Recent evidence of entrepreneurship's significant contribution to economic growth and development challenges the dominance of general equilibrium theory in macroeconomic thought. Microeconomics has long criticized the assumptions of the neoclassical economic model which underlies general equilibrium theory but has not swayed the grasp that general equilibrium theory has over macroeconomic policy formulation. Yet, general equilibrium theory does not incorporate entrepreneurship; on the contrary, the assumptions of this model exclude entrepreneurship as an economic variable.
Now, however, as microeconomic research finds more and more evidence confirming the importance of new business formation and growth, general equilibrium theory remains incapable of adapting to this reality. And, this theory frequently produces policy prescriptions that favor large, established firms over new, small firms.
This paper describes the weaknesses of general equilibrium theory that are relevant to entrepreneurship. Then, after reviewing the growing evidence supporting entrepreneurship, it describes Schumpeter's model of creative destruction and demonstrates how entrepreneurship empirical research supports this model. It concludes by urging economists to desert general equilibrium theory and search for a new macro-theory that incorporates entrepreneurship.
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