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Factors of Production

ENTREPRENEURSHIP
Until the twentieth century, this function was assigned to
the capitalist and frequently conflated with capital. In the
classical view, profit rather than interest was attributed to
ownership of capital. In the marginalist view, capital
earned interest, and profit was a mere residual after all the
factors of production were compensated. In his Principles
of Economics, first published in 1890, Alfred Marshall
made extensive references to “organization” and “manage-
ment,” referring to the coordination function of entrepre-
neurship but to neither risk-assuming nor innovation.
However, in 1912 Joseph Schumpeter, in The Theory of
Economic Development, featured the revolutionary role of
organizer and innovator and contrasted it with that of the
conservative financier, thus vividly distinguishing the
entrepreneur from the capitalist. The entrepreneur’s role
in this view is not merely that of manager and risk-taker,
but also of visionary—someone who seeks as much to
destroy the old order as to create something new. Since
innovation usually requires destroying old ways of doing
things, Schumpeter gave it the name creative destruction.
Profit is now assigned to entrepreneurship, to innovation.
With the rise of venture capitalists and other financiers
willing to take on more risk and do more for innovation
in the hope for supernormal returns, the distinction
Joseph Alois Schumpeter (1883–1950). Schumpeter’s 1912 between capitalist and entrepreneur has again become
work contrasted the entrepreneur with the capitalist. fuzzier. Now there are entrepreneurial financiers as well as
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entrepreneurial producers and distributors.
Although in business usage stock dividends are dis-
tributed profits, in economic analysis they figure as
returns to capital, a kind of interest payment, since they
are a return to finance rather than to entrepreneurship.
ment adopted to replace labor after wages rise from a low The fact that stocks are legally equity rather than debt
level, relative to interest on capital, may be abandoned shares is thereby ignored. Similarly, salaries of corporate
again in favor of labor as wages rise still higher. This coun- executive officers are treated as profit, a return to entrepre-
terintuitive reswitching can happen because the equip- neurship, rather than as wages for labor services.
ment used is itself a product of labor and equipment, and
because the ratio of labor to equipment varies for different SEE ALSO Entrepreneurship
products.
Frequently capital is treated as finance, associated BIBLIOGRAPHY
with the payment of interest. Yet the connection with Clark, John Bates (1965). The Distribution of Wealth (3rd ed.).
New York: A.M. Kelley.
equipment, in spite of Sraffa’s demonstration, has never
Daly, Herman E., and Cobb, John B., Jr. (1994). For the Com-
been severed entirely. One still studies capital deprecia-
mon Good: Redirecting the Economy Toward Community, the
tion, distinguishing wear-and-tear from obsolescence, and Environment, and a Sustainable Future. Boston: Beacon Press.
from the present value of investments in capital. Increas-
Marshall, Alfred (1997). Principles of Economics (8th ed.).
ingly, theory has come to treat any investment as a capital Amherst, NY: Prometheus Books.
investment. Furthermore, acquired skills (as opposed to Marx, Karl (1977). Capital. New York: Vintage Books.
know-how, an attribute of society rather than individuals)
Ricardo, David (2004). The Principles of Political Economy and
have come to be viewed as analogous to physical equip- Taxation. Mineola, NY: Dover Publication.
ment, capable of yielding their owners a return. This anal- Schumpeter, Joseph (1934/1912). The Theory of Economic Devel-
ogy suggests their current designation as human capital. opment. Cambridge, MA: Harvard University Press.
Thus capital is a concept still mired in confusion, and care Schumpeter, Joseph (1994). History of Economic Analysis. New
must be taken in its use to be sure what it means. York: Oxford University Press.

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