Entrepreneurship: An Analytical Thermodynamic Theory

Abstract:     
In this paper, we present a newly developed analytical thermodynamic theory and show that it offers a simple understanding of entrepreneurship. The approach we present in the paper is different from previous work on the subject in that we not only borrow the mathematical tools from, and the analogy to thermodynamics but treat economics in general and entrepreneurship in particular as a thermodynamic process. Entrepreneurship as a thermodynamic process can be represented by lognormal process, which contains a growth term and a dissipation term. The lognormal process in turn can be mapped into a thermodynamic equation. The thermodynamic equation is solved to derive an analytic function that explicitly represents the relation among fixed costs, variable costs, uncertainty of the environment and the duration of a production system. Our analysis shows that entrepreneurial ventures and established firms have different kinds of competitiveness in different kinds of market environments. Even if equilibrium states are reached, introduction of innovation by entrepreneurial venture changes the market and will disrupt the balance in old systems. Furthermore we use information theory to show that when environment changes suddenly, novice entrants as the entrepreneurs are, actually perform better than experts whose prior knowledge often cause severe biases in prediction, in terms of recognizing and acting upon opportunities.

Working Paper Series