In Human Action, Ludwig von Mises made a claim that remains deeply unsettling to statist thinking even today: the true driving force of the market economy is not the state, not bureaucratic planning, and not public authority—but entrepreneurs. This assertion is not rhetorical. It is a theoretical conclusion rooted in the logic of human action, the functioning of the price system, and the irreducible uncertainty of the future.

Mises stated this point unambiguously when he wrote that “the driving force of the market process is provided neither by the consumers nor by the owners of the means of production… but by the entrepreneurs” (Mises, 1949/1998, p. 256). This sentence alone dismantles an entire tradition of state-centered economic reasoning.

To understand why this is so—and why the state cannot replace this role—we must examine how markets actually work.

The Price System and Entrepreneurial Judgment

The market economy is not a mechanical system. It is a dynamic process driven by expectations, error, discovery, and revision. Prices do not merely “exist”; they emerge from exchange, competition, and anticipation of future conditions. And it is entrepreneurs—acting under uncertainty—who interpret price signals and reorganize resources accordingly.

Entrepreneurs do not simply respond to prices as passive data points. They judge what prices mean in relation to an unknown future. This insight is central to the judgment-based approach to entrepreneurship, developed in the Austrian tradition and later refined by scholars such as Frank Knight and, more recently, Nicolai Foss and Peter Klein.

Judgment, in this sense, is non-contractible and non-transferable. It cannot be bureaucratized, delegated to algorithms, or planned ex ante by the state. It involves committing resources today based on a subjective assessment of future market conditions that no authority can know in advance.

This is precisely why entrepreneurship cannot be replaced by state planning. Bureaucracies operate on rules, procedures, and ex post accountability. Entrepreneurs operate on responsibility for profit and loss. Without this exposure to loss, judgment becomes meaningless.

Why the State Cannot Be the Driving Force

Advocates of state intervention often respond with a familiar objection: “Without the state providing the legal framework and protection of private property, entrepreneurship cannot exist.”

This statement contains a partial truth—but it confuses necessary conditions with driving forces.

Yes, a legal framework that protects private property and enforces contracts is a precondition for a functioning market economy. But preconditions do not generate economic coordination. Oxygen is necessary for life, but it does not decide where a person walks.

The state, at best, defines the rules of the game. Entrepreneurs play the game.

The driving force of the market economy lies in:

• the anticipation of consumer demand,
• the reallocation of scarce resources,
• the continuous correction of error through profit and loss,
• and the competitive discovery of better ways to serve others.

None of these functions can be performed by the state without destroying the very signals—prices, profits, losses—that make them possible.

When the state attempts to “drive” the economy through industrial policy, subsidies, or planning, it substitutes political judgment for entrepreneurial judgment. But political judgment is insulated from loss. It reallocates resources without bearing responsibility for error. The result is systematic misallocation, rigidity, and stagnation.

Entrepreneurs as Coordinators of Knowledge

Mises—and later Hayek—understood that the core economic problem is not resource scarcity alone, but dispersed knowledge. Entrepreneurs act as coordinators of fragmented, local, and often tacit knowledge. They discover opportunities not because they are omniscient, but because they are alert, adaptive, and accountable.

The judgment-based theory of entrepreneurship emphasizes that firms exist precisely because markets cannot fully specify future contingencies. Entrepreneurs therefore own assets so they can exercise judgment when the unexpected occurs. This ownership is inseparable from risk-bearing.

The state, by contrast, does not own resources in this sense. It controls them politically. Its agents do not bear residual losses, nor do they reap residual profits. As a result, they lack both the incentive and the epistemic capacity to act entrepreneurially.

Property Rights: Protection vs. Direction

It is essential, therefore, to distinguish clearly between two roles:

1. Protection of private property rights
2. Direction of economic activity

The first is compatible with a market economy; the second is not.

A state that protects property rights enables entrepreneurship but does not replace it. A state that attempts to direct investment, innovation, or industrial structure necessarily overrides entrepreneurial judgment with political criteria—often ideological, electoral, or rent-seeking in nature.

Once this distinction is blurred, interventionists begin to claim that because the state provides the legal framework, it must also guide outcomes. This is a non sequitur. Courts do not tell entrepreneurs what to produce; police do not decide which technologies should prevail.

Conclusion: Responsibility, Not Authority, Moves Markets

The market economy is not driven by authority but by responsibility. Entrepreneurs move markets because they must answer to reality. They are rewarded when they serve others better and punished when they misjudge the future.

This is why Mises insisted that entrepreneurship is not a peripheral function but the central motor of the market process. And this is why attempts to replace entrepreneurial judgment with state control—no matter how sophisticated the rhetoric—inevitably undermine economic coordination.

The state may guard the rules of the road. But it is entrepreneurs who decide where society goes.

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Reference

Mises, L. von. (1998). Human action: A treatise on economics (Scholar’s ed.). Ludwig von Mises Institute. (Original work published 1949)

See Chapter XV, “The Market,” especially pp. 256–257, where Mises identifies entrepreneurs as the driving force of the market process.

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How to Cite this Article (APA 7th edition)

Wang, H. H. (2025, December 3). Entrepreneurs, not the state, are the driving force of the market economy. [Blog post]. William Hongsong Wang. https://williamhongsongwang.com/2025/12/13/entrepreneurs-not-the-state-are-the-driving-force-of-the-market-economy