Encyclonomic WEB*pedia: ENTREPRENEURSHIP

ENTREPRENEURSHIP:
A special sort of human effort that takes on the risk of bringing labor, capital, and land together and organizing production. This is one of four basic categories of resources, or factors of production. The other three are labor, capital, and land.
Entrepreneurship is the factor of production that assumes the risk and faces the uncertainty of combining the other three resources and engaging in production. Without entrepreneurship, the other resources remain idle and unproductive.
A Risky Job
The real world runs rampant with risk and uncertainty. Except for a few psychics, no one knows what the future holds. Life is a risky proposition for all resource owners. Injury or sickness might befall a worker. Fires or angry mobs might destroy capital. Floods or natural disasters might decimate land. Such events threaten the productivity of these resources.
Risk and uncertainty, however, take center stage for entrepreneurship. In that production necessarily occurs before consumption, an entrepreneur who organizes production never knows for certain that the goods produced will be desired by potential consumers. Herein lies the risk and uncertainty of entrepreneurship. A successful entrepreneur, one who guesses public preferences correctly, is very likely to make oodles of profit. However, the entrepreneur who guesses wrong runs the risk of great loss.
The Prospect of Profit
This dangling carrot of profit provides entrepreneurship with the incentive to produce goods, organize production, and seek ways to satisfy wants and needs. This is one of the key driving forces behind economic growth and a higher standard of living. It also helps drive resources to an efficient allocation.
The prospect of a reward for undertaking the risk and uncertainty of organizing production is only one type of profit. Consider these assorted types:
Monopoly Profit: This is the profit obtained due to market control, or monopoly power, which means a firm can charge a price that exceeds the opportunity cost of production. A firm with market control, especially a monopoly, faces little risk.

Normal Profit: This is the profit entrepreneurship foregoes from one production activity by engaging in another. This is the "going rate of profit" earned by entrepreneurship. In a sense, this can be consider the baseline profit that entrepreneurship can earn without undertaking any exceptional risk.

Innovation Profit: This is the profit entrepreneurship receives as compensation for undertaking innovative activity, especially developing new types of products or production techniques. Innovation profit is closely related to profits obtained due risk and uncertainty, but specifically aimed at the development innovations.
Organizers Not Owners
The role that entrepreneurship plays in production is frequently misunderstood. Some folks erroneously equate entrepreneurship with the ownership of capital. The two essential ingredients of entrepreneurship are risk and organization. The ownership of other resources (labor, land, and especially capital) is not necessary for entrepreneurship.
Clearly the entrepreneurial task can be eased if the entrepreneurship also happens to own the other resources. An entrepreneur who owns the necessary capital equipment, material inputs, and provides personal labor has a distinct advantage over another entrepreneur who must acquire those resources from others.
Manny Mustard, for example, is the owner and proprietor of Manny Mustard's House of Sandwich. He owns the entire operation, including all capital and land inputs. He supplies his own labor to the restaurant. More to the point, he is also the entrepreneur who takes on the risk of organizing the entire production operation.

In contrast, Roland Nottingham is a retired businessman with a sizeable stock portfolio, including a number of shares of OmniConglomerate, Inc. This gives him ownership of a fraction of the OmniConglomerate capital assets. While he is a capital owner, he is by no means an entrepreneur. He does not organize production and he faces about the same risk as placing his investment funds in a bank.
Entrepreneurship or Labor?
In theory, entrepreneurship is the risking-taking organizer of production. However in practice, entrepreneurship can be difficult to distinguish from labor. That is, a person can be labor today and entrepreneurship tomorrow.
Entrepreneurship is commonly found operating small businesses, like Manny Mustard's House of Sandwich. A proprietor such as Manny Mustard is both entrepreneurship and labor. Part of the time--time spend making sandwiches, cleaning utensils--Manny is acting as labor. And part of the time--time spent ordering supplies, scheduling employees--Manny is acting as entrepreneurship.
Entrepreneurship can also surface in other productive pursuits. Risk-taking organizers might emerge in large corporations, government agencies, universities, and even households.
Jonathan McJohnson, a middle-manager at OmniConglomerate, Inc., assumes the risk of developing, producing, and marketing a new product by organizing corporate resources (at the risk of getting fired). Jonathan McJohnson's efforts are entrepreneurship.

George Grumpinkston, a professor at Ambling Institute of Technology, develops a new computer-based method of instruction (at the risk of receiving no raises and being ostracized by colleagues). Professor Grumpinkston's efforts are entrepreneurship.
In neither case does the entrepreneurship require ownership of the resources organized nor are they likely rewarded for their efforts with profit, but the activities they perform are entrepreneurship nonetheless. They are risk-taking organizers.
Check Out These Related Terms...
     | resources | factors of | labor | capital | land | natural resources |
Or For A Little Background...
     | scarcity | limited resources | opportunity cost | resource allocation | economic resource |
And For Further Study...
     | second estate | ownership and control | property rights | private property | private sector | capitalism | free enterprise | efficiency | incentive | political views | business | firm | short-run production analysis | legal business organizations | American Enterprise Institute | Smith, Adam | profit | corporate profits | proprietorship | corporation |
Recommended Citation:
     ENTREPRENEURSHIP, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2025. [Accessed: December 16, 2025].