The Capitalist Entrepreneur In Eighteenth-Century Economic Literature

THE CAPITALIST ENTREPRENEURIN EIGHTEENTH-CENTURY

ECONOMIC LITERATURE

BY

PHILIPPE FONTAINE

I. INTRODUCTION

Although the capitalist entrepreneur played a significant role in theearly classical explanation of capital markets and economic develop-ment, mainstream opinion in the history of economic thought merelyholds that eighteenth-century economists failed to distinguish the entre-preneurial function from that of supplying financial capital. Accord-ingly, one considers the conception of the capitalist entrepreneur anerroneous view—characterized by the confusion between profits andinterest—that Jean-Baptiste Say corrected at the turn of the century(Schumpeter 1954, p. 555; Koolman 1971, p. 276). Moreover, thisconception has been mainly ascribed to British authors (Perroux 1929,p. 1665; Cole 1942, pp. 120-1; Hoselitz 1951, p. 212; Blaug 1985, pp.459-60), a claim which certainly goes back to Say's opinion that:

The English do not have a word to render entrepreneur d'Indus-trie, which has prevented them from distinguishing, amongindustrial operations, the service provided by the capital fromthe service provided by one who uses this capital through hisability and talent. Hence...the obscurity in the demonstrationswhere they [the English] try to go back to the source of profits(Say 1803, pp. 74-75, n. 1; see also p. 357, n. 1).

Say's criticism can be extended to French economists as well, for au-thors such as Quesnay, Baudeau and Gamier did not put forth a clear-

Ecole normale superieure de Cachan. A first draft of this paper was presented ata session of the Eastern Economic Association Convention in March 1992. 1 amgrateful to participants for their remarks. I also wish to thank Humberto Barreto,Robert Hebert, Antoin Murphy, Laurence Moss, Jean-Michel Servet, and this journ-al's referees for their insightful comments. The research for this paper was sup-ported by a grant from the French Ministry of Foreign Affairs (Lavoisier program).

Journal of the History of Economic Thought, 15, Spring 1993.©1993 by the History of Economics Society.

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THE CAPITALIST ENTREPRENEUR 73

cut distinction between the capitalist and the entrepreneur. By addingthese French economists to the British ones, we have thus many au-thors who were seemingly confused regarding the function of bothagents.

It is no surprise that commentators have focused on the functionalapproach to entrepreneurship, since it is the only way to build a scien-tific theory of profit. It is to be noted, however, that present-day econ-omists differentiate two issues: the definition of the entrepreneurialfunction; and, once this function is defined, the qualifications for aneconomic agent to perform it (see Tuttle 1927a, pp. 22-23). In theeighteenth century these two issues were confused. Economists wereconcerned with the abilities needed by the entrepreneur in order to ful-fill his function. Underestimating the problem of the acquisition ofentrepreneurial abilities, commentators have overlooked some of themost stimulating insights of the conception of the capitalist entrepre-neur.1

By recognizing the importance of the capitalist entrepreneur in eight-eenth-century political economy,2 we wish to demonstrate that a connec-tion exists between the ability to perform the entrepreneurial functionand the ability to accumulate capital. Accordingly, the possession ofcapital appears as a sign of an ability for entrepreneurship, which makesthe raising of funds easier for the entrepreneur.

First we show that the historical account of the confusion between theentrepreneur and the capitalist is unconvincing. Then we mention thePhysiocrats' and Garnier's unsuccessful attempts to develop a consistentconception of the capitalist entrepreneur. Only Turgot and to a lesserextent Smith provided theoretical foundations for this view of entrepre-neurship.

II. THE CUSTOMARY ACCOUNT OF AN "UNAVOIDABLE"CONFUSION

The first step in our analysis is to identify both the nature and rele-vance of the claim that the distinction between the capitalist and theentrepreneur was improbable in eighteenth-century political economy.Historians of economics have devoted much time to explaining theconfusion between the functions of both agents. Here we will not re-

1. For his remarks on the function of ownership of the business, Tuttle (1927a;1927b) appears to be the exception which proves the rule.

2. Karayiannis (1990, p. 249) provides a summary table of the capitalist entre-preneur's functions in classical literature.



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74 JOURNAL OF THE HISTORY OF ECONOMIC THOUGHT

examine all reasons adduced in this discussion (see Kirzner 1979, pp.42-52); it suffices to mention the traditional line of reasoning, whichplaces emphasis on historical arguments.

Even the best students of entrepreneurship have indulged in histor-ical-type explanations. For instance, Turtle states:

The business unit [by the close of the eighteenth century] wasstill relatively small, and was owned by capitalists, or land-owners, who also organized the business and managed it as agoing concern. One could scarcely expect under such condi-tions that economic writers of that period would differentiatethe composite function of capitalist-employer, or landlord-em-ployer, into specifically distinct economic functions, and ana-lyze their general income into specifically distinct functionalshares. The economist is dependent upon objective realities toawaken his consciousness of the idea (Turtle 1927b, p. 502;italics mine; see also pp. 507-8).

Other commentators go so far as to conclude that the confusion be-tween "the function of passive capital supplying and the function ofactive organization and management decision-making...was undoubted-ly unavoidable in the eighteenth century when individual proprietor-ship of trade, industry, agriculture and mining was the rule" (Sheehan1950, p. 30).

From the foregoing it is clear what kind of argument commentatorsput forward to justify the impossibility of differentiating the entrepre-neurial and capitalist functions. A number of eighteenth-century econ-omists were unable to distinguish the entrepreneur from the capitalistbecause their roles merged together in economic reality. Yet, if realityprovided economic functions in the form of their theoretical existence,one could rightly wonder what the role of theorists would be. Like-wise, it would be hard to account for the never-ending debate aboutthe nature of the entrepreneurial function and the subsequent quarrelsabout the best way to define it.

In addition, the historical explanation implies a methodological posi-tion about how to do the history of economic thought. In a nutshell,theoretical inadequacies are related to the state of society at a certaintime. Needless to say, this type of explanation is inconclusive, for"the state of society at a certain time" is neither obvious nor uniform.To be sure, one finds in eighteenth-century reality entrepreneurs whodo not possess capital, as well as capitalists who content themselveswith lending at interest, not to mention, as is usually claimed, entre-preneurs who possess a large part of the capital. Therefore, one can



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question the soundness of a position, which may result in oppositeconclusions. Furthermore, if, at the same time, one accepts that realityaccounted for the confusion between the entrepreneur and the capital-ist, and that the present-day conception of the entrepreneurial functionis the right one, by the same token one has to admit either that realitywas wrong in the past and right today or that reality no longer deter-mines theory today. Either contention is untenable.

It follows, then, that historians of economic thought should not con-fine themselves to the view that the economic models are merely theo-retical reconstructions of a well-defined reality. There appears to beno pnma facie reason to believe that theories faithfully reflect reality.3

Moreover, we do not have to take for granted that reality is the mostrelevant criterion in constructing economic theories. Existing theoriescount, too. At the very least, one can argue that economic theories donot have univocal relationships with the real world. This does notmean no relations at all. Nor does it imply an absolutist conception ofthe history of economics, for it may be of interest to determine onwhich grounds economists select the picture of reality that constitutesthe basis-component of their model. In any case, before rejecting theeighteenth-century conception of the capitalist entrepreneur on thegrounds of analytical flaws supposedly inherited from an "imperfect"reality, it seems advisable to appraise its explanatory power.

III. THE PHYSIOCRATS AND GARNIER ONENTREPRENEURSHIP

Quesnay was the first author to emphasize the necessity for theentrepreneur to be at once intelligent and wealthy.4 As he observed:'We do not regard the wealthy farmer here as a workman who tills thesoil himself; he is an entrepreneur who manages his enterprise andmakes it productive through his intelligence and his wealth" (Quesnay1757a, p. 483; translation mine). This remark requires further clarifi-

3. In this regard, it is worthwhile to recall "Adam Smith's lack of understand-ing of contemporary reality" (Redlich 1966, p. 716).

4. Although Cantillon (1755, pp. 31-32) distinguished the capitalist entrepre-neurs from the entrepreneurs of their own labor without capital, he never claimedthat the former had greater entrepreneurial abilities. He simply suggested thathigh interest rates incite entrepreneurs without personal funds to accumulate capi-tal (p. 113). On the other .hand, he did regard the difference between small andbig businesses as an important one, for the bigger the loans are in comparisonwith the funds devoted to the maintenance of the entrepreneur, the safer theseloans are (pp. 113-14).



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cation. By the intelligence of the head of the enterprise Quesnay pri-marily meant that the stronger the entrepreneur's compliance with thenatural order is, the greater the chances of success of the concern are.Indeed, every economic agent who acts according to the command-ments of the "divine legislation" can be characterized as behaving in-telligently. This only suggests that human beings aptly use God-givenabilities.5 In contrast, the lack of intelligence refers to a lack of under-standing of natural laws.

Intelligence is not everything, though. Economic agents must alsohave some knowledge, which enables them to get the goods they need(see Quesnay 1765, p. 742). In other words, in order for human be-ings in general and entrepreneurs in particular to use their intelligenceefficiently, they need to be educated. Take, for example, the farmer.Quesnay (1758, p. 633) seemed to suggest it is important that the far-mers' children (and therefore the farmers themselves) know how toread and write. They will then be able to set their business in orderand deepen their knowledge of agriculture. As Quesnay (1763, p.693) argued elsewhere, the lack of knowledge makes it difficult toimprove land through additional investments. Thus,

Only intelligent and educated men save themselves from thesewidely held errors, unfavorable to their interests. But onceagain to have successful results they must be capable of ad-vancing the necessary funds for the purchase of livestock andother cattle and to provide for additional outlays because theestablishment of good cultivation is always very expensive(Quesnay 1756, p. 7).

In addition to being intelligent and educated, entrepreneurs must bewealthy. The description of entrepreneurs as capitalists chiefly derivesfrom the alleged superiority of the big-scale cultivation (grande cul-ture) over the small-scale cultivation (petite culture), associated withthe superiority of the letting-out of land over share cropping. Sinceland needs investments, everything should be done in order to urgerich people to make large advances in agriculture. Quesnay even sup-ported the renting of land by the nobility (1757a, p. 491; 1757b, p.608), which he viewed as a means to restore agriculture and improvethe situation of the country nobility. The importance of the wealthyentrepreneurs in agriculture is also explained by the nature of agricul-

5. Quesnay (1766, p. 797) remarked: "Everything, here below, is subject tonatural laws: human beings are granted the intelligence required to comprehendthem and abide by them" (see also 1765, p. 736).



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tural investment itself and the subsequent suspicions of moneylendersabout agricultural undertakings:

Unlike trade, agriculture cannot find assistance from credit. Amerchant can borrow to purchase merchandise or he can buyon credit; because profit and the funds invested in the purchasereturn to him quickly, he can return the borrowed sums. Onthe contrary, the poor husbandman can only withdraw theprofits of the advances made for agriculture, the principalremains to sustain the same undertaking of cultivation. Thushe cannot borrow [these advances] to repay them after a prede-termined period. His assets being largely personal, those ableto lend to him would not find sufficient security there to war-rant a lengthy lodgment of their moneys. This makes it essen-tial that either farmers are rich in themselves or the govern-ment has sufficient regard for their circumstances to relievesuch an essential occupation in the kingdom (Quesnay 1756,p. 18).

Although of interest, Quesnay's remarks about the intelligent andwealthy entrepreneurs remain unsystematized. Indeed, Quesnay neverexpanded on the theme of entrepreneurial abilities. Moreover, there isno connection whatsoever in his writings between the ability to managethe enterprise and the ability to accumulate capital.

Also a Physiocrat, Baudeau highlighted the capitalist entrepreneur (seeKoolman 1971, p. 283, n. 5). Although he stressed the entrepreneurialability to direct and manage others' work, Baudeau did not connect thisability with the possession of capital.6 The entrepreneur is depicted as awealthy man because economic progress is said to depend upon theextent of the division of labor, and the division of labor itself upon largelabor-saving investments. As Baudeau put it:

What characterizes the large operations of all arts is that a mas-ter, with the aid of a small number of subordinates, and bymeans of his knowledge and the large machines to which heapplies that knowledge, produces prodigiously greater effectsthan those produced by tens, or even hundreds, of isolated menwithout science or machines (Baudeau 1771, pp. 44-45).

6. Hoselitz (1951, p. 210) even notes: "Baudeau and the more orthodox mem-bers of the Physiocratic school, though not unmindful of the requirement that asuccessful entrepreneur must be wealthy, stress primarily his cleverness, knowledgeand willingness to operate rationally by using the most productive methods."



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Another aspect of the conception of the capitalist entrepreneur isdeveloped in Gamier's Abrege elementaire des principes de I 'economiepolitique (1796). In the opening chapter, Gamier made a distinctionbetween the income of landlords and. the income of members of theworking class.- Whereas the former originates in property rights anddoes not imply labor, the latter derives from exertion. As for entrepre-neurs, "abstinence" (privation) and "risk" add to exertion. In order tounderstand what Gamier meant by abstinence we need first to recall hisdefinition of wealth. Wealth consists in "consumables," which includefungible and durable goods, and things which satisfy needs in a "medi-ate way," "that is, tools and machines, money in circulation, plow andcart-horses, etc." (Gamier 1796, pp. 6-7). Abstinence only concerns"consumables." Since the entrepreneur makes advances, he has to man-age without a certain amount of "consumables." Gamier went on todistinguish the service provided by the entrepreneur when he invests ina business from the entrepreneur's labor itself, which has nothing to dowith abstinence:

It is seldom that the consumer directly employs the workman.Likewise, it is seldom that the latter keeps by him something toeat while he works, and something to buy materials and tools.Moreover, this advance, whoever makes it, is a service distinctfrom labor, which needs a particular compensation. He whoprovides this service endures abstinence. Additionally, he ex-poses himself to unforeseeable events (hasards des evenements).Therefore, the compensation will be based on the extent ofabstinence and risk.... The advance that they [the entrepreneurs]make is called capital; the compensation they gain from it iscalled profit (ibid., pp. 34-35).

Clearly the profit of the entrepreneur is by no means related to his labor(cf. Smith (1776, p. 66) whose Wealth of Nations was translated byGamier). Profit depends on the amount of advanced capital and the riskof the enterprise. Such a conception displays an interesting attempt toenrich the theoretical relations between capital ownership and entrepre-neurship. Gamier did indeed believe that the capitalist entrepreneur,who abstains from immediate consumption, faces opportunity costspertaining to his consumption goods.

Unfortunately, too vague a terminology prevents Gamier fromsharpening his view of entrepreneurship. For instance, he confusedcapital with capital goods, and believed that lending at interest alsoimplied abstinence: "When this person [he who saves part of his in-come] lends to others his monetary savings, he actually hands over



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consumables that he has left in circulation and that he was entitled totake for his consumption" (ibid., p. 149; translation mine). As aresult, not only the capitalist entrepreneur but also the moneylenderis prone to abstinence. Both of them accept to go without part oftheir capital for a certain period of time; both of them are said topossess "consumables," which they are willing to hand over in ex-change for a future revenue. The entrepreneur, unlike the money-lender, runs a risk and should receive a compensation for it. This isconsistent with Garnier's overall position on risk. Indeed, Gamierbelieved that moneylenders never care how their capital is used.7

Their only concern is to recover the capital and receive interest on it:"Like landowners, the capitalists or mere possessors of money aremen of leisure who possess the most useful means of labor, and whoearn freely from them a profit (benefice), that is, a profit involvingneither labor nor an actual risk..." (ibid., pp. 103-4). On the otherhand, the capitalist entrepreneur's income chiefly depends on therisky character of his activity. Yet Gamier did not elaborate on therisk itself. He only identified one type of risk, the one related tonew undertakings (ibid., p. 202).

In sum, the conception of the capitalist entrepreneur in several eight-eenth-century works lacks theoretical foundations. As long as entrepre-neurial abilities are not linked to the ability to accumulate capital, noth-ing justifies their limitation to wealthy undertakers. If we want to finda consistent conception of the capitalist entrepreneur, we have to turn toSmith and Turgot.

IV. SMITH ON CAPITAL OWNERSHIP, ENTREPRENEURSHIP,AND CAPITAL MARKETS

Smith's inadequate treatment of the entrepreneur is an open secret.Hebert and Link even suggest that it would be more appropriate tospeak of a "nontreatment" (1982, p. 39).8 Nonetheless, Smith's obser-vations about the capitalist entrepreneur—the "undertaker"—are notdevoid of interest. Before coming to terms with Smith's theory of

7. This conception of the relationships between moneylenders and entrepre-neurs is totally at variance with Say's views (see, for instance, Say 1828-9, 1,p. 304; 4, p. 122, 239; 5, p. 276).

8. While correcting the traditional interpretation that Smith undervalued theimportance of the entrepreneur, Pesciarelli (1989, pp. 527-28) confines himself tothe functional approach to entrepreneurship: "First of all, Smith's undertaker facesrisk and uncertainty.... Secondly, the undertaker formulates plans and projects....Thirdly, he seeks out the necessary capital for implementation of his planned un-dertaking.... Fourthly, he combines and organizes the productive factors.... Last,but not least, the undertaker inspects and directs production."



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entrepreneurship, clarification is needed with regard to the respectivemeanings of "stock" and "capital." "Stock" denotes a certain amountof stored wealth, consisting either in money or goods. In today's eco-nomic language, Smith's stock would be called capital. The problemis thus to know how this capital is used by his owner and whether ornot it reproduces. On the other hand, "capital" represents an amountof wealth employed by the entrepreneur in the form of circulatingand/or fixed capital. Although the entrepreneur owns the "capital" ofhis business, he does not necessarily possess the whole "stock" accu-mulated into this "capital." Thus the "undertaker" is primarily the onewho employs his "stock" as a "capital"—a capitalist entrepreneur.

It follows that the contention that "something must be given for theprofits of the undertaker of the work who risks his stock in this adven-ture [the setting to work of industrious people]" (Smith 1776, p. 66;italics mine) chiefly applies to the capitalist entrepreneur. In this pas-sage, Smith did not provide a definition of the profit of the entrepre-neur in general. Rather, he gave a clue about the income of certainpeople who are "owners of stock" and decide to invest it in the pro-duction and selling of goods. Smith went on:

The profits of stock, it may perhaps be thought, are only adifferent name for the wages of a particular sort of labour, thelabour of inspection and direction. They are, however, alto-gether different, are regulated by quite different principles, andbear no proportion to the quantity, the hardship, or the ingenu-ity of this supposed labour of inspection and direction. Theyare regulated altogether by the value of the stock employed,and are greater or smaller in proportion to the extent of thisstock (ibid., p. 66).

In the above, the emphasis is not only on the relationships between theprofit and the amount of "stock employed" but also on the irrelevanceof the entrepreneurial labor for the definition of profit. This does notmean, however, that the function of the "undertaker" merely amountsto supplying the financial capital, since Smith observed that the mon-ied interest "is distinct, not only from the landed, but from the tradingand manufacturing interests, as in these last the owners themselvesemploy their own capitals" (ibid., p. 351). The fact that the "undertak-er" invests his personal funds in the enterprise and therefore assumesrisk means that the entrepreneurial function cannot be equated with thecapitalist function or a "particular sort of labour." By linking togethercapital ownership and entrepreneurship, Smith intended to emphasizethe risky character of entrepreneurship. In doing so, he was able to



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account for differences in management. Since capitalist entrepreneursface a risk which threatens the reproduction of their "stock," one canexpect them to manage carefully their concerns. In contrast, beingexempted from such a risk, entrepreneurs who use other people's moneyare less attentive to the management of their business.

In addition, the possession of capital may denote thrift, a qualitywhich is essential to the good management of the enterprise and there-fore to its development. As Smith put it: "To improve land withprofit, like all other commercial projects, requires an exact attention tosmall savings and small gains, of which a man born to a great fortune,even though naturally frugal, is very seldom capable" (ibid., p. 385).Thrift, which enables the entrepreneur to accumulate capital, likewisebenefits the management of the concern.

Moreover, capital ownership is of some relevance to the understand-ing of entrepreneurial behavior on capital markets. In this respect,Smith contrasted "undertakers" with entrepreneurs without capital, or,more generally, "sober men" with both "prodigals" and "projectors."As he noted,

if the legal rate of interest in Great Britain, for example, wasfixed so high as eight or ten per cent., the greater part of themoney which was to be lent, would be lent to prodigals andprojectors, who alone would be willing to give this high inter-est. Sober people [read: "undertakers"], who will give for theuse of money no more than a part of what they are likely tomake by the use of it, would not venture into the competition(ibid., p. 357).

In the first place, the possession of capital makes the "undertakers"aware of what they can relinquish to the moneylenders without en-croaching upon their "stock." Because "undertakers" do not want tocut their "stock," they maintain a proportion between their "capitals"and their loans; in contrast, the entrepreneurs without capital, havingno "stock" to maintain, do not properly assess their ability to payback. This difference appears of some importance to loan policy.Smith had misgivings about the involvement of banks in the financingof projects, where the entrepreneurs borrow the bulk of the "capital"unless they possess the financial resources, which ensure the capital ofthe creditors (see p. 307). Indeed, a bank must check that its "advanc-es had at no time exceeded that part of his [the borrower's] capitalwhich he would otherwise have been obliged to keep by him, unem-ployed and in ready money for answering occasional demands... (ibid.,p. 306). Yet a bank cannot constantly keep a close watch on the fi-



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nancial situation of its debtors. There are too many of them and theirfinancial situation evolves quickly. Moreover, the borrowers, particu-larly the spendthrifts, may well be unwilling to reveal their actualfinancial situation. Assessing the borrowers' solvency is then a costlyand uncertain process. This is less demanding, however, when thebank deals with capitalist entrepreneurs, who are cautious not to breakthe proportion between their "capital" and their loans. Banks benefitfrom lending money to capitalist entrepreneurs, whereas private mon-eylenders (who can control the financial situation of their debtors moreeffectively than banks) are more suitable for lending money to entre-preneurs without capital (ibid., pp. 305-6).

In the second place, there exists an important difference between theborrowers who are involved in new enterprises ("projectors") andthose who conduct "ordinary" undertakings. Whereas the latter knowby experience how much of their "capital" is needed to meet "occa-sional demands," the former have only a vague idea of this amount.Consequently, they do not know precisely what limit to impose ontheir borrowings. The above distinction is closely akin to the distinc-tion between "undertakers" and entrepreneurs without capital. Interest-ed in maintaining their "stock," the capitalist entrepreneurs usuallycontent themselves with ordinary profits and therefore with "ordinarybusiness,"9 whereas the entrepreneurs without capital, having nothingto lose, are more likely to initiate projects, which often are ill-advisedand unsuccessful (ibid., p. 341). However, as long as the new enter-prises were conducted by "sober people," Smith did not object to inno-vation, for "if he ['the man who lives within his income'] enters intoany new projects or enterprises, they are likely to be well concertedand well prepared" (Smith 1759, p. 215).

Generally speaking, Smith paved the way for a more rigorous con-ception of the capitalist entrepreneur. However, Smith's failure toclarify the theoretical content of the entrepreneurial function preventedhim from following through his line of argument. It fell to Turgot,then, to give the most systematic account of the capitalist entrepre-neur's behavior.

9. Spengler (1959, p. 8) fittingly remarks that "Smith's undertaker strikes oneas a prudent, cautious, not overly imaginative fellow, who adjusts to circumstanc-es rather than brings about their modification."



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V. TURGOT'S CONCEPTION OF THE CAPITALISTENTREPRENEUR

A number of passages in Turgot's writings echo Quesnay's phrasesabout the conduct of the capitalist entrepreneur. For example, Turgot(1766, p. 55) spoke of "intelligent and rich cultivators." Yet such simi-larities are superficial, for Turgot, unlike Quesnay and the other Phys-iocrats, regarded the ability to accumulate capital as a sign of successwhich makes for better entrepreneurship.

According to Turgot, capitalist entrepreneurs are large-scale under-takers whose function demands special abilities. It is the working-classmembers who acquire such abilities when accumulating capital (seeFontaine 1991, 1992a). While describing the capitalist society, a soci-ety where all land is occupied and money in use, Turgot identifiedthrift, as opposed to land appropriation, as the main source in the accu-mulation of "moveable wealth":

In the present state of things, as all land is occupied, there isbut one way to become rich, it is either to possess, or to pro-cure in some way, a revenue or an annual profit above what isabsolutely necessary for subsistence, and to reserve this surplusevery year so as to form a capital... (Turgot 1766, p. 85).

In this connection it may be worth while to recall that:

It was not only the Proprietors of landed estates who thus accu-mulated their surplus produce. Although the profits of industryare not, like the revenue of the soil, a gift of nature... and com-petition obliges the working man to content himself with a priceless than he would like, it is nevertheless certain that this com-petition has never been numerous or keen enough in any kind oflabour, to prevent, at any time, a man who is more expert, moreactive, and above all, more thrifty than others in his personalconsumption, from earning a little more than was necessary forthe subsistence of himself and his family, and from setting asidethis surplus to create therewith a little store (Turgot 1766, p. 65;emphasis added).

Of course, accumulating capital demands special abilities, for theworkman only receives a subsistence wage. First, he needs calculationabilities. In order to survive during bad years, when his wage sinksbelow bare subsistence, the workman must compare his "faculties"with his needs. Otherwise, he can not survive. As a wage-earner, heis sometimes forced to use his savings to satisfy his current consump-



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tion. Consequently, he must save on the latter each time he receivesmore money than he needs to satisfy his basic needs. In order to do so,the workman must evaluate exactly how much he can rely on, namely,the wages which he can expect. Although imperfect—because of the"accidents" which always threaten the workman—this expectation ishelpful. It enables him to know what level of consumption he is per-mitted in the present. However, this expectation does not exempt theworkman from controlling the household expenses, since the restrictionof these expenses to the necessities of life is actually the only protectionwhich he can erect against the occasional fluctuations in wages. Theworkingclass member who has succeeded in accumulating capital reck-ons likewise on his calculation abilities and his "spirit of thrift" in orderto manage his concern. More precisely, he estimates its costs and itsprofits, and tries to live according to his estimates so as to realize hisexpectations. Just as the workman compares his income with his con-sumption expenses, the capitalist entrepreneur may compare his plannedincome with the expenses of production. However, since he can neverbe certain of the amount of his profits, his main duty remains to controlclosely the costs of production.

In addition to revealing the ability of the entrepreneur to accumulatecapital, the possession of capital attests that the entrepreneur possessesthe abilities required to conduct an enterprise successfully.10 This is thereason why the enterprises financed on loans are likely to fail:

Most of the entrepreneurs in agriculture borrow little, and theyalmost all invest only their own funds. The entrepreneurs ofother employments, who want to consolidate their fortunes,strive to attain the same position, and, unless they have greatability, those who carry on their enterprises on borrowed funds,run great risk of failing (Turgot 1766, p. 94).

By suggesting that entrepreneurs without capital are less successfulthan capitalist entrepreneurs, Turgot did not mean that the latter do notborrow at all. He was indeed fully conscious of the growing needs ofenterprises (see Turgot 1770b, pp. 152-53). The emphasis put on capi-tal ownership does not reflect a disregard for the lending at interest,but rather expresses its importance. Indeed, entrepreneurs may have

10. Perroux (1929, p. 1665) suggests that for several authors such as Smith,Ricardo, Senior, John Stuart Mill, Edgeworth, Marshall, Cossa, Nazzani, Graziani,Loria, Supino, Hermann, Bohm-Bawerk, Rossi and Cherbuliez, "capital ownershipappeared as the criterion of ability for business." Unfortunately, he does not followthrough, nor does he cite Turgot.



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trouble borrowing money.11 Turgot ascribed such importance to thecapitalist entrepreneur because the entrepreneur has to rely on themoneylender. The capital which the entrepreneur possesses signals hisability to save on expenses and confine himself to commitments basedon estimates. Therefore, the larger the capital of the entrepreneur, themore solid his personal reputation and the easier his access to capitalmarkets.12 Not only is this capital a real guarantee but also a "signal"that the moneylender uses in order to assess the entrepreneur's abilityfor business. This estimate of the entrepreneurial abilities brings aboutdisparities in borrowing conditions. Indeed, "money on loan does nothave the same price, either for all men or at all times, because in lend-ing, money is paid for with a promise only, and because, if the moneyof all buyers looks the same, the promises of all the borrowers are notthe same" (Turgot 1770b, p. 161). Therefore, capitalist entrepreneurshave better borrowing conditions than entrepreneurs without capital:

Although the interest cannot be the same in all situations, thereis however an interest which varies little, at least in a shortperiod of time. It is the interest on money placed with nearly afull guarantee, such as the one given by a sound mortgage or bythe solvency of some merchants, whose wealth, wisdom andprobity are widely acknowledged (Turgot 1770a, p. 192).

In contrast, those who have no capital whatsoever will have to payhigher interest rates, for no one will be willing to lend money tothese potential entrepreneurs unless they pay a high risk premium.

In conclusion, Turgot was not so much interested in clarifying thedistinction between the entrepreneurial function and the supply-of-capitalfunction (see Fontaine 1992b) as in showing that the success of theenterprise is closely linked with the possession of capital. In doingso,he proposed that the accumulation of capital and the acquisition ofmanagerial abilities go hand in hand.

VI. SUMMARY AND CONCLUSION

Commentators have long worried about the disappearance of the en-trepreneur from economic theory (Baumol 1968; Barreto 1989). Yet

11. Although he was aware of the insufficient development of capital markets,Turgot never claimed that the ability to make up for a market deficiency—to useLeibenstein's phrasing—entered the entrepreneurial function.

12. Casson (1987, p. 152) maintains that: "Unless the entrepreneur has anestablished reputation, he has a strategic problem in obtaining the confidence ofothers."



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they have not paid attention to the eclipse of the capitalist entrepre-neur. Despite its inadequacies, the conception of the capitalist entre-preneur allows one to explain the acquisition of entrepreneurial abili-ties, thus providing a qualitative dimension to the nature of entrepre-neurship. In this conception the ability to perform the entrepreneurialfunction is related to the possession of capital. This shows that theacquisition of entrepreneurial abilities is strongly connected with capi-tal market deficiencies. Furthermore, the conception of the capitalistentrepreneur provides an answer to the question of why some entrepre-neurs fail while others succeed. This answer focuses on the functionof raising capital.13 Not only the access to capital is more difficult forthe borrowers without capital but it also entails additional costs. Thisdiminishes the entrepreneur's chances of success.14

In the same vein, it is to be noted that the capitalist entrepreneur didnot totally disappear from political economy with Say's distinctionbetween the capitalist and the entrepreneur. Indeed, Say was aware ofthe paradox of the entrepreneur:

I know that by means of loans and credit, a man able to man-age an enterprise, finds the funds to take it through to the end.Yet, in order to obtain credit, not only does he have to possessthe qualities which alone can reassure the lender..., but thesequalities have to be known by the people who have money tolend.... But...in order to give pledges of his intentions and ofhis talents, it would be necessary [for this man] to have whatis actually wanting, namely: funds (Say 1829, 4, pp. 130-31).

Although he distinguished between the capitalist function and the en-trepreneurial function, Say did not deny any explanatory power to theconcept of the capitalist entrepreneur.15 Had commentators not ne-

13. Leibenstein (1968, p. 73) writes: "One of the important capacities of man-agement is the ability to obtain and use factors of production that are not wellmarketed."

14. Even if the banker is altogether wrong about the abilities required for thesuccessful conduct of the enterprise, this does not mean that his assessment has noinfluence over the access to capital and therefore over the possibility of becomingan entrepreneur.

15. According to Hoselitz (1951, p. 218), "Say has two theories of entrepre-neurship. One is general and independent of a particular social framework. Thesecond is the theory of the capitalist entrepreneur."



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glected Say's attention to capital ownership,16 they would have real-ized that the ability to accumulate capital and hence the possession ofcapital were still considered essential for successful entrepreneurshipat the beginning of the nineteenth century.

16. Say (1828, 1, pp. 286-7) observed that "there is a more favorable situa-tion [than the one where the credit is widespread]: it is the situation where noone needs loans, where everyone has been able to amass enough capital in hisown profession to meet, without borrowing, the advances required by his ownoccupation."

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