Entrepreneurship is the undertaking of new business ventures that may eventually become profitable companies. Some economists identify entrepreneurship as a factor of production because it can increase the productive efficiency of a firm. Several different definitions of entrepreneurs and entrepreneurship exist, and even though entrepreneurship is neither land, labor, or capital, most place entrepreneurs in the same critical category as more consistently identified factors of production.

Key Takeaways

  • The factors of production specify the inputs required to produce economic activity, and are traditionally generalized as: land; labor; and capital.
  • Entrepreneurship involves taking on risk and organizing production through establishing new businesses and exploring new ideas and new products.
  • Entrepreneurship can be seen as the secret sauce that combines all the other factors of production into a product or service for the consumer market.

Factors of Production

Factors of production are the inputs needed for the creation of a good or service. For example, some economists define an entrepreneur as someone who goes about and utilizes these factors – land, labor, and capital – for profit. Yet other definitions consider entrepreneurship in a more abstract way – entrepreneurs identify new opportunities among the other factors without necessarily controlling them - implying that entrepreneurship itself is a factor of production.

Since disruptive innovations are the result of human insight, it is not entirely clear that entrepreneurship should be considered a separate factor of production from labor. Economists disagree about whether entrepreneurs are different from laborers, are a subset of laborers or whether they can be both simultaneously.

Risk and the Entrepreneur

One of the least developed aspects of mainstream microeconomics is the theory of the entrepreneur. The 18th-century economist Richard Cantillon called entrepreneurs a "special, risk-bearing group of people." Since that time, risk-bearing has been an important characteristic of the economic entrepreneur.

Later economists such as Jean-Baptiste Say and Frank Knight believed market risk was the crucial element of the entrepreneur. It wasn't until the middle of the 20th century when Joseph Schumpeter and Israel Kirzner independently developed comprehensive applications of risk-bearing in a productive framework.

Schumpeter noted that the other factors of production required a coordinating mechanism to be economically useful. He also believed that profits and interest only exist in a dynamic setting where there is economic development. According to Schumpeter, development takes place when creative individuals come up with new combinations of the factors of production. Schumpeter argued that entrepreneurs created dynamism and growth.

Value and Returns

Some economists define the factors of production as those inputs that generate value and receive returns. Labor generates value and receives wages as payment for work. Capital receives interest as payment for its use. Land receives rents as payment for its use. It is the entrepreneur, according to this theory, that receives profit.

This theory clearly differentiates between the laborer and the entrepreneur based on the type of return. There are some important challenges to this view. For example, do entrepreneurs receive profit commensurate with their marginal revenue product? Is there a definable market for entrepreneurship that corresponds to its returns, and corresponds with an upward-sloping supply curve?

Entrepreneurs and Asset Ownership

These issues beg another question: Does an entrepreneur necessarily need access to economic assets? Some economists say no – it is only the ideas that matter. This is sometimes known as the "pure" entrepreneur. According to this theory, entrepreneurial acts are non-marginal and purely intellectual.

Others, however, disagree since only an owner of assets can be exposed to risks inherent in those assets. This view assumes that entrepreneurship is embodied in the creation and operation of a firm and the deployment of the other factors.

Austrian economist Peter Klein says that if entrepreneurship is treated as a process or attribute – not an employment category – it cannot be treated as a factor of production. Normal factors of production can be depreciated during times of economic struggle. This doesn't apply to attributes, however.