the market, and it makes progress and sustained prosperity possible.

Economists emphasize that the market is a resource allocation mechanism. However, they often fail to explain how this allocation occurs because they fail to mention the role of entrepreneurial activity in trade. Resource allocation is the result of entrepreneurial discovery for potential gains from trade. In this sense, entrepreneurship, rather than resources and their allocations, matters more to individual wellbeing and to prosperity. In the social context, profit drives the entrepreneurial discovery of previously overlooked opportunities for trade and thereby signals a more desirable way to organize society's resources.

In order to foster socially-beneficial entrepreneurial activity, policymakers must pay attention to the quality of institutions-especially as they impact profits. Institutions that enable individuals to bet on the future and to reap the gains they have discovered will foster entrepreneurial discovery and, as a result, will create a dynamic and prosperous society. These institutions include: Well-defined and enforced property rights; Freedom of contract and its enforcement; Limited interference from government with market outcomes.

Citation - Chicago Style

Kirzner, Israel M. and Frederic Sautet. "The Nature and Role of Entrepreneurship in Markets: Implications for Policy." Mercatus Policy Series Policy Primer, No. 4, Arlington, VA: Mercatus Center at George Mason University, June 2006.