Modern Economy, 2011, 2, 552-560
doi:10.4236/me.2011.24061 Published Online September 2011 (http://www.SciRP.org/journal/me)
A Theory of Political Entrepreneurship
Matthew McCaffrey, Joseph T. Salerno
Auburn Univer sit y , Department of Economics, Auburn, Alabama, USA
Pace University, Lubin School of Business, Department of Finance and Economics, New York, USA
Received June 20, 20 11; revised July 21, 2011; accepted August 1, 2011
Abstract
This paper adapts the entrepreneurial theory developed by Richard Cantillon, Frank Knight, and Ludwig von
Mises to the theory of “political entrepreneurship.” Political entrepreneurship is an outgrowth of the theory
of the market entrepreneur, and derives from extending entrepreneurial theory from the market into the po-
litical sphere of action. By applying the theory of the entrepreneur to political behavior, we provide a basis
for identifying political entrepreneurs, and for separating them analytically from other government agents.
The essence of political entrepreneurship is the redirection of production from the path it would have taken
in an unregulated market. Nevertheless, this production does produce an income stream to political entrepre-
neurs which closely resembles the profit of market entrepreneurs.
Keywords: Entrepreneurship, Political Entrepreneurship, Ownership, Production, Uncertainty, Income
Distribution, Profit and Loss
1. Introduction1
Recent literature has stressed the importance of capital
ownership, decision-making, and uncertainty-bearing in
entrepreneurial theory [1-5], emphasizing the entrepre-
neurial theory of Richard Cantillon, Frank Knight, and
Ludwig von Mises. This paper seeks to extend this ana-
lysis to a relatively underdeveloped area in economics:
the theory of “political entrepreneurship.”2 We develop
an economic theory of political entrepreneurship; one
which demonstrates that political entrepreneurship dis-
torts the structure of production, regardless of the pre-
sence of anti-social behavior such as rent-seeking. While
some theories speak of entrepreneurship in a metaphori-
cal fashion, “political entrepreneurship” is a truly eco-
nomic function precisely because entrepreneurial theory
may be applied to the political realm without sacrificing
realism, and without reference to analogy and metaphor.
There are three major branches of thought in the the-
ory of political entrepreneurship which are relevant to
this paper.3 The first is found in the public choice litera-
ture. This branch has largely focused on the rent-seeking
aspects of political activity: the stifling of competition
through legal barriers to entry, lobbying and special in-
terest practices, legislation brokering, coalition-building,
etc.4 The second branch focuses on the entrepreneurial
element more than the political, and largely relies on the
entrepreneurial theory of Israel Kirzner, which empha-
sizes alertness and discovery as the key elements in en-
trepreneurial behavior. Entrepreneurship in the market is
a metaphor for an entrepreneurial element which exists
in all human behavior. In this theory, political entrepre-
neurs are individuals alert to opportunities to profit from
1The authors wish to thank Xavier Méra for his helpful comments on
early drafts of this paper. The participants of the Ludwig von Mises
Institute’s 2011 summer research seminar also provided useful recom-
mendations which improved the quality of the paper. This paper was
written with the assistance of a fellowship from the Ludwig von Mises
Institute.
2The concept “political entrepreneur” is sometimes attributed to Joseph
Schumpeter [6], although the term does not appear in hiswritings.
However, Schumpeter’s theory of democracy as a system of competi-
tion between individuals vying for political control certainly anticipates
aspects of the current literature. For some discussion cf. [7,8] and [6].
To our knowledge, political entrepreneurship as an explicit concept first
appears in Dahl [9], which bears some similarity to Schumpeter’s the-
ory.
3Klein et al. [10] provide some review of the literature and outline
p
otential research opportunities.
4Cf. for instance [11-17]. [18] explores the same sort of political
entrepreneurship, but from the opposite perspective, that of positive-
sum “innovations” in policy. [15] and [19] deal primarily with “policy
entrepreneurship,” which is that part of political entrepreneurship
concerning “legislation innovation.” Within the public choice tradi-
tion, there is also research which incorporates political entrepreneur-
ship without developing an explicit theory of the entrepreneur [11].
There are also sub-disciplines within the broader category of political
entrepreneurship. For some discussion of the relationship of “bureau-
cratic entrepreneurship” to “political” and “public entrepreneurship”
[10,20].

M. MCCAFFREY ET AL.553
the political system.5 These two literatures often incor-
porate a third approach based on the new institutionalism,
which emphasizes the role of political entrepreneurs in
shaping, changing, and consolidating political institu-
tions.6 We should also note that although there are dis-
tinct elements in these approaches, much of the existing
research incorporates a mixture of public choice, Kirzne-
rian entrepreneurship, and new institutionalism, as well
as the work of other social scientists such as Friedrich
Hayek and Joseph Schumpeter.
The purpose of this paper is not to critique these ap-
proaches, although we shall make some remarks in pass-
ing. What matters for us is that while there are important
findings in the abovementioned literatures, they tend to
address only the practical manifestations of political be-
havior, and focus almost entirely on exploring the vari-
ous methods by which politicians redistribute wealth to
favored interest groups. Thus, “political entrepreneur-
ship” is usually a metaphor for rent-seeking, and is used
to explain how, in practice, politicians and political ben e-
ficiaries go about acquiring income through the percep-
tion and exploitation of rent-seeking opportunities. What
is more, this literature (especially that based on the work
of Professor Kirzner) tends to focus on other metaphoric
aspects of political behavior as well, such as alertness
and discovery, to the neglect of more concrete economic
matters, such as own ership, uncertainty, and production.
The concept of political entrepreneurship need not be
a metaphor, however. In the theory of political entrepre-
neurship, relatively little attention has been paid to the
entrepreneurial theory begun by Richard Cantillon [25]
and developed by Frank Knight [26], Ludwig von Mises
[27] and others,7 which emphasizes ownership, decision-
making, and uncertainty-bearing as the primary compo-
nents of entrepreneurial activity. Explaining how these
characteristics of entrepreneurship exist in the political
realm and thus, how “political entrepreneurship” differs
from “voluntary,” or “market entrepreneurship”—is the
purpose of this paper. It is important to note that we are
not simply looking for a novel definition of political en-
trepreneurship, but for a specific function within the state.
And while our approach has implications for future re-
search, we wish to emphasize that this paper is an ex-
ploratory attempt to provide a new theory of political
entrepreneurship, and not the last word on the subject.
Interestingly, our theory happens to coincide with the
etymology of the word entrepreneur, which traditionally
referred to risk-bearing agents of government production
[30].
2. Characteristics of Political
Entrepreneurship
2.1. Political Entrepreneurship Defined
The theory of the entrepreneur is a branch of the broader
field of the theory of inco me distribution, which seeks to
explain the different returns or rents to various economic
functions. Income theory may be divided into three broad
categories: the theories of wages, interest on capital, and
entrepreneurial profit.8 This paper discusses the income
of the entrepreneur, and how this economic function and
income category relate to the political sph ere. What con-
cern us are the following characteristics of entrepreneur-
ship: ownership, the direction of scarce resources through
production for the future satisfaction of consumer wants,
and uncertainty-bearing [5]. We will show that the idea
of entrepreneurship in economic theory proper has an
analogous function in the sphere of government opera-
tions; that is, in the sphere of socially organized, coercive
economic exchanges.9 Put another way, in order to an-
swer the question “What is political entrepreneurship?”
we might also ask “Who are the political entrepreneurs?”
It appears reasonable to describe as “political entrepre-
neurs” those individuals who perform the same or similar
functions in the political sp here as entrepreneurs perform
in the free market economy. It is important though that in
the theory of political entrepreneurship, as in the theory
of the market entrepreneur, we deal with an economic
function and not an economic personality.10
More specifically, the function of political entrepre-
neurship consists in the direction of coercively obtained
resources by the state toward processes of production
which would not otherwise have taken place. We will
justify this explanation in the following sections of this
paper. For now, we merely wish to clarify the direction
of our argument. For now, we wish to point out that po-
litical entrepreneurship is capable of yielding profits and
losses to, based upon the political entrepreneur’s ability
to correctly anticipate future market conditions. We call
this income stream “quasi-profits,” which captures both
its entrepreneurial and non-market character.
8To which might be added the theory of land rents, depending on which
p
articular theory of income d is tribution is adopted.
9We wish to look at coercion only in regard to entrepreneurial theory.
However, there is a voluminous literature on the economics of coercive
exchanges; a fundamental and systematic theoretical work relevant to
this paper is [31]. For some insights into the division between coercive
and non-coercive entrepreneurship, cf. [22]. Also note that “political,”
i.e. governmental, exchanges are only one form of coercive exchange.
However, the following analysis could easily be generalized to a more
complete “coercive entrepreneurship,” which might include, for exam-
p
le, “criminal entrepreneurship,” “political entrepreneurship,” and
other types of coercive wealth transfer.
10This is relevant in the context of political entrepreneurship because,
as we shall see, it may be the case that the political-entrepreneurial
function is shared by a group of individuals.
5Cf. for instance [19, 21-24].
6Cf. for instance [6, 18, 24], and the literature cited there.
7For an elaboration on the differences and similarities between Cantil-
lon, Mises, and Kirzner, and an explication of the many entrepreneurial
traditions in economic theory, cf. [28,29].

M. MCCAFFREY ET AL. 554
2.2. Ownership
The entrepreneur is first and foremost an owner (specifi-
cally, of capital goods). An actor who exercises ultimate
control over resources may be said to own them in the
economic sense. The question then arises: does economic
ownership exist within government? Government is de-
fined as “an organization with a comparative advantage
in violence, extending over a geographical area whose
boundaries are determined by its power to tax constitu-
ents” ([32], p. 21 ).
It must be the case then that within the state apparatus
there are individuals who exercise ultimate control, and
are thus owners. All resources used by the state must in
the end be under the direction of some individual or
group. In practice, the administrative and legislative en-
vironment of a particular state (e.g. pure democracy, con-
stitutional monarchy, etc.) will determine who exactly
the ultimate resource owner(s) is (are). This is an open
empirical problem which may vary from case to case and
also over time within a particular state. Below we shall
examine examples of political ownership. Here we only
wish to repeat that state owners do not finance their o wn-
ership; that is, while they do acquire resources over
which they exercise ultimate control which are thus eco-
nomically speaking the property of the state, these re-
sources must first be coercively obtained from the pub-
lic.11 The resources appropriated by the state are not spe-
cifically and immediately acquired by the consent of the
original owners. If they were, they would be voluntarily
provided to the state and not compulsorily removed. We
shall have more to say about this below.
Rents accrue to the entrepreneur through his control
over, and direction of, the factors of production. The dif-
ference between market owners and government owners
is the method of finance. Whereas market entrepreneurs
engage in exchange, saving, etc. voluntarily to build th eir
supply of capital goods, government actions are financed
through compulsory methods. This will prove a crucial
point in distinguishing market from political entrepre-
neurs, and will be discussed further below. For our pre-
sent purposes though, the question of how an actor fi-
nances his ownership (through voluntary or coercive
appropriation) does not concern us; ultimate control de-
notes ownership.12
In discussing ownership, it is important to note the dif-
ference between ultimate control and delegated control.
This consists, by and large, of the distinction made by
Ludwig von Mises between “entrepreneurs” and “man-
agers”: even though managers may exercise some control,
ultimately they are subject to the orders of the entrepre-
neurs, and thus are not owners ([27], p. 301). This nar-
rows the function of political entrepreneurship by ex-
cluding minor bureaucratic figures that exercise no ulti-
mate authority, in other words, those functionaries who
are responsible to others and whose decisions may be
overridden.13
Let us take an example. Imagine a local despot, an ex-
treme example of ultimate control. Through his mono-
poly on the use of force, this despot supports his rule
through taxation, and thus owns the resources contained
within his territory and may do with them what he wishes.
He may delegate authority to various officials who carry
out the ordinary affairs of the state. But although these
officials (managers) make many decisions without con-
sulting the despot, the despot can always reject them
because it is his power which overrides all others. All de-
cisions regarding resource allocation are subject to his
check, even if he chooses not to exercise it.
2.3. Investment and Production
We must now examine whether it is possible for the po-
litical entrepreneur to “invest” in any sense comparable
to a market entrepreneur, and thus to acquire a rent or
income. Market entrepreneurs are engaged in the con-
stant rearrangement of the production process through
the direction of scarce resources. This is the decision-
making aspect of entrepreneurial behavior: choosing
between alternative production opportunities. We must
therefore investigate whether political entrepreneurs can
arrange resources in a similar manner, and if so, what
income can be derived from this behavior. If it is not
possible for the political entrepreneur to invest, then
there can be no question of entrepreneurial income or an
entrepreneurial function in the sense in which we define
it. All appropriated funds would have to be considered
consumption, and thus simple redistribution requiring no
special treatment beyond the ordinary literature. What
concerns us though is the possibility o f the ex istence of a
productive rent distinct from simple consumption.
11Holcombe [22] discusses the coercive nature of government finance
in regard to political entrepreneurship. Note that the above claim re-
garding coercion is not equivalent to claiming that governments, as
compulsory financiers, do not pass any sort of “market test.” Govern-
ments do need to maintain some degree of goodwill with society at
large, because, as is commonly noted, all state authority ultimately
rests on the consent of the governed. But this does not disprove ou
r
claim.
12This is not to imply any ethical judgments regarding the concept o
f
economic ownership. We do not distinguish here between “just” and
“unjust” ownership, but merely between owners and non-owners in an
economic and value-fre e s ense .
As far as investment is concerned, there are ambigui-
ties in the theory of government spending which require
clarification. This is especially true of the writing of
Murray Rothbard [31,34], the foremost advocate of the
13“Naturally, in capitalism, owners might delegate to others the author-
ity to act on their behalf, but this does not change the nature of entre-
p
reneurship, i.e., ultimate control of a particular resource” ([33], p.
348).

M. MCCAFFREY ET AL.555
thesis that all government spending is consumption, whose
treatment of the subject we must briefly examine.14
Rothbard summarizes h is findings as follows:
As for the transfer expenditures made by the govern-
ment (including the salaries of bureaucrats and subsidies
to privileged groups), it is true that some of this will be
saved and invested. These invest ments, however, will no t
represent the voluntary desires of consumers, but rather
investments in fields of production not desired by the
producing consumers. They represent the desires, not of
the producing consumers on the free market, but of ex-
ploiting consumers fed by the unilateral coercion of the
State... The new investments called forth by the demands
of the specially privileged will turn out to be malinvest-
ments. ([31], p. 1168; emphasis in original)
Schumpeter espoused much the same view:
The friction or antagonism between the private and the
public sphere was intensified from the first by the fact
that... the state has been living on a revenue which was
being produced in the private sphere for private purposes
and had to be deflected from these purposes by political
force. ([38], p . 19 8 )
This does not, however, demonstrate that government
investment is not production as such, but rather that go-
vernment investment is different from the pattern of in-
vestment which would have taken place in an unre-
stricted market. Yet such differences do not affect the
status of investments in the sense of time-consuming
production. The investment of government is simply dif-
ferent from market investment and thus not directly in
accord with the wants of consumers. As a consequence
of government investment, the so-called “structure of
production” is therefore not lengthened sustainably, but
is instead radically altered.15 If the term “investment” is
meant, as it is for Rothbard, to refer to consumer-driven-
production, then government expenditure can never be
considered investment ex ante, although ex post it might
turn out to be used in a way which consumers find bene-
ficial. If we emphasize the ex ante reference point, then
perhaps some other term must be coined for investment-
like activity in government. This does not contradict our
argument however, which depends on ly on the ability of
government to devote scarce resources to time-consum-
ing production processes.16
Given the limitations of arguments to the contrary in
this literature, we conclude that governments can engage
in investment activities, in the sense that states can em-
bark upon time-consuming processes of production which
yield necessarily uncertain results. The exact likelihood
that such processes actually have their intended effect is
a separate matter. At essentially every stage in the pro-
cess of wealth redistribution there is an opportunity for
resources to become simple consumption goods, and we
cannot underestimate the importance of this fact in any
historical study of political entrepreneurs.
What matters for our argument is that there can be
meaningful investment by government, carried out by the
owners of political resources. As opposed to the theory
of Rothbard, it would be more accurate to speak of “go-
vernment production” as the foil to “market production.”
This terminology incorporates the means of appropria-
tion (coercive or voluntary), and would also avoid tor-
turing the definitions of “capital” and “investment” to
mean only “those things produced in unregulated mar-
kets” [37]. Understanding the theory of income distribu-
tion in light of such definitions might also lead toward a
clearer understanding of the pricing of various factors of
production under a system of economic intervention,
when both private and public production exist simulta-
neously in the economy.
As owners, market entrepreneurs devote their re-
sources to time-consuming processes of production in an
attempt to anticipate the future wants of consumers, in
order to earn profit. Yet in the political arena, there is no
such easily identifiable purpose to which resources are
devoted. Since the main tenance of capital values and the
use of economic calculation are at least partially absent
in the decision-making process of the state, there is no
immediate and necessary end which is attributable to
political actors (e.g. attaining money profits, or even be-
ing reelected). All we know with certainty is that the
pursuit of utility is a necessary feature of all human ac-
tion. Owners within the state devote resources to those
ends which are most highly valued to them.
Let us summarize using the example of the despot. He
faces a choice between using his resources for produc-
tion or consumption. Suppose he decides to build a mar-
ketplace for his subjects, the better to consolidate trade
and increase tax revenue. It is clear that this activity is
production, because the despot receives little consump-
tion benefit by improving the conditions of his subjects.
Only if the marketplace yields returns as expected does
the despot’s welfare increase. Unfortunately, the exact
effects of government investment are difficult to untan-
gle. In this example, taxpayers have experienced a wel-
fare decrease through taxation. But the very same tax-
payers might enjoy increased welfare if the new market-
place proves more useful than the previous arrangement.
14For a review and a defense of this approach to production and welfare
economics, cf. [35,36]. There are some additional complications o
f
Rothbard’s approach which are explained in [37 ].
15If we take into account the costs of administration and bureaucracy, it
is possible production will curtailed in addition to simply diverted from
its previous course.
16It is important to remind ourselves that uncertainty is a necessary
condition of all human action. It applies to all time-consuming produc-
tion, whether carried out in the market or by government. The outcome
of production is therefore not determined beforehand, because both
market and government production plans c an be f rustrated ex pos
t
.

M. MCCAFFREY ET AL. 556
In this case we cannot say much about the net welfare
effects, but we can say that the despot has diverted pro-
duction from what it would have been in an unrestricted
economy.
2.4. Uncertainty-Bearing
This brings us to the third characteristic of entrepreneur-
ship: uncertainty-bearing. The market entrepreneur is an
owner, and therefore when he commits his property to a
production process, he necessarily bears uncertainty in
an attempt to anticipate the future constellation of con-
sumer demand. If his judgment about the future is right,
he can earn profits, and if not, h e incurs losses. The inci-
dence of profits and losses falls to the market entrepre-
neur precisely because it is his capital which is at stake
and his judgment which directs that capital.
Likewise, within government, owners face an oppor-
tunity cost of investment when choosing particular pro-
duction processes. In the sphere of government, all acti-
vity is financed either through borrowing, taxation, in-
flation, or some combination of the three. Each method
involves the transfer of property to the state apparatus,
for the purposes of either produ ction or consumption .17 If
production is chosen, then some other process is fore-
gone, thus setting the stage for either profits or losses to
emerge. Once resources have been acquired however, the
results of allocating those reso urces fall on the (political)
owner: profits or losses generated from resource alloca-
tion accrue to the individual(s) responsible for the deci-
sion-making. The institutional statu s of government does
not therefore eliminate uncertainty-bearing.
There is one sense in wh ich the uncertainty-bearing of
the market and government differ. This is with respect to
the consequences of uncertainty-bearing and ownership.
Profit and loss alter the pattern of ownership in society in
order to allocate goods to their most valued ends. With-
out this mechanism profits can be won or lost, but the
pattern of ownership in society does not reflect the supe-
rior or inferior decisions of government resource alloca-
tion. The political actor may of course lose his position
or sully his reputation (i.e. suffer a loss in terms of his
“political capital”), and these possibilities do, to some
extent, mitigate the problem of ownership, but they can
never do so completely.18 Some government agents are
subject to electoral success which can be forfeited if the
agent does not allocate resources to suit the needs of his
supporters. Others seek to maintain a certain level of
fame or prestige which can be decreased through behav-
ior which alienates supporters [14].19 But apart from this
narrow sense, uncertainty-bearing is present in state al-
locations of resources.
Consider again the case of the dictator . Suppose he de-
cides to invest his resources in building a fortress which
will be used to further enhance his revenue (through
military expansion, say). What is the result if a foreign
army invades and destroys the fortress? The investment
in the fortress now yields a loss to the despot: it is his
fortunes which suffer as a result of defeat. The resources
he owned have been lost, and are no longer capable of
generating a positive rent to him.20
2.5. A Theory of Political Entrepreneurship
We may define political entrepreneurship then as the
direction of coercively obtained resources by the state
toward processes of production which would not other-
wise have taken place (that is, would not have taken
place in an unrestricted market). The uses of the capital
involved in th ese processes of produ ction ex ante inv o lve
production which would not have taken place. These
processes thus necessarily redistribute resources and alter
the prevailing welfare situation. Whether or not produc-
tion is actually intended to increase the welfare of the
public, or merely the welfare of the political entreprene ur,
is not important for our argument. State investments in-
volve uncertainty. And as we mentioned above, the un-
certainty of government investment is borne by the own-
ers of property—the political entrepreneurs.21 In this
important sense the entrepreneurial function as we have
defined it exists in government as well as private mar-
kets.
The direction of resources, originating from the judg-
ment of government owners, comprises the entrepreneu-
rial element in government action. Without the elements
19It might be argued that in a particularly responsive democratic society
agents of the state are directly and immediately responsible to thei
r
constituents, and that therefore the political process would alter the
p
attern of ownership, because any error is instantly punished by
r
e-
moval from power. If this was the case however, coercion would not be
necessary. With perfect responsibility and approval, we would not be
referring to what is usually called government, but in fact to an unre-
stricted market. In any case, this line of reasoning would not apply to
bureaucracy or even mildly unresponsive forms of government.
20In addition, whatever consumption value the despot receives in addi-
tion to his speculative investment would also be lost.
21The absence of entrepreneurial losses might be thought to indicate the
absence of a political entrepreneurial function. Consider the following
remark from Mises:
There is a simple rule of thumb to tell entrepreneurs from non-en-
trepreneurs. The entrepreneurs are those on whom the incidence o
f
losses on the capital employed falls. Amateur-economists may confuse
p
rofits with other kinds of intakes. But it is impossible to fail to recog-
nize losses on the capital employed. ([40], p. 11)
Our position though is merely that the absence of losses indicates the
absence of market entrepreneurship.
17Although our theory includes all three methods, for the purpose o
f
simplification we shall focus on f inance through taxation.
18In addition, the problems inherent in bureaucracy make it difficult fo
r
incentives such as this to have more than a superficial effect on the
b
ehavior of political entrepreneurs [39]. For a discussion of the types
of political capital that political entrepreneurs attempt to maintain, cf.
[14].

M. MCCAFFREY ET AL.557
ownership, direction, and judgment we would simply be
speaking of gifts or monopoly privileges as ordinarily
understood in economic theory. Acts of political entre-
preneurship produce what Rothbard describes as “waste
assets” ([31], pp. 94 1, 962-966, 969). His presentation of
production theory however did not examine the entre-
preneurial aspect of waste asset production, a gap which
the present paper hopes to partially fill.
It is important to note though that production need not
be carried out strictly by government; political entrepre-
neurship might also take the form of financing produc-
tion in the private sector. In this case we should take note
of the distinction between entrepreneurs and managers
mentioned above. In the case of political entrepreneurs
financing private firms, these firms would not be entre-
preneurial, but managerial. This approach also implies
that every firm which depends on political entrepreneur-
ship becomes to some extent nationalized. It might be the
case that political control over private firms is slight. But
control could also signal de facto nationalization while a
de jure separation of the public and private sectors re-
mains intact.
An ex post analysis of politic al entrepren eurship is d if-
ficult however. Definitions of market entrepreneurship
tend to include the objectives of entrepreneurial acti-
vity— usually the satisfaction of consumer wants, which
is tied to the profit and loss system. In matters of gov-
ernment, as we have noted, there is no objective which
can be ascribed to all political behav ior (besides increas-
ing the welfare of the political entrepreneur), and the
goal of political entrepreneurship is not strictly deter-
mined. Production might be geared toward long- or
short-run ends. The product of political entrepreneurship
might be either public goods or private goods. The end of
production could be the satisfaction of consumer wants
(the imitation of market entrepreneurship), or it could be
directed toward the satisfaction of interest groups. Which
of these, if any, actually occurs is a matter for historical
investigation. Because no goal can be attributed to all
political entrepreneurs, their success and failure cannot
be discussed in terms as simple as the market entrepre-
neur. Rothbard ([31], p. 965) notes: “Once the govern-
ment remove[s] its subsidies and let[s] all capital com-
pete equally in serving consumers, it is doubtful how
much of this investment would survive”—doubtful, but
not strictly determined. We can speak about ex ante uti-
lity, and we can identify an income which falls to the
political entrepreneur based on his direction of scarce
resources, but theory alone cannot say much more about
success and failure.
This brings us to the critical qu estion of the income of
the political entrepreneur. So far we have attempted to
discover economic activity within the operation of the
state which resembles market entrepreneurship. Now it
remains to be seen if an income stream exists which de-
rives from this economic function. The total stream of
income which accrues to the state may be directed either
to consumption or production. The economic literature
has dealt extensively with the consumption aspect of
state resource allocation. Our intent is to discuss the in-
vestment-production side. This analysis must begin with
the observation that it is possible, however unlikely, that
political entrepreneurs could produce goods and services
which are valued on the market at prices greater than
their costs of production, thus generating a positive net
revenue for political entrepreneurs.
But how are we to characterize the net income which
flows to the political entrepreneur? It is clear that this
income is neither ordinary wages nor an interest payment.
But what relation does it have to market entrepreneurial
profit? Thus far there is no clear answer to this problem.
It might be argued that the income to political entrepre-
neurship is a simple monopoly gain. But we must be
careful not to confuse these categories. Whatever the
institutional status of gov ernment production , the income
we have in mind is rooted in uncertainty. Like market
profit, in a long-run equilibrium, this income would be
eliminated by perfect foresight.
The possibility which remains is that the income to
political entrepreneurship is equivalent to ordinary en-
trepreneurial profit and loss, and indeed, the income of
the political entrepreneur does appear to have much in
common with that of the market entrepreneur.22 The es-
sence of the two activities is similar, as we have argued
above. However, they are not equivalent. Because both
classes of entrepreneur are capable of error, it is difficult
to distinguish between incomes based on an ex post
analysis. We might separate the two forms of profit
based on their welfare effects, but this avoids the pro-
blem of function in favor of effects. We also might point
to the distinction drawn above between losses which
rearrange the pattern of ownership (market entrepre-
neurship) and losses which generally do not (political
entrepreneurship).
There are then similarities and differences between the
two forms of entrepreneurship. It appears then that unless
we focus on only one aspect of the theory, we cannot
easily classify this branch of income. We therefore use
the term “quasi-profits” to describe the income to politi-
cal entrepreneurship. This captures the entrepreneurial
aspects of political behavior, without falsely conflating
different types of profitability. It is quite possible that
further exploration of this topic might yield a more con-
clusive answer. For now though, we can be satisfied with
“quasi-profits.”
22Hoppe [41], for example, describes the income of productive gov-
ernment industries as “market income.”

M. MCCAFFREY ET AL. 558
The existence of a state as such does not necessarily
imply the existence of political entrepreneurship. It is
always necessary for a state to coercively obtain some
revenue to support itself, but it is not necessary that it
devote this revenue to production. Without this commit-
ment of resources, no function meaningfully comparable
to entrepreneurship can exist in government, because in
this case all government revenue is consumption. Gov-
ernments may certainly have incentives to invest and
produce, but there is no reason, theoretically speaking,
why they must. Therefore, it is conceivable that states
can exist without engaging in political entrepreneurship,
so long as we do not consider simple taxation entrepre-
neurial.
One advantage our theory enjoys over other theories,
such as those found in th e public choice literature, is that
it does not depend upon assuming the anti-social (i.e.
economically inefficient, rent-seeking) behavior of poli-
tical entrepreneurs. We have instead explained political
entrepreneurship in terms of the traditional theory of in-
come distribution. This definition rests, not on assump-
tions about the behavior of political entrepreneurs, but
merely on the principle that political entreprene urs reveal
a preference, though production, for production which
would not otherwise have taken place. Our own approach
is in this sense much broader than definitions which de-
pend on restrictive assumptions regarding the values of
political entrepreneurs. We assume nothing about the
content of values; we merely develop the logical impli-
cations of certain types of political behavior. Further, our
definition includes more than simply politicians in the
common sense of the word, but in fact anyone who exer-
cises ultimate decision-making control over public re-
sources. This too broadens the potential scope of political
entrepreneurship, and might include certain bureaucratic
functions as well as those positions which are actually
decided through an electoral process. At the same time
however, this definition is narrower than most because,
as a practical matter, there appear to be far fewer eco-
nomic owners in the state apparatus than managers. Even
in the most developed governments, it appears that there
are very few individuals who truly control the allocation
of resources within the state, and these individuals are
often members of a specific political unit, such as a leg-
islative body or committee.23 Finally, our theory allows
us to make statements about resource use in nonmarket
contexts without implicitly including any outside value
judgments regarding the desirability of the market econ-
omy.
We also have drawn a sharp distinction, expressed in
terms of production processes, between political entre-
preneurs and market entrepreneurs. Political entrepre-
neurs as we have defined them cannot be market entre-
preneurs by the very fact that, at least initially, they di-
vert production away from the path set for it by the mar-
ket. This further recommends it as a tool of analysis. We
can also argue for the efficacy of our theory because it
allows us to conceive of political entrepreneurship in
terms of property, scarce resources, and choice and pre-
ference, concepts which together form the sine qua non
of theoretical economics.
Given our theory then, what sort of activities would
constitute examples of political en trepreneurship? We do
not have the space here to delve into detailed empirical
examples, but we can point out the more obvious direc-
tions in which empirical research may be carried. In ge-
neral, principals of the state who exercise control over
the use of resources—that is, they are not required by
some other decision-maker simply to redistribute them—
are political entrepreneurs. Depending on the precise
form of administration, there could be a great number of
political entrepreneurs or only a few.24 Channeling tax
money into various forms of plant and machinery and
similar investment in market assets would be examples
of political entrepreneurship. On the other hand, the vast
majority of contemporary bureaucrats would not be po-
litical entrepreneurs, even if on a daily basis they make
decisions which are not questioned by their superiors. As
noted above, our theory highlights the difference be-
tween political entrepreneurs and what we might call
“political managers,” who make decisions abou t resource
use but are beholden to higher authorities.25 At the same
24Although the alternative definitions of political entrepreneurship
mentioned above allow for many political entrepreneurs to exist simul-
taneously (because one need only be alert or exert a small influence on
p
olicy to be a political entrepreneur in the usual sense), our ultimate
control criterion necessarily limits the amount of political entrepre-
neurs acting in standard representative democracies. It might even
b
e
the case that only one individual can be considered a political entre-
p
reneur in most contemporary democracies (for instance, a president or
p
rime minister). This fits nicely with our notion of market entrep
r
e-
neurship, where there are also relatively few entrepreneurs in most
firms, as opposed to the alertness-discovery literature, which generally
recognizes much more entrepreneurial activity in the economy.
25If we keep with traditional classes of income-earning in economics,
we find portions of the functions of the capitalist, entrepreneur, and
wage-earner in the political sphere, although the parallels are imperfect
due to the presence of coercion and the partial absence of markets. As
far as the state is concerned, the citizens are the capitalists, providing
the resources necessary for the state’s projects, but receiving no interest
return because their resources are appropriated. The redistributing
agents are the political entrepreneurs, who receive income based upon
the correctness of the forecasted results of their endeavors, but are no
t
necessarily removed from power for mismanagement. Bureaucrats and
other functionaries who handle the everyday operations of the state are
the managers, and despite their administrative importance are largely
on par, economically speaking, with those who exercise no control at
all over decisions of importance, such as the low-level staff (e.g. the
j
anitors) of government. Poli
t
ical managers are essentially simple
wage-earners, although their wages are not necessarily connected with
their discounted margina l v al u e p roduct.
23This fact strongly points toward the theory of group entrepreneurship
as the most important means of further exploring the basic ideas devel-
oped in this paper, and especially in exploring historical examples o
f
p
olitical entrepreneurship. Cf. [23] for similar remarks.

M. MCCAFFREY ET AL.559
time, lobbyists and others working outside the political
sphere—that is, outside the nexus of ultimate control of
political resources—are not usually political entrepre-
neurs, but merely rent-seekers.26
There is some similarity between our theory of politi-
cal entrepreneurship and the notion of “unproductive”
and “destructive” entrepreneurship found in Baumol [42].
Baumol’s concepts are also employed to investigate en-
trepreneurial activity which does not result in net gains
for society (whether these gains are in utility, physical
productivity, or whatever). Although Baumol does not
utilize our approach, his theory is to some extent consis-
tent with it. Baumol also discusses production and re-
source allocation as explanations of the income of po-
litical entrepreneurs, especially in his historical examples,
although his approach relies heavily on the rent-seeking
aspects of political entrepren eurship, as mentio ned above.
Nevertheless, his examples often fall within the scope of
our definition. One particularly interesting case is that of
the military entrepreneurs of the late Middle Ages, who
commissioned bridges and fortresses in order to secure
and enhance their incomes. We view these sorts of pro-
jects essentially as investments, as opposed, for example,
to the construction of palaces, which we view essentially
as acts of consumption. As a final point, these early po-
litical entrepreneurs were among the first individuals for
whom the term “entrepreneur” was originally coined:
risk-bearing producers directing state resources [30].
3. Conclusions
We have altered the fundamental assumption of entre-
preneurial theory, market production, and this has al-
lowed us to adapt the Cantillon-Knight-Mises theory of
the entrepreneur to state production, which in turn has
given us a theoretically sound definition of political en-
trepreneurship. This theory sees the essence of political
entrepreneurship in the diversion of the structure of pro-
duction away from what it would have been in unre-
stricted market. It has also shown us that the judgment in
allocating resources employed by political entrepreneurs
potentially yield s a revenue stream not previously identi-
fied and which is subject to uncertainty. Another useful
aspect of our theory is that it does not require any assum-
ptions about the values of political entrepreneurs, and
thus applies to all persons who meet our definition, not
simply those who should happen to exhibit anti-social
behavior. This advantage should not be underestimated.
Research on the problem of incentives and inefficiencies
in the state apparatus is among the oldest in political
economy, yet it is instructive and useful to carefu lly con-
struct our theories so as to demonstrate funda mental rela-
tions without having to resort to assumptions about val-
ues.
Much work remains to be done in exploring the func-
tion of political entrepreneurship. Specifically, there is a
great deal which might be said regarding the role of po-
litical entrepreneurship on expectations, institutions , eco-
nomic sociology, etc. Unfortunately these topics lie be-
yond the scope of the present paper. Although the above
discussion must be regarded as only the first step in a
larger research program, at the very least we must con-
sider that ownership, uncertainty, and production should
not be neglected in any study of political entrepreneurship.
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