Austrian Capital Theory and the Link Between Entrepreneurship and the Theory of the Firm

Several writers link entrepreneurship to asset ownership, trying to incorporate the theory of entrepreneurship into the theory of the firm. The critical link, we argue, is capital heterogeneity. Transaction cost, property rights, and resource based approaches to the firm assume that assets, both tangible and intangible, are heterogeneous; arranging these assets to minimize contractual hazards, to provide efficient investment incentives, or to exploit competitive advantage is conceived as the prime task of economic organization. None of these approaches, however, is based on a systematic theory of capital heterogeneity. In this paper we outline the approach to capital developed by the Austrian school of economics and integrate it into an entrepreneurial theory of the firm. We refine Austrian capital theory by defining capital heterogeneity in terms of subjectively perceived attributes, that is, the functions, characteristics, and uses of capital assets. Such attributes are not given, but have to be discovered by means of entrepreneurial action. Thinking of entrepreneurship as the organization of heterogeneous capital provides new insights into the emergence, boundaries,and internal organization of the firm, and it suggests testable implications about how and where entrepreneurship is manifested.