[Page 1] Baumol argues that as opposed to common belief a theory of entrepreneurship already exists. The misunderstanding that the entrepreneur is absent in theory stems from
1) Neoclassical theory of the firm (and production), which assumes a status of equilibrium. In such theories there is no place for entrepreneurs since they focus on -and recognize opportunities in - disequilibrium. So the entrepreneur is not mentioned in the neoclassical theories.
2) Wrong expectations: we tend to expect the theory of entrepreneurship to deal with topics that we do not demand of the theory of, for example, labor. In the theory of labor we focus on the attributes and determinants of demand, supply, allocation among alternative uses, product prices and wage payments/earnings. However the modern theory of entrepreneurship already does all that, though more qualitative and less formal.
[P.2]Schumpeter explained supply, prices, and payments as entrepreneurial activities. The earlier Schumpeterian model (1911) tells us that the efforts of the successful innovative entrepreneur is rewarded by temporary monopoly profits (profits/earnings and prices) that, if substantial, attract rivals who seek to acquire some of those profits via imitation (supply of imitative entrepreneurship), and in the process erode those supercompetitive earnings.
[P.3] Baumol here explains allocation of resources: In growth literature there seems to be sudden appearances and disappearances of entrepreneurs for certain periods of time. This is due to the fact that they switch the locus of their activity, moving into the arenas where the payoff prospects have become the more attractive. And in doing so, they move in and out of the activities that are most generally recognized as entrepreneurial, exchanging them with other activities that also require considerable enterprising talent but are often quite distant from the production of goods and services. Entrepreneurs reposition themselves to...
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