At Work & Economics 101 & Public Square & Theology 101

Why Entrepreneurship Is Essential for Economic Development

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Since our banishment from the Garden of Eden, man has faced a central cultural dilemma: how do we fulfill God’s creation mandate in a world of aggravated scarcity without either starving to death or killing one another?

This is not at all a moot point.

Whether they know it or not, different societies seek to answer this question with every change of economic institutions and policies. History is full of stark examples revealing that different attempts to solve our dilemma have resulted in widely different consequences.

Key Components of Economic Development

Economic theory rooted in an understanding of man as a purposeful actor created in God’s image teaches that to materially fulfill God’s cultural mandate, we must take advantage of the division of labor, capital accumulation, and entrepreneurship.

  • Division of labor opens the door to increased productivity by allowing people to specialize at lines of production where they are most efficient.
  • Capital formation also contributes to economic progress by increasing the productivity of the user. Likewise, with more capital investment comes better technology that will further increase productivity.

In order for economic progress to continue over time, however, it is important not to waste capital that has already been accumulated. This is why entrepreneurship is the third major contributor to economic development.

Entrepreneurship and Economic Development

Waste is possible, because production decisions in the present are based on a forecast of uncertain future market conditions. If the producer forecasts incorrectly, he will use his capital making something people do not want. He will also be unable to sell his output at the price needed to cover his costs.

Entrepreneurs need to use economic calculation if they are to direct factors of production toward their most valued uses. Market prices allow entrepreneurs to make meaningful comparisons of social value between different consumers’ and producers’ goods because prices are all expressed in terms of the same good.  These same objective prices are determined by the subjective preferences of buyers and sellers:

  • If the expected price of a final product is greater than the sum of the prices of the factors of production, the entrepreneur will produce that good.
  • When entrepreneurs reap a profit, they do it precisely by providing those goods that people value the most in the least costly manner.

One cannot neatly sever the components responsible for economic expansion from one another and find a single key that explains economic progress:

  • A highly developed division of labor would be impossible without the accumulation and use of capital goods.
  • Likewise, the entrepreneur must invest real capital in the production process and if he errs in his market forecast, he can indeed reap large losses.
  • At the same time, capital per se never guarantees economic progress either, because it must be wisely utilized.

Economic progress is the happy consequence of a highly developed division of labor, taking advantage of an increasing capital stock wisely invested by entrepreneurs.

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