9 - Entrepreneurs in Economic Growth: Arbitrage and Innovation

Summary

This chapter starts with the argument that the greatest benefit of the market is to make the best use of everyone’s enthusiasm and creativity, instead of making efficient allocation of given resources, as proposed by mainstream economics. The chapter analyzes the traditional theories (neoclassical growth theory and Keynesian economics) that economists use to explain economic growth. Their common shortcoming is ignoring the role of entrepreneurs. The chapter then outlines the entrepreneur-centric “Smith–Schumpeterian growth model” and the two functions of entrepreneurs (i.e. arbitrage and innovation). Arbitrage is the discovery of disequilibrium and exploitation of lucrative opportunities in markets under existing technological conditions and resources. Innovation creates or commercializes new things that did not exist, or breaks away from routines. With this perspective, it also gives a brief analysis of China’s economic growth over the last few decades.