I fail to see the point of professional economists

9 06 2011

The entrepreneur Luke Johnson has a column in the Financial Times. Yesterday’s column was particularly amusing, as he bashed pretty much the entire economics profession. The opening sentence was “I fail to see the point of professional economists”. It went downhill (or uphill, depending on your perspective) from there.

Here are some of his pearls of wisdom:

“And the most dangerous economist of modern times is surely Alan Greenspan, the former head of US Federal Reserve who cheered America over a cliff.”

“Give me the company of artisans who create tangible things, like the bakers and chefs with whom I work in my restaurant companies. They might lack some of the rhetorical finesse of the economics commentators we read or hear through the media – but their practical skills are of vastly greater value to society than the pseudo-science espoused by Krugman et al. ”

Johnson also wrote: “The fact that most economics textbooks barely mention entrepreneurs – and when they do they miss the point – shows that most “dismal scientists” are out of touch and unversed in the real workings of marketplaces.”

Actually, this last point is a good one indeed.

Although other academics certainly study entrepreneurship, most economists do not.  Indeed, I wrote something about this a few months ago. The following is from a piece I wrote on the intellectual precursors of Joseph Schumpeter, who helped to pioneer the academic study of entrepreneurship in the 1940s.

Given that their teachings had massive implications for business, it is striking that early economists in the English-speaking world rarely spoke about businessmen as a class, let alone particular firms, when analysing the economy. Instead, they dealt with abstractions such as the laws of supply and demand, balance of payments, equilibrium, and comparative advantage. The apparent expectation was that market forces would “naturally” bring different factors of production together and then transport goods to where the price was highest. Nowhere in The Wealth of Nations is the function of the entrepreneur directly discussed, an omission that was repeated in the works of most English-speaking economists of the nineteenth century. [1]

Alas, market forces can only really operate with the aid of flesh and blood human beings. It appears that writers on economic topics in the French speaking world were much more aware of the importance of the individual entrepreneur. Jean-Baptiste Say (1767-1832), a French economist, discussed the role of the entrepreneur in creating value by shifting resources into faster-growing parts of the economy.[2] The word entrepreneur entered the English language very slowly: when the Say’s works were translated into English in 1836, the translator decided to render “entrepreneur” as “adventurer”, a term reminiscent of the investors who had “adventured” or lent money to the Hudson’s Bay Company.[3][4] John Stuart Mill (1806-1873), further refined the concept of the entrepreneur in his 1848 Principles of Political Economy. Mill provided a much clearer distinction than either Cantillon or Say between true entrepreneurs and those  business owners (such as shareholders of a corporation) who assume financial risk without actively participating in the  management of a company.[5] Despite its use by such an influential thinker as Mill, English-speaking economists did not really pay that much attention to the category of the entrepreneurs until the 1940s. According to the Oxford English Dictionary, the most common meaning for entrepreneur in the nineteenth century was “one who ‘gets up’ entertainments, esp. musical performances”.[6]

Mill, it should be noted, devoted just a few pages in his massive tome to the concept of the entrepreneur. At no point in this book did Mill mention the inventor  James Watt (1723-1819) or any of the other entrepreneurs whose innovations were dramatically transforming the world around him.

An economics textbook published by Frank Fetter in New York City 1904 referred to “enterprisers”, but did not really explore entrepreneurship in great depth, confining its discussion to just a few pages out of six hundred.[7] Moreover, this book was unusual in that it spoke about “enterprisers” at all, which is one of the reasons why Fetter has been called “a forgotten giant.”[8]  The economic profession’s  collective sin of omission in this era is striking given that captains of industry such as Rockefeller had then made themselves into  household words in the United States, which was by now the world’s most advanced economy. Despite the visibility of the surnames of particular entrepreneurs such as Ford, Heinz, or in Canada, Eaton in their own homes, early twentieth century economists were simply not that interested in entrepreneurs. Nor did they pay much attention to the reasons why the old-style market economy characterized by  a large number of tiny family firms had been transformed by the rise of the Big Business, that is the emergence of vast impersonal corporations owned by absentee shareholders and managed by salaried executives. Totally committed to their aprioristic approach, English-speaking economists preferred to focus on thought experiments and deductive reasoning about how people would behave in a given circumstance.[9]

[1] Charles A. Tuttle, “The Entrepreneur Function in Economic Literature,” The Journal of Political Economy 35, no. 4 (1927): 504.

[2] Evelyn L Forget, The Social Economics of Jean-Baptiste Say: Markets and Virtue (London: Routledge, 1999).

[3] As the translator noted in a footnote, “the term entrepreneur is difficult to render in English ; the corresponding  word, undertaker, being already appropriated to a limited sense. It signifies the master-manufacturer in manufacture, the farmer in agriculture, and the merchant in commerce ; and generally in all three branches, the person who takes  upon himself the immediate responsibility, risk, and conduct of a concern of  industry, whether upon his own or a borrowed capital. For want of a better  word, it will be rendered into English by the term adventurer” .Jean Say, Traité d’économie politique.  A treatise on political economy  or The production, distribution, and consumption of wealth. By Jean-Baptiste Say. Translated from the fourth edition of the French, (Philadelphia, Grigg & Elliot., 1836), 78.

[4] N. S. B. Gras, “Capitalism-Concepts and History,” Bulletin of the Business Historical Society 16, no. 2 (April 1, 1942): 24.

[5] Bert Hoselitz,  “The Early History of Entrepreneurship Theory, Explorations in Entrepreneurial History”, 3,no. 4 (April 15, 1951), pp 193-220

[6] Second edition, 1989; online version November 2010. <http://www.oed.com:80/Entry/62991&gt;; accessed 17 February 2011. Earlier version first published in New English Dictionary, 1891.

[7] Frank Fetter, The principles of economics : with applications to practical problems (New York: Century, 1904), 265-272.

[8] See blog post by Prof. Jefferey Herbener, http://mises.org/about/3231. Accessed 14 February 2011.

[9] Geoffrey Martin Hodgson, How economics forgot history: the problem of historical specificity in social science (Routledge, 2001).



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