Cantillon’s Theory: The Origin of the Word "Entrepreneur"

Who invented the word "entrepreneur" in 1755? It wasn't Steve Jobs, and it wasn't even Adam Smith.

The term was traced back to Richard Cantillon, an Irish banker with French roots writing in the early 1700s. His work, Essai sur la Nature du Commerce en Général, laid the foundation for modern economics and gave us the first technical definition of the entrepreneur. 

The Core Definition: Fixed vs. Uncertain Income

Cantillon’s theory is built on a simple distinction between two types of economic actors:

• Hired People (Employees): Individuals with fixed incomes (wages). They know exactly how much they will earn.
• Entrepreneurs: Individuals with non-fixed incomes. They pay known costs now to produce goods that they hope to sell later at an unknown price.

The Entrepreneur as Risk Bearer

For Cantillon, the defining characteristic of an entrepreneur is not innovation (as Schumpeter would later argue), but Risk Bearing.

He uses the example of a merchant who buys farm goods at a fixed price in the country, transports them to the city, and sells them. The risk is created by the uncertainty of supply and demand in the city. By the time the merchant arrives, prices may have fallen.

Because of this uncertainty, Cantillon viewed a wide slice of society as entrepreneurial—far beyond just business owners. In his view, anyone who works for an uncertain wage is an entrepreneur:

"All the other entrepreneurs, like those who take charge of mines, theaters, buildings... as well as the entrepreneurs of their own labor who need no capital to establish themselves, like journeymen artisans, coppersmiths, seamstresses, chimney sweeps, water transporters, live with uncertainty and proportion themselves to their customers."

The Economic Role: Balancing the Market

Why do we need these risk-takers? Cantillon argued that entrepreneurs perform a vital stabilizing function.

By forecasting the need for resources and investing in the future, they help balance supply and demand. They buy when prices are low (increasing demand) and sell when prices are high (increasing supply)--arbitrage. Without entrepreneurs willing to bear the "uncertainty of the decentralized world," the volatility of the business cycle would be far more acute.

Theory Connect: Cantillon’s Legacy & Evolution

Richard Cantillon is often called the "Father of Enterprise Economics." His definition of the entrepreneur as a bearer of uncertainty set the stage for three centuries of economic debate. To fully understand Cantillon’s theory, it helps to see how later theorists expanded, refined, or contradicted his original ideas.

1. Cantillon vs. Frank Knight: Refining "Uncertainty"

Cantillon introduced the concept of uncertainty, but Frank Knight (writing nearly 200 years later in Risk, Uncertainty, and Profit) formalized it.

• The Connection: Both define the entrepreneur by their relationship to the unknown future.

• The Evolution: Cantillon viewed all non-fixed income as uncertainty. Knight refined this in his Uncertainty-Bearing Theory by distinguishing between Risk (measurable odds, like a casino) and True Uncertainty (unmeasurable odds, like starting a new business). Knight argued that entrepreneurs earn profits specifically for bearing true uncertainty, a direct evolution of Cantillon’s "unknown price" theory.

2. Cantillon vs. Schumpeter: Stabilizer vs. Disruptor

The text mentions Schumpeter briefly, but the contrast is vital for understanding economic theory.

• Cantillon (The Stabilizer): He viewed the entrepreneur as someone who balances supply and demand. By buying low in the country and selling high in the city, the entrepreneur smooths out market inefficiencies.

• Schumpeter (The Disruptor): Joseph Schumpeter argued in his Creative Destruction Theory that the entrepreneur is an innovator who destroys the status quo.

• Key Takeaway: If you are fixing a market inefficiency (arbitrage), you are a Cantillon Entrepreneur. If you are inventing a new product that makes old ones obsolete, you are a Schumpeterian Entrepreneur.

3. Cantillon vs. Israel Kirzner: The Art of Arbitrage

Cantillon’s example of the merchant transporting goods to the city is the grandfather of Israel Kirzner’s theory of "Entrepreneurial Alertness."

• The Connection: Kirzner argued that the entrepreneur is someone "alert" to profit opportunities that others miss.

• The Link: Cantillon’s entrepreneur spots a price discrepancy (cheap in the country, expensive in the city) and acts on it. This is pure arbitrage, which is the core of Kirznerian Entrepreneurship.

---

Quick Comparison: The Evolution of the Entrepreneur

Why This Matters Today

Cantillon’s theory remains surprisingly modern because it democratizes entrepreneurship. By his definition, "entrepreneurship" isn't just about starting a tech unicorn; it is about decision-making under uncertainty.

Modern Application: A freelancer negotiating a project fee, a gig-economy worker, or a commission-based salesperson are all "Cantillon Entrepreneurs." They have traded the security of a fixed wage for the potential upside (and downside) of variable income.

 

---

References