A human capital approach to entrepreneurial capacity

Entrepreneurial capacity is said to determine the long-run size of the firm. However, it is either a black box or a gift, an exogenous parameter which is beyond economic explanation. This paper formulates the concept as a kind of human capital on the basis of the classical works of Hayek (1945) and Cease (1937, 1960). It then shows that the firm neither expands infinitely, nor shrinks into a negligible entity. Further, the concept is shown to predict that accumulation of physical capital in the economy promotes growth in the average size of firms, as usually observed. Lucas (1978) derives the same prediction, but his reason for it is different.