Entrepreneur, entrepreneurship

French term (taken over into English) for "enterpriser" or "one who undertakes."
An entrepreneur is a person who detects a previously untapped opportunity to
make substantial profits (either by lowering the costs of producing existing
good/services or by creating brand new ways for people to satisfy their wants
through new products) -- and then takes the initiative in bringing together the
necessary factors of production to exploit this opportunity, typically by organizing
a new business firm (or perhaps a new subdivision of an existing firm) for the
purpose. The new opportunity which the entrepreneur has detected may involve
the introduction of a new good or service only recently invented or improved. It
might involve introducing some existing good or service into a new market area
where it is presently unavailable or deepening the original market by finding and
publicizing new ways for new groups of customers to use it. It might involve
recognizing the potential of some new production technology for dramatically
lowering the costs of production of an existing good or service, making it possible
to garner huge sales increases at the expense of much higher cost substitutes that
are thereby rendered obsolete and no longer competitive. Entrepreneurs thus serve
an important role in enabling the economy to adapt to changing conditions and
new possibilities for material improvements by creating new production
organizations, and even whole new industries. Because of its essential role in
initiating the process of production, entrepreneurship is identified by some
economists as a "fourth factor of production," alongside land, labor and capital.

In its essence, entrepreneurship involves looking ahead to foresee future

conditions of supply and/or demand that will be quite substantially different from
present conditions. Having arrived at a vision of the future based on observation
of previously unnoticed trends, tentative theories, recent discoveries and
inventions, and a large dose of creative imagination, the entrepreneur
differentiates himself from the prophet, the social scientist and the idle dreamer
by taking practical action to reallocate costly resources in the present so as to
prepare for meeting an expected future demand. However, if the entrepreneur's
vision of the future proves to be incorrect, all or part of the resources mobilized to
prepare for that future may prove to have been wasted, so there are risks of large
losses. The prospect of far above average profitability is normally necessary to
attract the necessary resources into an undertaking with such a high possibility of
loss. Being the first in the field with an exceptionally good idea may well yield far
above average profits because of the possibilities for explosive sales growth and
because of especially favorable pricing conditions enjoyed due to the temporary
monopoly the firm enjoys until imitators can gear up to enter the marketplace.

The entrepreneur may personally bear all or most of the risk of the new enterprise
by using only his own resources and thus becoming the sole owner of the
business. Frequently, however, the entrepreneur will organize the business in such
a way as to share the risks with others, either by borrowing part of the initial
financing from banks or from wealthy passive investors or by selling bonds. The
entrepreneur may even give up part of the ownership of the enterprise (and thus
part of the claims on future profits) to other partners or share-holders willing to
buy their way in after the entrepreneur has developed and explained the basic
concepts of the new undertaking. However, such risk-sharing arrangements will
normally be structured by the entrepreneur in such a way that the entrepreneur
retains an ownership interest larger than his original share of the resources put at
risk. In other words, there are financial returns to entrepreneurial creativity above
and beyond the returns demanded for pure risk-bearing. Entrepreneurship is
something above and beyond risk-bearing or even ownership of the enterprise,
even though any or all of these functions may happen to be performed by the
same person in individual instances.

Because the entrepreneur originated the idea of the business venture and took the
lead in mobilizing the human and non-human resources to make it a reality, the
entrepreneur often takes on the role of operational management of the new
enterprise as well, especially during the lean early years before the basic
assumptions of the undertaking have been proved valid in practice. However this
need not always be the case, and many highly gifted entrepreneurs in history seem
to have been quite remarkably lacking in ordinary managerial ambitions and basic
skills. Once the core entrepreneurial function of discerning the new profit
opportunity and mobilizing resources to exploit it has been fulfilled, the task of
exerting day to day control so that these resources are efficiently employed to
meet the owners' planned objectives can well be delegated to professional
managers who need not be either entrepreneurs or even share-holders.

Even though entrepreneurs frequently become managers, and even though

professionally trained managers sometimes become entrepreneurs, the function of
 entrepreneurship is as separate and distinct from management as it is from
ownership and risk-bearing. It is good to keep this in mind, because the term
"entrepreneur" is sometimes applied incorrectly and indiscriminately in ordinary
speech to any business owner or high-ranking manager.

Factors of production
The scarce resources that are useful not so much for direct and immediate
satisfaction of human wants as for producing other goods or services. Economists
often find it useful for purposes of theoretical simplification to group the millions
of different sorts of factors of production into several very broad categories and
then discuss them as though all the items within each category were perfectly
substitutable for each other and therefore traded on a single market. The simplest
such conventional categorization of the factors of production divides them into
land, labor, capital, and sometimes also entrepreneurship and/or human capital.

Gross National Product (GNP)

An estimate of the total money value of all the final goods and services produced
in a given one-year period by the factors of production owned by a particular
country's residents. ("Final" goods and services means goods and services sold or
otherwise provided to their final consumers -- that is, to avoid double counting,
the value of steel sold to GM to make a car is not added separately into the GNP
or GDP totals because its value is already included when we add in the final sales
price of the car to the customer.)

GNP and GDP are very closely related concepts in theory, and in actual practice
the numbers tend to be pretty close to each other for most large industrialized
countries. The differences between the two measures arise from the facts that
there may be foreign-owned companies engaged in production within the
country's borders and there may be companies owned by the country's residents
that are engaged in production in some other country but provide income to
residents. So, for example, when Americans receive more income from their
overseas investments than foreigners receive from their investments in the United
States, American GNP will be somewhat larger than GDP in that year. If
Americans receive less income from their overseas investments than foreigners
receive from their US investments, on the other hand, American GNP will be
somewhat smaller than GDP.

Equivalent estimates of GNP (or GDP) produced in a given year may theoretically
be arrived at through at least three different accounting approaches, depending
upon whether the transactions that determine the prices of final goods and
services are looked at and tallied up by focussing on the buying or by focussing
on the proceeds from selling or by focussing on the nature of the products
themselves. Using the expenditure approach, you can estimate total GNP as the
sum of estimates of the amounts of money that are spent on final goods and
services by households (Consumption), by business firms (Investment), by
government (Government Purchases), and by the world outside the country (Net
Exports). Using the incomes approach, you can estimate total GNP by summing
up estimates of the different kinds of earnings people receive from producing
these same final goods and services:

• Total wages and salaries

• Profits of incorporated and unincorporated businesses
• Rental incomes
• Interest incomes

(Plus certain adjustments to account for wear and tear on productive assets like
plant and machinery -- depreciation -- and what are called indirect business
taxes). Using the product or output approach, you can estimate GNP by summing
up the output of all the various organizations producing goods and services in the
country, subtracting out the costs of their raw materials to avoid double counting
and making suitable adjustments for depreciation and for the value of imports and
exports. (In theory, all three approaches should give you the same grand totals --
but of course in actual practice there will be discrepancies, and sometimes sizable
discrepancies, between the three estimates.)

Why does anyone bother to estimate the GNP or GDP? For the same reasons
statistical data is also gathered on unemployment rates, consumer price levels, the
international trade balance and so on -- to facilitate economic policy making by
government, to assist in planning by decision-makers in private business, and to
test economic theories. If government policy makers include among their goals
the promotion of economic growth and material prosperity in the national
economy as a whole by means of monetary and fiscal policy, they need to have
some reasonably precise way of telling how the economy is doing so as to decide
whether they should be pushing on the gas or stepping on the brakes.
Businessmen responsible for planning new investments in plant and equipment or
the introduction of new products can use macroeconomic data and economic
theory to forecast the likely levels of demand for their products and the probable
trends in their various costs of production. Finally, a historical record of such
statistics provides economists with the necessary data to test and refine their
theories about how the economy actually works (and, in the process, perhaps to
improve the policy makers' understanding of the likely consequences of their
policies).

GNP and GDP are among the most comprehensive measures of the overall
amount of economic production taking place in a national economy. Nevertheless,
the available statistics produced by government agencies are always far from
perfect estimates of what they purport to measure. They are measured in money
value terms to get around the problem of adding up total output of many different
goods and services that are normally expressed in many different kinds of
incomparable physical units. Microeconomic theory gives us lots of reasons for
believing that the relative prices at which products trade on a free market
represent reasonably unbiased estimates of the relative values consumers put upon
the various kinds of goods and services traded -- at least where there are no large
problems with externalities or public goods. But not all the final goods and
services produced in a society are traded on the free market, and the relative
contributions of these untraded goods and services to the consumers' material
living standards are therefore awfully difficult to estimate very well. Most of the
services produced by government, to take the largest example, cannot be valued at
a free market price because they are not offered for voluntary purchase on a free
market -- instead, the presumed beneficiaries of these services (the citizenry) are
forced to pay for them through taxes, whether they think the benefits are "worth
it" or not. In compiling the national accounts, the government statistical offices
simply make the heroic (and self-flattering) assumption that all the goods and
services provided by government are "worth" at least what was spent to produce
them, however outrageous the costs might have been and however worthless (or
harmful) the output might have been in the eyes of the citizenry.

A very large category of privately produced goods and services whose production
does not register at all in the official GNP or GDP statistics (because they do not
trade for money on the market) consists of householders' home production for
their own use -- things like backyard vegetable gardening, do-it-yourself home
and auto repairs, and the innumerable productive service activities of homemakers
in cooking, cleaning, sewing, childcare and so on. Another major omission from
the national accounts consists of goods and services that actually are traded for
money on markets -- black markets -- but the transactions are deliberately
concealed from government information collectors, either to avoid prosecution for
trading in illegal demerit goods (for example, drugs and prostitution) or simply to
avoid paying taxes or submitting to costly regulations on otherwise potentially
legal business transactions (working off the books, unauthorized import/export
trade, "moonshine" production of liquor, etc.). Economists' unofficial estimates of
the size of the American "underground economy" in recent years range from no
less than 5% to as much as 30% of official GDP!)

If one wants to use GNP (or GDP) to measure changes in overall levels of
economic production from one year to the next, then using money prices as a
"common denominator" for adding up all the disparate kinds of goods and
services introduces another problem for the accuracy of the estimates -- inflation.
Using money valuations to measure output at several points in time is a little like
using a rubber tape-measure to measure several different distances. Part of the
increase in GNP (or GDP) from one year to the next really is the result of
increased output, but part is also likely to be due merely to change in the value of
the currency unit used to measure it. Government statistical compilers try to deal
with this problem by producing estimates of "real" or "constant dollar" GNP (and
GDP), dividing their original ("current dollar") estimates by one or another of
many possible "price indexes" constructed to account for and remove the effects
of general price inflation -- but the problems of choosing and constructing
appropriate price indexes for this purpose are themselves numerous and admit of
no single unambiguous "best" answer to the problem.

It is also important to keep in mind that GNP and GDP (even when divided by the
size of the population to produce "per capita GNP") were never intended even
 theoretically to be good measures of overall economic welfare: they are at best
only measures of recent levels or rates of productive activity. Overall societal
welfare is a broader concept than just economic welfare, and GNP (or GDP) is at
best only a very incomplete measure even of economic welfare, since levels of
current production do not necessarily reflect the levels of accumulated wealth
actually at the disposal of the citizenry. Moreover, the greater availability of
leisure time made possible by today's higher levels of productivity is pretty
clearly an improvement in our economic welfare over the days of the early 19th
century 14-hour workday. But this improvement does not show up at all in our
long-term GNP growth rates -- except possibly in a backwards way, since our
official GNP would no doubt be much higher than it is today if everyone still
worked a 14-hour workday using our modern technology instead of "wasting" all
those potential labor hours on "nonproductive" recreation, relaxation,
contemplation and socializing. And of course aggregate GNP and GDP do not
give any indication as to who gets to consume how much of the goods and
services produced, nor do their compilers exercise any "judgment" about what
these goods and services are or ought to be (as the advocates of the "equitable
distribution" and merit goods and demerit goods concepts would want to insist
upon as crucial determinants of societal welfare).

Inflation
In contemporary usage, a sustained rise over time in the general level of prices,
normally measured by a weighted index of prices of a large and representative
sample of goods and services (both consumers' goods and producers' goods)
regularly traded in the economy under consideration. (In 19th century usage, the
term referred more specifically to any sustained expansion in the stock of money
available within the economy under consideration -- the eventual consequence of
which would normally be a generalized increase in prices.)

When the quantity of money available in the economy begins to exceed the
amount that firms and households (in the aggregate) feel they wish to keep on
hand to finance their expected volume of trading in the foreseeable future, people
tend to increase their rate of spending all at once, shifting the demand curves for
nearly all goods and services to the right at the same time and thus driving up the
general price level -- which is just another way of saying that each unit of money
begins to be worth less than before in its purchasing power. Such an acceleration
of spending may happen for any of a number of reasons:

1. The money stock itself is rapidly expanding

2. The available stocks of many goods have suddenly shrunk
dramatically due to natural disaster, wartime destruction, or political
interruption of established international trading relationships through
embargoes or blockades
3. The average amounts of money people want to keep on hand is
shrinking due to rising guesstimates of what future inflation rates might be
4. Increasing availability of new close money-substitutes like credit
cards, or
5. because households' willingness or ability to save is for some
reason sharply decreasing.

History strongly suggests, however, that sustained inflation at rates of more than
four or five percent per year in "normal" times is nearly always due primarily to
government or central bank policies of rapid monetary expansion rather than to
anything else that may be going on in the private sector to influence the public's
demand for cash balances.

If the money stock continues to increase a great deal faster than the public's total
demand for cash holdings, the inflationary process begins to feed upon itself.
Initial experience with accelerating inflation quickly convinces the public that the
future purchasing power of their money holdings is going to be very much less
than it is in the present -- leading people to reduce still further their desired
amounts of money to hold and further accelerating the general rise in prices
because of their desperate efforts to spend away their money as quickly as
possible, before its value melts away. When such an inflationary panic once takes
hold, the result is apt to be hyperinflation, in which prices may begin increasing
by several hundred percent (or even several thousand percent) per month until the
monetary system collapses altogether and people resort to primitive barter (or the
use of more stable foreign currencies, if available) rather than accept the
government's worthless money as payment for their goods or services.