The Entrepreneur and the Theory of the Modern Corporation
26 Pages Posted: 6 Feb 2010 Last revised: 15 Feb 2010
Date Written: Spring 2006
The foremost description of the classic entrepreneur, immediately prior to the Great Depression and now, was presented by Frank Knight in his seminal work, Risk, Uncertainty, and Profit. In this Article, I will explicate Knight's theory of the entrepreneur and show how it relates to both the Berle-Means Paradigm and the nexus-of-contracts theory of the corporation. My effort here is in part intellectual history and in part the tentative beginnings of a new positive account of the corporation. In the latter regard, this Article takes only the first step in what may prove a quite exhaustive effort to re-plow the field of corporation law. Part II describes capitalist ideology, and the central place therein of the entrepreneur, as it was understood at the nascence of the New Deal. Part III examines the Berle-Means view of the modern corporation, how that view depended on, and was fueled by, the “death” of the classical entrepreneur, and how the study of corporation law thereafter focused on the problems presented by separation of ownership and control. As Part III notes, economists working in the tradition of Adam Smith (unlike corporation law scholars) continued to give the entrepreneur a central place in their study and defense of capitalism long after the birth of the New Deal. Part IV examines the development of the Nexus-of-Contracts theory of the corporation, and how one of its central assumptions -- the study of the classical entrepreneur -- is irrelevant and misleading if one hopes to understand the modern corporation. Part IV then describes my counterview: corporation law can be understood, at least in important part, as intended to ensure that the modern corporation has an effective surrogate for the classical entrepreneur. Part V revisits the work of Frank Knight to develop an understanding of the central characteristics of the classic entrepreneur, and why it is reasonable to assert that the modern corporation generally does have an adequate surrogate for the classic entrepreneur. Part VI tests the predictive power of entrepreneur primacy in comparison to the predictive power of two versions of director primacy. The Article concludes with a brief look ahead.
Keywords: Entrepreneur, Frank Knight, Berle, Coase, Alchian. Meckling, Shareholder Primacy, Intellectual History, Capitalism, Uncertainty, Theory of the Firm, Separation of Owneship and Control, Modern Corporation
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