The entrepreneur speculates that consumers or other entrepreneurs will demand a particular good in the future. He identifies factors of production and/or land that can be obtained from other entrepreneurs and/or workers and combined and used up in order to produce this good. He also identifies capitalists and/or landowners who are willing to provide present money in a credit transaction which can be used in exchange for the factors of production needed, and only needs to be returned after the completion of production.
He will only proceed with production of the goods if he expects the total money obtained from the goods demanded to exceed the money paid for obtaining the factors of production plus the interest paid on the money obtained from the capitalists. The difference between proceeds and expenses is the entrepreneurial profit that he expects. In addition, he will only proceed if he sees no other alternative occupation that yields a higher profit.
If his expectation turns out to be true, he will be able to repay the capitalists and/or landowners who entered into this credit transaction. The entrepreneurial profit is his remuneration for improving the utilization of the factors of production used up, by withdrawing them from lines of production where they fulfilled less urgent demands (and whose owners hence demanded less money in exchange) and employing them in lines of production where they fulfilled a more urgent demand (and hence turned out goods that consumers or other entrepreneurs paid more money for, either because they turned out more useful goods or a larger number of goods than before).
If his expectation turns out to be wrong the capitalists and/or landowners suffer a loss. The remaining money needs to be paid back to them. The factors of production and land were fulfilling more urgent consumer demands or were satisfying a larger number of consumers before the entrepreneur withdrew them from certain lines of production. He will be forced to find new lines of occupation where he is of more use to consumers. The capitalists and/or landowners alike will be impelled to find other entrepreneurs to lend money to and make sure they only contribute to projects where factors of production and land are being put into lines of production where they fulfill more urgent demands than before.
Even if the entrepreneur’s money obtained cover exactly the amount of expenditures for the factors of production obtained, he will still be unable to pay the capitalists the interest they were demanding. They get their initial investment back, but they are not compensated in accordance with their time preference.
- ↑Economic Functions