The 3 Type Of Individuals That Transform Economies

Max Weber (1864-1920), Joseph Schumpeter (1883-1950), Frank Knight (1885-1972)
Max Weber,  Joseph Schumpeter, , Frank Knight

In economics, there has always been a big debate about what drives economic growth. In the end, economists have assumed that positive “shocks” to an economy just kind of happen. However, there have been some thinkers who looked inside the black-box and focused on entrepreneurship.

The three* most interesting thinkers have to be the Max “Protestant Work Ethic” Weber , Joseph “Creative Destruction” Schumpeter and Frank “Uncertainty” Knight. They all lived in the early 1900s. Their views of the individuals that drive the “positive shocks” could be summarised as:

  • Weberian Entrepreneur. Weber took the view that the Calvinist belief that accumulating wealth, living frugally and not relying on the Church for salvation was the driver for economic growth. A businessman being rational and using their savings would be the template, that is the “Protestant work ethic”.
  • Schumpeter’s Innovator. Schumpeter took another view. He saw disrupters who went against the tide as the true drivers of growth. They would be irrational, driven by their passion and would “creative destroyers” of large established firms. They would get their funding from banks, who could pick the winning disrupters. The rewards (profits), though, would go to the disrupter.
  • Knight’s Financing Capitalist. Knight agreed with the irrational entrepreneur. But departed from Schumpeter by arguing that financiers would not easily pick the disrupters. In fact, the scale of uncertainty would be enormous. For him, anything that could be forecasted easily (or with probabilities) would be called “risk” and could be insured against. But picking disrupters would not fall into that category, instead uncertainty (full of unknowns) would dominate. For Knight, it would be the financier that would be rewarded (get the profits), whether they be the banker or equity investor. The disrupter, meanwhile, would be salaried as an employee.

So there you have three diverging views on who “deserves” profit, the frugal rational process person, the disrupter or the financier of the disrupter. Take your pick.

* I took these ideas from Maria Brouwer’s “Weber, Schumpeter and Knight on Entrepreneurship and Economic Development”

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