INVESTMENT ENTREPRENEURIAL IN ABILITY*

Theodore Schultz W.
of University Chicago, Chicago, Illinois, USA

Abstract
is Entrepreneurship a pervasive activityin a dynamic economy. A wide array of people at various points over the lifecycle are entrepreneurs, only bureaucrats not and farmersbut also laborers, students, housewives and consumers are entrepreneurs.Entrepreneurial returnsare a significant source of income in a dynamic economy. The economic value of the entrepreneurial ability that is acquired by education can be identifiedand measured. Whereas conceptually every entrepreneurialaction entails some risk, risk is not a unique attributeof a dynamic do economy. The idea that the economic value of what entrepreneurs is to be equated as a returnforriskbearing,is rejected.This investment approach to entrepreneurial ability implies that the returnsthat actually occur to education are substantiallyundervalued.

I. Introduction
In largemeasureeconomic eitheromitsthe entrepreneur it burdens or theory himwithesoteric niceties implications whichare rarely observable. The the of is in in for entrepreneur not required equilibrium theory solvingthe problems which that theoryis appropriate.In nearly all of the production function literature, entrepreneur the does not appear as an expliciteconomicagent. In the part of theorythat deals with "pure profit", the entrepreneur inis dentured riskand uncertainty. argument thispaperis thatthe abilito The of ties of entrepreneurs deal with the disequilibria to that are pervasivein a dynamiceconomyare a part of the stock of human capital. It is well documentedthat experience, healthand especially schooling enhancethe acquired abilitiesof entrepreneurs. Most of the relevantstudiespertainto the effects of schooling farmers theirabilityto perceiveand to interpret of on new information to decideto reallocate and theirresources take advantageofnew to and better opportunities. thishumancapital approach,schooling treated In is as an investment. Thus the argument this paper features of investment in entrepreneurial ability. Entrepreneurs have not receivedtheirdue in economics; theyare notgiven
adequate credit for the contributions they make in a dynamic economy. It is
*

I am indebted GaryS. Beckerand RobertE. Lucas, Jr.fortheir to comments. helpful

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438 T. W. Schultz to not sufficient merely attribute someinnovations businessenterprises, to or as to treatentrepreneurs doingno morethan collecting windfalls and bearing lossesthat occuras a consequence surprises. of Although is obviousthat the it economic behaviorof manypeoplein a dynamic is economy neither repetitive nor routine,whatis not obviousis that in additionto businessmen, thereare many other people who at different juncturesduringtheir life cycle are that entrepreneurs, the demandforwhattheydo dependson the changesthat characterize the particular economicdynamics, that the supplydepends on theirnumber and abilityand thattheeconomic value oftheirservices (inputs) of is substantial.The contribution entrepreneurs economicgrowthis of to major importance, althoughits is concealedin national incomeaccounting. of The economics theacquisition entrepreneurial of is ability stillin its infancy. The puzzle ofthe emergence firms of of mayalso be explainedin terms organizationalhumancapital.' For thereto be a "rent"thataccruesto the "scarce" entrepreneurial ability, what entrepreneurs musthave some economicvalue. They are innovators do in Schumpeter's in theory; Dahmen's phrase,Schumpeter succeededin integrating dynamics technology business the of and enterprise.2 WhatSchumpeter could not have anticipatedis the growthof researchand development(R and D) in the publicsector.In the UnitedStates,forexample,70 per centof all basic researchis fundedby the federalgovernments in the case of and researchonly 25 per cent of it is being done by privatefirms.4 agricultural innovators have becomea decreasing Schumpeter's part of the technological story. bedevils many economistsin analyzing entrepreKnightian uncertainty neurship.Knight's modest prefacein Risk, Uncertainty, Pro/itstates and of entersimply that,"The particular technical contribution thetheory free to prisewhichthisessay purports make is a fuller to and morecareful examina...." tion of the role of the entrepreneur Although much of Knight'streatise is devoted to the function entrepreneurs a dynamicmarketeconomy, of in this part has receivedall too littleattention. is perceptive It and relevantto and I shallturnto it presently. is noteworthy economists myapproach, It that who draw on Knight rarelyconsiderKnight's entrepreneurs a dynamic in economynor are theyaware, so it would appear, of Knight'sremarkable 23
Edward C. Prescott and Michael Vincher, "Organizational Capital", Journal ofPolitical Economy, 88, June 1980, pp. 446-61. 2 Erik Dahmen, Entrepreneurial and the Development Swedish Industry,1919Activity of 1939. Translated into English by Axel Leijonhufvud,published forthe AmericanEconomic Association by Richard D. Irwin, Inc., 1970. See preface by the author dated November 1969. 8 Theodore W. Schultz, "The Politics and Economics of Research", Museum of Science and Industry Nobel Hall of Science Induction Program, Chicago, Illinois, April 23, 1980. 4 Theodore W. Schultz, "The Economics of Research and Agricultural Productivity", International Agricultural Development Service Occasional Paper, New York, New York, 1979. Scand. J. of Economic8 1980
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Investment entrepreneurial in ability 439 to page preface the London School of Economics1933 reissueof his treatise.' As alreadynoted,it is not sufficient treat entrepreneurs to solelyas economicagentswhoonlycollectwindfalls bear lossesthatare unanticipated. and If this is all they do, the much vaunted freeenterprise systemmerelydistributesin some unspecified mannerthe windfalls and losses that come as If has value it mustperform usesurprises. entrepreneurship someeconomic a ful function whichis constrained scarcity, whichimpliesthat thereis a by supplyand a demandfortheirservices. Entrepreneurial ability continuesto be an elusive conceptin economics. The dialoguebetweentheoryand observableentrepreneurial behavioris not one of the more cogentand usefulparts of economics.The supply of this nor abilityis rarelyconsidered; is the demandforit an integral part of economicanalysis.The entrepreneur seldomappearsin ourtheoretical literature. Baumol2puts it neatly: "The references scantyand moreoftentheyare are totallyabsent. The theoretical firmis entrepreneurless-the Prince of Denmarkhas been expungedfrom discussion Hamlet."Thereare of course the of well-defined problemsthat equilibrium theorydeals with whichrequireno for entrepreneur theirsolution.If therewere competition withno contrived scarcity and if the economy had arrivedat an equilibrium, if therewere and no changesthat woulddisturb that equilibrium, entrepreneurial abilitywould have no economicvalue. Kirzner approaches the entrepreneur the traditionof the Austrian in School. He also arguesthatthere no roomfor entepreneur equilibrium is the in theory.He presentsa theoryof the marketand pricesin whichthe entrepreneur a necessary is active agent.Nevertheless, of his analysiscomesto all naughtfor he concludes"... that at the marketlevel ... entrepreneurship is notto be treatedas a resource The market .... neverrecognizes entrepreneurial abilityin the sense of an available usefulresource."3 What went wrongin arriving thisconclusion? at Whether not thereare returns entrepreneuror to shipthat are not "profits" not made explicit.Accordingly, returns is that the accrueto economic agentswhobring about theequilibrating process changes as occur that give rise to disequilibria not surface.This means that the esdo sentialand rewarding activitiesof entrepreneurs dealingwithdisequilibria in that are inevitablein the dynamicsof modernization and economicgrowth are omitted.
1 Frank H. Knight, Risk, Uncertainty, and Profit, London School of Economics and Political Science, Reprint No. 16, 1933. 2 I findWilliam J. Baumol's very briefpaper ("Entrepreneurshipand Economic Theory", American Economic Review, Papers and Proceedings, Vol. 68, May 1968, pp. 68-71) exceedinglyperceptivein seeing that the entrepreneurial functionis an essential part of the process of economic growth. 3 Israel M. Kirzner, Competitionand Entrepreneurship, University of Chicago Press, 1973. Kirzner's book contains many cogent economic insights. His counterproductive conclusion is clearly set forthin his paper, "Alertness, Luck, and EntrepreneurialProfit", presentedat the AmericanEconomic Association meetings,August 31, 1978. To the best of my knowledge, this paper has not been published.

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440 T. W. Schultz Knight, however, facesup to thecontributions entrepreneurs a dynamic of in marketeconomy.He deals at lengthwith the risk-uncertainty probleminin herentin Nature,i.e. naturalresources, technological changesand in the of instability prices.He sees factor pricesas moreamenableto contracts than output prices.Thus the intervalof time betweenproduction based on conand the sale of the outputis a special sourceof risk.He also tractedfactors as sees advances in knowledge the mostpervasiveand important part of the on riskproblem.The treatiseis richwithinsights the limitations informaof as occur underactual market tion and of expectations change and progress with contributions entrepreneurs He the of conditions. is indeedmuchconcerned to the equilibrating process,despiteall mannerof riskand uncertainty. Knight devotes a long chapter(ChapterV) to the theoryof changeand absent.In ChapterXI he returns this "unchangwithuncertainty to progress of knowable ingproperty changing", notingthat it wouldrequirea completely of worldwhichis in his view a pure artifact our minds,a refuge whichwe to world.It should also be noted that whereas-windfleefroman unknowable have no effect current on fallsand lossesthat are not anticipated production, of expost,however, the theycan affect distribution incomeand the subsequent But unsettled issue. It allocativebehaviorof entrepreneurs. thereis a critical, betweenrisk,as referring eventssubject to pertainsto Knight's "distinction and as to a knownor knowableprobability distribution, uncertainty, referring numerical to eventsforwhichit was not possibleto specify probabilities".' He as Friedmandoes not believethat thisis a valid distinction. follows, I do, whichdeniesany valid distincL. J. Savage in his viewofpersonal probability, is tion along theselines. But to argue that this distinction not valid forthe of does decisionof the entrepreneur, not solve the problem the observer, i.e., the economist, because he is not privyto what the entrepreneur subjectively thinks probable. is

II. Attributes of Entrepreneurs

to Whileit is permissible use "ability"and "capacity" of peopleinterchangefacably,2it is betterto thinkof people as havingabilitiesand of nonhuman torsas havingcapacities.The capacityof croplandcan be increased irrigaby limeto neutralize acidityof the soil and by theapplication the tion,drainage, The new varieties wheat of fertilizers. productive of capacityof highyielding is exceedsthat of sometraditional varieties. Capacity,but not ability, applicable to all nonhuman factors, including machines, equipment, and structures. have abilitiesboth innate and acquired. It is the acquired People, however,
'

Milton Friedman, Price Theory,Aldine Publishing Co., Chicago, Illinois, 1976, p. 282. Friedman in his Price Theory,cited above, uses these two terms interchangeably;the "capacity of entrepreneurs"predominates.

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Investment entrepreneurial in ability 441 that are enhanced by schooling,health and exabilities of entrepreneurs perience. What are the attributesthat distinguish the entrepreneur frompeople who are also active economicagentsbut who are not entrepreneurs? Schumbut it excludesmostof the worthwhile peter'sconcepthas merit services that entrepreneurs as render.It is usefulto treat entrepreneurs providing firmspecific humancapital,or as organizational humancapital withinfirms. The of in do treatment what entrepreneurs large corporations is ambiguous.It is that this vast literature silenton the muchlargernumbers noteworthy is of to small entrepreneurs. surveyby Marrisand Muelleris committed the The failureof competition whereasFama providessupportforthe efficiency of large corporations.' Small firms, however,have not become extinct.I am especiallymindfulof agriculture throughout the world; there are literally many millionsof small farmers who are entrepreneurs. entrepreneurial The domainof manyotherpeopleis also smallas theyreallocate in theirresources response changesin economicconditions. to People who supplylabor services forhireor whoare self-employed reallocate their services response changes in to in the value of the workthey do. Studentslikewiseare entrepreneurs when they reallocatetheirown time along withthe educationalservicestheypurchase as theyrespondto changesin expectedearnings and to changesin the personalsatisfactions theyexpectto derivefrom theireducation.Housewives are also entrepreneurs dealingwithchangesin the value of theirown time in and ofthe purchased goodsand services theydevoteto household production. Consumption opportunities changein a dynamiceconomy inasmuch also and as pure consumption in entailstime,here,too, consumers as entrepreneurs act responding such changes.2By all odds, the economicdomain of most to entrepreneurs indeedsmall. is The bearingof risk is not a unique attributeof entrepreneurs. Whereas entrepreneurs assume risk,therealso are people who are not entrepreneurs who assume risk. Conceptually, a dynamiceconomythereare entreprein neursand thereis risk;in a stationary (static) economythereare no entrepreneurs and thereis risk,and humanagentsin such an economy who engage in economicactivitiesalso assume and bear risk.The implication that no is economy whether be stationary dynamic riskless, it or is whereas entrepreneurs are dynamicspecific. Empirically, is highly it implausible that thereeverwas or will be a risklesseconomy.Any observablestationary economythat has arrivedat economicequilibrium and as long as the equilibrium persists, does not need and does not have entrepreneurs, such an economy not free but is
1 Robin Marris and Dennis C. Mueller, "The Corporation,Competition,and the Invisible Hand", Journal of Economic Literature,Vol. 28, March 1980, pp. 32-63; and, Eugene Fama, "Agency Problems and the Theory of the Firm", Journal ofPolitical Economy,88, April 1980, pp. 288-307. 2 Theodore W. Schultz, "The Value of the Ability to Deal With Disequilibria", Journal of Economic Literature,13, September, 1975.

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442 T. W. Schultz
of risk.Accordingly, bearingof riskdoes not distinguish the betweenpeople who are entrepreneurs those who are not entrepreneurs. and of In Some elaboration this issue is warranted. traditional agriculture that has arrived overmanygenerations whatis a closeapproximation a (statioat of nary) economicequilibrium,' farmers bearingrisk. Since they do what are their forebearshave done for generations, their productionactivitiesare routineand repetitive; thereis no need for,or demand for,entrepreneurial is no ability.Although traditional agriculture not riskless, new economicdeto routine. cisionsare required.There are no incentives alter the prevailing Productionand consumption activitiesare repetitive.Over the life cycle, to people do what theirforebears did. Thereis no reasonor incentive search is foradditionalinformation. What is knownfrom past experience optimalin The allocatingthe available resources efficiently. workthat is done is repetiThe tive. No new skillsare called for.There are no changesin expectations. rationalthingto do underthese conditions to repeat doing what is being is theirecodone. Although people may be verypoor, they may be illiterate, nomiclife may be harsh,they are routinely equating theirmarginalutility of and theirmarginal the costto a finedegree.It bearsrepeating: bearing risk is not a unique attribute entrepreneurship. of Before leave theroutine, I repetitive economic state,it is evidentthathighly sophisticated decisionrules can evolve over time that are routinely applied. In thinking about the non-repetitive activitiesof humanagents,my concept which entails making of a disequilibrium state calls for entrepreneurship decisionsthat are neither routine norrepetitive. The economic behaviorimplications riskaversionin a dynamic of economy is not pursuedin this paper. It has receivedmuch attention whereasthe acand Laffront2 quiredabilitiesofentrepreneurs beenneglected. have Kihlstrom providea usefulbrief reviewof part of the literature bearingon riskaversion and theyhave a modelto determine who choosesto be or not to be an entrepreneur.It is not obvious,however, that when one's own time needs to be reallocatedthat the individualhas this choice. A more generalanalyticalproblemin economicsis thateconomic disequilibriaare not at homein equilibrium theory. is plausibleto arguethat what It is economic agents do today given theirinformation expectations conand
1 The economics of traditional agriculture is featured in my TransformingTraditional Agriculture, Yale University Press, New Haven, 1964; reprintedby the Arno Press, New York, 1976. 2 Richard E. Kihlstrom and Jean-Jacques Laffront, "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion", Journal of Political Economy,89, August 1979, pp. 719-48, present a model on the assumption that, "individuals decide whether to become entrepreneursor workers by comparing the risky returns of entrepreneurshipwith the nonrisky wages determined in a competitivelabor market". This model omits any consideration of the entrepreneur'scontributionto the production process. They "assume that all individuals are equal in their ability to performentrepreneurial as well as normal labor functions". They state that their model is a special case in of Knight's view while acknowledgingthat Knight emphasizes differences ability.

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Investment entrepreneurial in ability 443 sistent withthe implication equilibrium of But thisapproachdoes not theory. of of information expecand deal withthe effects the shortcomings yesterday's tationson the situation whicheconomic in agentsfindthemselves today.Nor does it deal with tomorrow's limitationsof problem when corresponding become evident.Substantialadvances and today's information expectations have been made in treating aspects of this problemin termsof the costs of on and for searching information the returns thissearchprocessand in develto For oping"more"rationalexpectations deal withthisproblem. thepurpose at hand, the assumptionis that increasesin the ability of entrepreneurs in and to contributes theirefficiency acquiringinformation in formulating and acting upon theirexpectations. is The substance myargument thatdisequilibria inevitable dynamic of are in cannotbe eliminated law,bypublicpolicy, economy. Thesedisequilibria and by A surelynot by rhetoric. moderndynamiceconomywould fall apart wereit actions of a wide array of human agents who not for the entrepreneurial reallocatetheirresources and thereby bringtheirpart of the economyback into equilibrium. decisionto reallocate resources Everyentrepreneurial entails risk. What entrepreneurs has an economicvalue. This value accrues to do for themas a rent,i.e., a rentwhichis a reward theirentrepreneurial performthis rewardforthe entrepreneurship ance. This rewardis earned.Although of most human agents is small, in the aggregatein a dynamiceconomyit in income. The concealaccountsfora substantial partoftheincreases national of thatentrepreneurs mentof this part in the growth nationalincomeimplies have not receivedtheirdue in economics. III. Demand for Entrepreneurship

This demandis a function economicdisequilibria. Human agentswho perof witha viewofdeciding ceiveand evaluatesuchdisquilibria whether notit is or for the worthwhile themto reallocatetheirresources, including allocationof theirowntime,are entrepreneurs. analyticalproblem made difficult The is by virtueof the fact that economicdisequilibria exceedingly are heterogeneous. In They differ dependingon the source(cause) ofthe disequilibria. theevent of war, all mannerof economicdisequilibria a rule occurabruptly. as One of the effects politicalinstability the economyis that it becomesdisorof on Economicactivities altered are ganizedand besetwitheconomic disequilibria. interventions that nationalizeparts of the private by various government sector,impose regulationson other parts and pursue policies designedto redistribute personalincome. In dealing with changesin economicevents, economists tend to concentrate the processof economicgrowth on and mothis processas an integralpart of economic dernization, treating dynamics. This process,however,also gives rise to a wide arrayof different classesof in economic whereone turns investigating disequilibria. Thus,no matter what
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444 T. W. Schultz actually do, the disequilibriathat are observed are characentrepreneurs terizedby muchheterogeneity. are growth enthat are associatedwitheconomic Many of the disequilibria innovator) (Schumpeter's dogenous.An innovationby a businessenterprise housestudents, agents-laborers, event.Individualeconomic is an endogenous of and small farmers-are rarelyinnovatorsof anything wives, consumers, Publicallyfinancedand organizedresearchhas bemeasurableimportance. advances,especiallyso in the case sourceof technological come an increasing The resultsof this researchare a major source of economic of agriculture. growth. economic in is This set ofdisequilibria pervasive modern disequilibria. of is Muchofthe demandforentrepreneurshipa consequence thisset. as It is helpfulto approach the demand forentrepreneurship having the entreof occurs,the particular attributes a schedule.When a disequilibrium highat the to preneurfaces a schedulewherethe incentive act is relatively to the outsetand as he proceedsto reallocatehis resources, incentive make declines.The part of this demandschedulethat matters further adjustments above that of a zero in analyzingthe observablebehaviorlies substantially small,the incentive gain. When the additionalgain has become sufficiently to point. equilibrium proceeding the perfect becomestoo weak to warrant occasionedby a parforentrepreneurship the Under competition demand Once the technique has been ticular technologicaladvance is transitory. will adopted,a newequilibrium have beenattained'and thedemandforentrefrom this eventwill no longerexist. A sequenceof technological preneurship for advances over time, however,maintainsthis demand. The implications for case, whichentails a once the supply of entrepreneurship the transitory fromthat of the steady sequence of importantly for all adoption, differs the of advances,whichhas come to characterize modernization technological will This difference be considered presently. agriculture. IV. Supply of Entrepreneurship to The supply is not restricted a small part of the adult population.One observesthat many people,if not all, have some abilityto supplyentreprethat this parwhenthereis a demandforit. It is also documented neurship education,and health. When it is ticularabilityis enhancedby experience,
1 Both production and consumption are altered by the new equilibrium. The event of hybrid corn is illustrative of what such a new equilibrium entails. The costs of producing corn are reduced. When the hybrid corn is widely adopted the benefitsfromthe reducto tion in costs are transferred consumers. The gain in real consumer income alters consumer behavior. As a consequence of the increase in productivityoccasioned by hybrid corn and the associated complementaryinputs that followed in its wake, in the United States, although the corn acreage harvested in 1979 was 33 million acres less than in 1932, the production in 1979 was three times the amount produced in 1932. There were also Farms became largerand numberof farmsdeclined very marked scale and location effects: substantially. The comparative advantage of the heart of the corn belt increased and more of the production shiftedinto the better parts of this corn producing area.

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in ability 445 Investment entrepreneurial worthwhile, people invest in education and also in health and one of the of doingso is revealedin theiradditionalentrepreneurial ability. effects in of It is clearlyevidentthat millions farmers low incomecountries have land,laborand their substantial abilityto altertheuse thattheymakeoftheir to technical and price stockofreproducible physicalcapitalin response better that they are not bound to Their responsesdemonstrate opportunities.' and that theyare not indifferent what had been routinetraditional farming to to opportunities improvetheireconomiclot. of The necessity dealingwith disequilibria a is Experience. Learningfrom in have littleor good teacher.Althoughmost farmers low incomecountries reveals considerable no schooling, theirrecentperformance abilityto learn; varieties food of to wit,in theirsuccessin the adoptionsof new highyielding research of oriented the to grains.In view of the contributions agricultural and the large amountsof additional of requirements low income countries in to the capital being committed agricultural devemopment thesecountries, to these research observedability of this new breed of farmers transform and is contributions the additionalcapital into increasesin food production clear and substantial. in One measureof the entrepreneurial abilityof farmers low incomecounvarietiesof wheat and rice are triesis the highrate at whichhigh yielding varietiesbecame available to these farmers less adopted. Such highyielding of than two decades ago. The suitability thesevarietiesdiffered countries; by and new complementary inputshad to be purchased,notablyfertilizer, the appropriatechangesin farmpracticeshad to be learned. There were new South and East Asia, of all the croplandused risks.By 1976-77,throughout in was devotedto highyielding to grow wheat 74 percent varieties; the case was 30 percentof the croplandused to growrice. of rice, this achievement in to In turning the comparative advantage of the schoolroom acquiring need to be conof the entrepreneurial ability, limitations on-farm experiences sidered. As the technologybecomes more complex the comparativeadfromexperiincreases.The economicvalue of learning vantage of schooling in technoence and so too from schooling dealingwitha onceforall improved Although logy is exhausted when the farmerattains his new equilibrium. and schooling time dependsteadytechnicalchangesrenderboth experience is ent,the abilityaquiredfrom schooling moreusefulin dealingwithchanges and also moredurablethan that acquiredfrom exin a complextechnology is of The changes succintly perience. implications a sequenceofsteadytechnical
An extended analysis of this behavior is presented in my "Investment in Population Quality Throughout Low-Income Countries", in World Population and Development: Challengesand Prospects,edited by Philip M. Hauser, Syracuse University Press, 1979, pp. 339-60. and Spread of High Yielding Varieies of Wheat and 2 Dana G. Dalrymple, Development Rice in Less Developed Nations, USDA, Foreign AgriculturalEconomic Report, No. 95, 1978.
1

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446 T. W. Schultz put by Welch' "A rapid rate of technicalchange renderspast experience But, content today'sexperience. of the obsoleteand it increases informational less relevantfromtoyesterday just as morerapid technicalchangerenders perspecit day's perspective, renderstoday less relevantfromtomorrow's is are tive". One implication that no generalstatements possibleabout the ability acquired fromexperiencesunless the value of the entrepreneurial is Another implication that of attributes the technicalchangesare specified. risesrelativeto that of learning from the comparative advantageof schooling becomesmorecomplex. as technology experience and dynamicsof U.S. The Education and Entrepreneurship. complexity thateducation enhances entrepreneurial evidence the provides strong agriculture in to The empiricalissue is not restricted difference the abilityof farmers. on 8 between and 12 yearsofschooling the allocativeabilityoffarmers. effects of The evidence also resolvesthe puzzle why the proportion U.S. farmers withone or moreyearsof collegeeducationincreasedbetween1940 and 1960 whichexceededby a wide margin (white males, ages 35 to 54) by 83 percent, both self-employed occupations.Farmersare normally that of the non-farm the effects and Thus,in thecase offarmers, productivity workers entrepreneurs. on and of educationare oftwo parts,namely, work-skills on entrepreneurship of that occuras a consequence changesin the in dealingwiththe disequilibria I Traditional Agriculture,advanced the hypoeconomy.In my Transforming in farmers moreefficient allocatingtheirresource are thesisthat traditional farmers not fullyregainan ecodo farmers because modern are than modern beforetheyface new technicaladvances. This hypothesis nomicequilibrium the rate of adjustment withspecial has lead to many studies to determine was amongthe vanguardin of to attention the effects education.Chandhri2 in is to that the inputcomposition agriculture sensitive the education showing Research in this area owes much to Welch3who built on the of farmers. and the workof Griliches4 Evenson.5In Welch'sapproach, demandforentreis researchactivity, the by preneurship determined the level of agricultural and opportunities the level the morerapid the changesin production higher educaabilityacquiredfrom the largerthe advantagesof the entrepreneurial

1 Finis Welch, "The Role of Investment in Human Capital in Agriculture"in Distortion8 of Agricultural Incentives, edited by Theodore W. Schultz, Indiana University Press, Bloomington, 1978, pp. 259-281. 2 D. P. Chandri, "Education and Agricultural Productivity in India", Ph. D. Dissertation, University of Delhi, 1968. 8 Finis Welch, "Education in Production", Journal of Political Economy, 78, Jan.-Feb., 1970, pp. 35-59. 4 Zvi Griliches,"The Sources of Measured ProductivityGrowth:United States Agriculture, 1940-1960", Journal of Political Economy, 71, 1963, pp. 331-46. Zvi Griliches, "Research Expenditures, Education, and the Aggregate Agricultural Production Function", American Economic Review 54, 1964, pp. 961-74. 5 Robert Evenson, "The Contributionof Agricultural Research and Extension to Agricultural Production", Ph.D. Dissertation, Universityof Chicago, 1968.

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Investment entrepreneurial in ability 447 in from new technologies the the called tion. Although increases productivity it formorework-skills, was not plausiblethat the additionalskillsof college graduates could account for all of the very considerable increasesin their earningswhichin Welch's study came to 62 per cent more forthe college graduatesthan forthose who had completed highschool.He foundthat the advancesin agricultural research one-third thisdifference of explainedroughly betweencollegeand high school graduates.' Huffman'sstudies2get at the heartof allocationissue. He focusedon the in of use ofa single fertilizer,3theproduction corn.His rationale input, nitrogen is that wherea major changeoccurswithvariouslesserchangesin its wake, the educationof farmers should speed the adjustments.The major change was the 22 to 25 per cent declinein the pricesof nitrogen relativeto that drawnfrom of corn.Using a sample of countydata fivekey cornbelt states forthe period1950-54to 1964,he foundthat one additional yearofeducation in thisone dimension improved resulted the farmers earning $52 morefrom of in allocative efficiency one farmeractivity,i.e., in using nitrogen corn in production. Petzel's study4deals withthe relationships betweenfarmer educationand the dynamicsof acreage allocationsto soybean productionin the United States. He uses an implicitoptimizing model based on farmers'expected prices.His studyfocuses a periodofrapidgrowth the acreagedevotedto on in soybeansin nine statesfrom1948 to 1973. Petzel foundthattheadjustments made by farmers occurred morerapidlyin the counties whereaverageeducation levels are highest.He also foundmorerapid adjustments withrespect to two dimensions scale,namelythe total croparea devotedto soybeans of and the unit scale per farm.5 It is clear fromthese studies along with the resultsfromvarious other studiesthat in U.S. agriculture, whichhas been remarkably dynamicduring

1 Research expenditure per farmwere $4.30 in 1940 and $28.40 in 1959. The implication of Welch's analysis is that if research were to fall from$28.50 to $4.30 per farm,about one-third of the differential would disappear. In my view, if there were no agriculture research for a decade, the technology of U.S. agriculture would arrive at an economic equilibrium and the complexity of agricultural production would require the skills of less than that of a high school education. 2 Wallace E. Huffman,"Contributionsof Education and Extension in Differential Rates of Change", Ph.D. Dissertation, University of Chicago, 1972. Wallace E. Huffman, "Decision Making: The Role of Education", American Journal of AgriculturalEconomics, 56, 1974, pp. 85-97. Wallace E. Huffman, "Allocative Efficiency:The Role of Human Capital", Quarterly Journal of Economics, 91, 1977, pp. 59-77. s It is noteworthythat the decline in price of nitrogenfertilizer was a consequence of a major technological advance. The development of the "Kellogg" process reduced the real costs of producing nitrogen sharply. 4 Todd Petzel, "Education and the Dynamics of Supply", Ph.D. Dissertation, University of Chicago, 1976. 5 See Finis Welch, "The Role of Investment in Human Capital in Agriculture", 1978, pp. 273-274, already cited, for a fulleraccount of Petzel's contribution.

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448 T. W. Schultz
recent decades, the entrepreneurial ability of farmersis measurablyenhanced by theireducation.' Rare is the entrepreneur is onlyan entrepreneur. who Mostpeoplewho performentrepreneurial functions also do routineworkwhichmay be unskilled or at the otherextreme highly technical skilled, work.Whereasstudents make entrepreneurial decisionstheirprogram studiesis essentially of routine work; the activitiesof housewives householdproduction the same attributes, in has and it is also true for consumers. Schoolingand highereducationand also healthon whichthe empirical evidenceis stillverysparse,are investments in acquiredabilities.They enhancenot onlythe skillsthat people use routinely but theyalso increasethe entrepreneurial abilityof individuals. While much progresshas been made in analyzingthe returnto investment human in capital, these returnsto educationundervalueboth the private and social of return to because of the omission the contribution entrepreneurial ability. V. Closing Remark is Entrepreneurship a pervasiveactivityin a dynamiceconomy.At various if is pointsoverthelifecycle,everyperson an entrepreneurforno other reason in than the increases the value of humantimeovertime.Since 1900,the real value of an hour of workof the normallabor forcein the United States has of The processes a dynamiceconomymakes disequilibria increasedfivefold.2 inevitable. Not only businessmenbut also laborers,students,housewives, consumers and farmers assess and, whentheydeem it to be worthperceive, action entailsa risk. while,act to regainequilibrium. Every entrepreneurial But risk is not a unique attribute a dynamiceconomy. of educaExperience, tion and healthenhanceentrepreneurial to in ability.The return investment In a educationis well documented. agriculture, substantial partofthisreturn in its to investment educationaccruesfrom contribution theentrepreneurial to abilityoffarmers.
1 Other studies on education and allocative ability are reviewed by Welch in his 1978 essay and in my, "The Value of the Ability to Deal with Disequilibria", already cited. 2 Theodore W. Schultz, "On the Economics of the Increases in the Value of Human Time and Resource8,ed. R. C. 0. Matthews. Proceedings of Over Time", in Economic Growth Fifth World Congress of the International Association, Tokyo. Macmillan, London, 1980.

Scand. J. of Economic8 1980

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