in a later chapter.2 Here it is sufficient to notice that in order to produce it is necessary to combine, say, the services of raw materials, manmade tools and equipment, physical space, human labor of a number of different varieties, and so on. In a system based on private property, it is likely that most, if not all, productive resources are the private property or are under the control of individual members of the system. These individuals are resource owners.
They are owners of raw materials, men with labor services to sell, and so on. Resource owners have an obvious role in the market system. All productive activity must begin with the purchase of the services of the necessary productive resources. These purchases are made from resource owners. Market theory analyzes the way resource owners respond to the alternative opportunities of resource sale presented to them by the market and to changes in these opportunities.
3. Entrepreneurs. Under the heading “resources,” we have included everything whose services are necessary to obtain products. There is no productive service necessary for the production of any desired good or service that can be purchased from anyone other than the proper resource owner. And yet there still remains one further role in the market system, without whose successful fulfillment production would be hopelessly inefficient. This is the role of the entrepreneur. The entrepreneur’s role is to decide what resources should be used, and/or what goods and services should be produced; he makes the ultimate production decisions. These decisions must involve speculation concerning an uncertain future, since in its pure form an entrepreneurial decision is an act of purchase followed by a subsequent act of sale of what was previously purchased.
Among market roles, the entrepreneurial role is the least simple to grasp. The source of its elusiveness lies in the fact that some element of the entrepreneur’s speculative function is exercised whenever human beings act. In fact we must recognize that in theorizing about the making of decisions, we may be concerned with two analytically distinct kinds of decisions. First, there is the decision between definite alternatives. Here the adoption of any one definitely known objective is accompanied by the sacrifice of a no less precisely known set of alternative potential objectives. This kind of decision making is clearly never possible in the real world of uncertainty (in which we wish our market system to have its setting). In a world of uncertainty men must invariably make a second kind of decision, one choosing between courses of action whose outcomes are quite uncertain, being susceptible to numerous possible unforeseeable modifications by external events. Although we can never expect to find actual instances of the first kind of decision, we may sometimes theorize concerning decisions of the second kind by temporarily reasoning as if the outcomes were not clouded by uncertainty. In reasoning in such a way the economist is abstracting from the speculative or “entrepreneurial” element in the making of the particular decision.
In speaking, however, of a distinct entrepreneurial role to be filled by hypothetical agents to whom we assign the name entrepreneurs, we are drawing attention to a unique class of decisions that it is essential for market theory to distinguish. In a system where specialization and division of labor have been carried to a fairly advanced stage, there is room for a class of decisions for which uncertainty is of the essence (thus to speak about such decisions as if they were made in a world without uncertainty would be self-contradictory). In such a specialized market system, it is possible to purchase all the productive services necessary for the production of a proposed good, at a definite total money cost. Similarly, when the good has been produced, it too can be sold in the market for a definite sum of money. By itself, a decision simply to buy a group of resources, or their productive services, involves no essentially speculative element; neither does a decision to sell a finished product, once it has been produced. But the decision to buy a bundle of productive resources at one price in order to resell “them” (that is, the finished product for whose production these productive services suffice completely) later at a higher price, is essentially speculative. In a market there is constant opportunity for this kind of decision to be made, and we distinguish the “pure” function of making this kind of decision by referring to it as the role of the entrepreneur. The entrepreneur must simultaneously make the decisions concerning which good he will produce and which resources he will use in its production, under the condition that he can expect only an uncertain price for the product when it will be sold. The entrepreneur makes one such speculative decision out of innumerable possible speculative decisions.
Of course, we must immediately point out that in a market system any one person is likely to fulfill more than one of these three “market roles.” All resource owners and entrepreneurs are also consumers. We have already noticed, too, that a decision by an individual in his role of consumer or resource owner invariably involves an entrepreneurial element. Similarly, an individual whose activities are primarily entrepreneurial is likely to combine with them activities belonging to one or both of the other possible market roles. A producer may be contributing his own capital, and will quite probably be directly supplying supervisory labor services to the production process. In this way, he is acting in part as a resource owner. A producer may engage in entrepreneurial speculation not only in order to secure profits, but also because he obtains a peculiar thrill from taking bold risks. In this way, he is acting in part as a consumer. The resolution by the theorist of the integrated activities of a market participant into the three general, distinct functions is purely a matter of analytical expedience. We understand the market process more fully, we will find, because we understand that individuals perform a variety of functions that are susceptible to a separate theoretical “explanation.”
THE STRUCTURE OF THE MARKET SYSTEM: VERTICAL RELATIONSHIPS
The analytical isolation of the various possible market roles leads directly to the perception of a unique structure of human actions within the market system. The recognition of market structure is in turn the indispensable step toward the understanding of market operation.
In asserting that there is a structure in the decisions made in the marketplace, we mean simply that the decisions belonging to each of the various market roles are linked in a stable pattern of relationships. Decisions of resource owners, for example, are conditioned on the one hand by the urge to gain money income, and on the other hand by the different alternatives offered by various entrepreneurs. The decisions of consumers are conditioned on the one hand by their own tastes and income, and on the other hand by the different alternatives offered to them by various entrepreneurs. The decisions of the entrepreneur, in turn, are conditioned by a simultaneous appraisal of the various alternatives offered to him by those he is able to buy from, and of the various alternatives offered to him by those he may be able to sell to; and so on.
In this section we notice, first of all, markets related to each other “vertically.” A vertical relationship can be said to exist between two markets when goods or services bought in one of the markets are sold (either alone or in combination with other goods or services) in the other market. The simplest possible notion of vertical structure within the market system may perhaps be obtained from Figure 2-1. The figure shows here that the market system consists of two markets; a market for products (in which entrepreneurs are the sellers and consumers are the buyers), and a market for productive services (in which resource owners are the sellers, and entrepreneurs are the buyers).3 The structural relationship between the markets is seen, for example, by noticing that the prices consumers are willing to pay for particular products in the product market will determine the prices entrepreneurs can offer for particular resources in the market for productive services (also termed the resource market or the factor market).
Figure 2-1
A more realistic view of the vertical
