Fritz Redlich on Entrepreneurship (2): Entrepreneurial Types

Fritz Redlich wrote economic histories of European phenomena, notably the iron and steel industries, advertising, and the development of entrepreneurial classes. Most of these works are published in German. Upon his arrival in the US, he was counseled by Frank Taussig and the man who took his chair at Harvard, Joseph Schumpeter, to write in English on American phenomena. Redlich did so, writing a massive study of the 19th century American finance industry and a study of the wartime (WWII) housing market in the US. All along, he maintained an active interest in the men who were business leaders in his case studies and in the Robber Barons of American industrialization. This study caused him to write several pieces that are taxonomies of business leaders; he was careful to make distinctions among the roles of leadership (in a social or historical sense), capitalist, manager, executive, and entrepreneur. He even worried over subcategories of entrepreneurs who had control over capital or not, or whether they were CEOs or top management teams with decision authority, and whether they had decision authority that arose because of “rising through the ranks”, marriage into family businesses, access to owned or borrowed capital, and kinship. The most complete of these typologies appears in a self-edited volume of his writings titled, Steeped in Two Cultures, published by Harper and Row in 1971. The paper itself was first published in Germany in 1959 and I cannot find an electronic version of it. The chapter is titled, “Entrepreneurial Typology.”

Redlich had a couple of other major papers in which he examined entrepreneurial types. One is discussed in my previous post. Another was published as Redlich, Fritz. 1949. The Business Leader in Theory and Reality, The American Journal of Economics and Sociology,Vol. 8, No. 3 (Apr., 1949), pp. 223-37. Find it here.

This article is chock-a-block with interesting insights. In this paper, Redlich makes clear distinctions between entrepreneurial function and management function and capital function. He even takes Schumpeter a step further, identifying that economic development (Schumpeterian movement between circular, steady-state economies) may include creative entrepreneurs, creative managers, and creative capitalists “who should be distinguished from their brethren who do not” elevate themselves to the dynamic theory (p. 226). He exercises his historian’s bent and gives examples, particularly of the creative capitalists from his studies of the financial sector.

He makes the additional point that when dealing with theory, one uses a Weberian Idealtypus to describe the functions. This is certainly what Schumpeter did when he invoked the entrepreneur as the engine in the dynamical process of moving from one circular flow to another after significant innovation. Redlich scolds mildly that we should not conflate this theoretical construct with the Realtypus entrepreneurs we identify in empirical analyses. They may correspond. But he correctly notes that in large enterprises the ideal types of entrepreneur, capitalist, and manager are reflected in the activities of top management team. Some functions are shared out. Some managers may have responsibilities that touch two or three of the ideal types. He even goes so far as to say:

“[t]he situation regarding the entrepreneur is clear. To the Idealtypus entrepreneur there is no corresponding Realtypus entrepreneur. … The entrepreneur pure and simple is very rare in economic life.” (p. 228)

The third area upon which Redlich trains his lens is risk. He states that there are financial risks and “other” risks. In the latter category, he identifies business risks, but alludes to what we would now characterize as uncertainties arising from unknown market conditions. He does not use Knightian judgment, but implies it — in my interpretation. Financial risk is borne by the capitalist. Moreover, he takes a fairly modern system-level view of capital and financial risk.

“[E]conomic development has now reached the point where the man who makes entrepreneurial decisions is, as a rule, an employee and in some cases may not even legally be connected with the enterprise. In those earlier decades it was a matter of course that the risk resulting from decisions was borne by the men owning the enterprise and to a large extent by the decision-maker in his capacity as one of them (“capitalist”). The financial risk of a corporation today, however, is widely distributed. It is borne by owner investors, by non-owner investors, by banks as providers of short-term capital and by purveyors in their capacity as creditors … This distribution of risk has important consequences. The four categories: owner-investors, non-owner investors, providers of short-term capital, and purveyors as creditors can be made up of firms themselves and to the extent that firms are risk-bearers the risk is actually borne by their own owner-investors, non-owner investors, lenders of short-term capital, and purveyors; and so on ad infinitum. In the last analysis, someone may bear the risk evolving from entrepreneurial decisions for an enterprise of which he has not as much as heard the name. This diffusion of risk is of great importance for the functioning of our economic system because it enables the national economy to survive the disasters of large scale enterprises. It is evident that one must discard the age-old concept of the entrepreneur as the risk-bearer. . . .” (pp. 231-32)

The last of Redlich’s arguments that I’ll highlight follows from the foregoing analysis. He takes on the allocation of profit and the fact that it may not correspond to entrepreneurial rents.

“in our century the entrepreneur appears typically as the employee of a corporation and his remuneration, or the largest share thereof, is paid in the form of a salary. Consequently the distribution of “profit” will depend on the distribution of power within the enterprise, on bargaining capacity, and accidental factors, such as the availability of one or several men for a position requiring entrepreneurial capacity. Occasional entrepreneurial contributions of men down the line, as have been described above, may well remain without any reward; or to put it differently, profit due their entrepreneurial activities may go to capitalists or employees of the corporation who are the superiors of the entrepreneurs. Very important for the distribution of “profit” is whether or not the entrepreneur controls the corporation and how essential a large venture capital is for its success. It is at this point that the risk problem enters the scene. The distribution of “profit” within the enterprise runs the gamut between the entrepreneur receiving all “profit” and the entrepreneur being exploited. In the former case we may find extremely high salaries of corporation officials and numerous members of their families employed, while no or only low dividends accrue to the stockholders. In the latter case the real head of the corporation (entrepreneur) may receive no more than wages of management while dummy presidents representing the controlling groups are highly paid and large dividends are enjoyed by the stockholders. . . .” (pp. 232-3)

A few comments on the foregoing quotation. First, this looks like rudimentary agency theory. Second, we see these same arguments made in strategic management tracts even now. Third, the italicized term venture capital is his, as are the italics! Finally, he invokes in a footnote to this passage that Francis A. Walker foresaw this issue in his paper in the Quarterly Journal of Economics in 1891! Read the footnote! Then read Walker’s piece on residual claimants, rents, and profits. Brilliant. And to my knowledge, not included in our profession’s recent forays into economic rents. (C.f. Lippman and Rumelt, 2003)

Redlich, an economic/business historian of the first half of the last century, has written much to provoke our thinking. Or, my thinking, at least.


About Randy
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One Response to Fritz Redlich on Entrepreneurship (2): Entrepreneurial Types

  1. Peter Klein says:

    I believe Jack High discusses the Walker article in the paper referenced here:

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