Are Entrepreneurship and Speculation Different?

In popular culture, entrepreneurs are often praised and speculators are to be shamed. They are seen as fundamentally different classes of individuals. An entrepreneur is described as someone who creates something and actually cares about their mission. A speculator seen as someone who shifts around between different industries for only the goal of financial reward. An entrepreneur would be someone who adds something real to the world or creates something new. A speculator is someone who merely finds arbitrage opportunities. However, both of these things are fundamentally interlinked and cannot be pulled apart. Austrian economics collapses both people into one. The act of speculation is about future outcomes in an uncertain world. By this definition, all entrepreneurs are also speculators. While entrepreneurs value real new businesses or products, speculators often give people access to things for cheaper than they would have otherwise and make entrepreneurial creation possible. While they are theoretically the same, they add different types of value, with entrepreneurs giving more tangible value and speculators giving a more hard to understand yet important value.

Kirzner describes entrepreneurs as people with unusual alertness. They are aware of situations in the market that are inefficient just before others are. They can see where things have been done poorly and can be done more effectively. They also are able to understand consumer needs and fill gaps effectively. Rather than being necessarily creative, they are merely observant and understand how to turn that observation into meaningful action. Schumpeter has a more dynamic interpretation of the entrepreneur, and he describes it as someone who disrupts the status quo through creative destruction. They destabilize the current market for a short period by putting in a previously unseen solution, and the whole industry must adjust. While this is uncomfortable for businesses at that time, it ultimately leads to more innovation and better outcomes for everyone. All of these examples of entrepreneurs describe them as someone who is finding or creating something fundamentally new and filling a gap if that would have otherwise remained unfilled, and the market would have remained stagnant. Both of these definitions hold a high view of the value that entrepreneurs add to the world.

Speculators are commonly described as people who look at all of the financial opportunities in front of them, and choose the one with the highest risk adjusted return. They do not care in which industry they operate or about the specifics of the business that they run. They are simply trying to maximize their return on investment. Speculators are often aligned in financial markets, as they attempt to short stocks they think are priced too high or find arbitrage opportunities between assets that are mispriced in relation to one another. This work does not have as tangible a benefit as the examples previously assigned to the entrepreneur. Because this benefit is not so easy to see, people assume that these speculators are making money without adding any value to the world. However, speculators often do not get credit for the real value that they add. They add incredible value to the price system at the margins. Through finding arbitrage opportunities and stabilizing unstable prices, they allow this society as a whole to utilize its resources more effectively. They speed up the adjustment processes of the price system and thus increase the refresh rate for society-wide information. Whilst speculators cannot point to as tangible an altruistic goal as most entrepreneurs can, they are still necessary to the effective functioning of our market economy.

All entrepreneurs are to some extent speculators. If you have to choose between being one or the other, it would most likely be more enjoyable to be an entrepreneur, as the benefit could be much more easily perceived. If someone is skilled at speculating, they can add a great amount of information to the price system by simply looking for opportunities. Some of the most important industries and businesses in the world are not compelling enough to have people operate them from passion and subject matter interest. The profit driven speculator can step in and do the dirty work where there’s not a clear motivational social benefit story. Sometimes things that start as speculation turn into more creative ventures as they stumble upon an opportunity. Even the most financially focused speculator can still possess some alertness, turning them into a more clearly recognizable entrepreneur. Entrepreneurs and speculators are fundamentally the same, but often motivated differently. However, the complexity of the human mind, and the constant shifting of the world can quickly shift any entrepreneur or speculator to fulfill a new role on the spectrum from greed to beneficience, and that is a good thing.