Cantillon Theory of Entrepreneurship
Cantillon’s Theory: The Origin of the Word "Entrepreneur"
Who invented the word "entrepreneur"? 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). Without entrepreneurs willing to bear the "uncertainty of the decentralized world," the volatility of the business cycle would be far more acute.
References
Cantillon, R. (1755). Essai sur la Nature du Commerce en Général (The Cradle of Political Economy).
Rothbard, M. N. (1995). An Austrian Perspective on the History of Economic Thought: Classical Economics (Vol. 2). Ludwig von Mises Institute.
