Мамырбаева Элима (3 МЭО)
Entrepreneurship in Israel Kirzner’s Theory
Elima Mamyrbaeva1
March 2012
Abstract
The purpose of this essay is to show the procedure that Israel Kirzner uses to
derive his definition of the entrepreneur. In order to better understand his theory, I
posit Kirzner’s notion of an entrepreneur in the Austrian tradition emphasizing that
this concept opens up different perspectives as compared to the neoclassical
theoretical framework. Perhaps most importantly, Kirzner has made the Austrian
School intelligible for non-Austrians. By bridging the chasm between Austrian and
mainstream thinking, the crucial role of entrepreneurship and the individual
entrepreneur has become visible to a much broader audience.
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Introduction
“The market is a process” – the sentence, with which Ludwig von Mises, an
outstanding Austrian economist who had a significant influence on the modern
Libertarian movement and the "Austrian School" of economic thought, began his
lecture, and which left the lasting impression on Israel M. Kirzner and inspired him in his
works. He wrote later, that all his subsequent training and research in economics, both
Elima Mamyrbaeva – student in her 3rd year at MGIMO-University (Moscow State Institute of
International Relations).
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before and after obtaining his doctorate under Mises, has consisted in learning to
appreciate what it was that Mises meant by this assertion.
As a result, we have an extensive legacy, consisting of Kizner’s research, which
enrich our understanding of the theory of the competitive process, the role of the
entrepreneur in bringing about market coordination and innovation, the nature of capital
and interest, the dangers resulting from the regulated economy, and the importance of
individual freedom for the open-ended creativity that enhances the general human
condition.
Mises, as Kirzner explained, viewed the market as a “process.” But what kind of a
process is it? Kirzner has emphasized that it is a process of entrepreneurial alertness.
The satisfaction of consumer demand may be the purpose behind production, but there
must be some who, in the social system of division of labor, have the specialized role of
anticipating what it is that consumers will desire in the future and then hiring, directing,
and coordinating the use of the means of production towards that end.
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Alertness. The Role of the Entrepreneur
What guides entrepreneurs in this task is the anticipation of profits — revenues in
excess of the expenses to bring goods to market — and the avoidance of losses. But
one of the insights that Kirzner has highlighted is that while entrepreneurship is crucial
to the workings of the market, it cannot be bought and sold like other goods or
resources for a certain price. The reason is that the essence of entrepreneurial activity
is “alertness,” an attention to scanning the market horizon for opportunities and
innovations that can result in making better goods, or new goods, or bringing lessexpensively manufactured goods to the market place.
Kirzner's idea of entrepreneurship is based on what he calls spontaneous
learning2. He calls the state of mind that enables spontaneous learning to occur
alertness. Just as learning is spontaneous, so is alertness. It cannot be produced or
improved upon. This state of mind is part of human nature, by definition. Individuals
2
Kirzner, Israel. Perception, Opportunity, and Profit. Chicago: University of Chicago Press, 1979. P. 146.
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differ in their alertness. If two individuals have identical boat-building experiences, one
may learn while the other does not3.
But to be “alert” is to notice something that others have neither seen nor thought of
before. Alertness means thinking and seeing “outside the box” of the known set of
opportunities and routine ways of doing things. It is the process of discovering new
knowledge and possibilities that no one has either previously imagined or noticed.
In Israel Kirzner’s view, one of the most important reasons for open, competitive
markets is for individuals to have the profit incentives and the chance to benefit from
alertness. The free-market institutional order creates the conditions under which people
will be more likely to have the motivation to be alert, even though we can never know
ahead of time what their creative discoveries will generate and unearth.
The coordination of the actions of millions of specialized producers and consumers
around the global market is brought about through the price system. Any change in
someone’s willingness or ability to supply or demand any product anywhere in the
market is registered through a change in the price of the good, service, or resource in
question. Furthermore, such changes are occurring all the time in a world of unceasing
change. The resulting changes in market prices due to shifts in supply and demand
conditions are constantly creating new profit or loss situations.
A central task of the entrepreneur, Kirzner has argued, is to be alert to these shifts
in market conditions and indeed to anticipate them as best he can.
His role in the market economy is to bring about modifications and transformations
in what goods are produced, where they are produced, and with which methods of
production, so that production activities are continuously tending to reflect the actual
patterns of consumer demand.
Through his alertness to profits to be gained and losses to be avoided, the
entrepreneur ensures the adjustments to change that are required for a process of
continual coordination of market activities, upon which both the existing and an
improving standard of living are dependent.
3
3
Profit and entrepreneurship. Equilibrium
Kirzner, Israel. Perception, Opportunity, and Profit. Chicago: University of Chicago Press, 1979. P. 170
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Profits, therefore, are the reward for an entrepreneur’s successful alertness to
changing, discovered, and created opportunities in the market that result in the
production, marketing, and selling of those products most highly and urgently
demanded by the consuming public as expressed in their willingness to pay prices for
them in excess of their costs of production.
On the other hand, it is the “social function” of competition to create the
opportunities and incentives for entrepreneurs to compete against each other in the
pursuit of those profits, with the tendency for those profits to be competed away in the
attempt to capture consumer business.
Kirzner argued that the possibility of earning profits is desirable because it
pragmatically acts as the incentive mechanism to help bring supply and demand into
balance and to bring productive innovations to market. He has also defended the justice
in any profits earned on the free market. The direction of any production process is
based on a vision and a conception in the mind of the entrepreneur about the likely
shape of market things-to-come. Precisely because it is a discovery process in which
individuals perceive opportunities and possibilities in things and situations that others
have not, the successful earning of profits should be considered to be “just” under the
simple notion of finders-keepers. Central to Kirzner’s reasoning is that every discovery
of a new opportunity is the appropriation of that which had not existed before a human
mind had seen the potential for gain in a particular situation or in the use of some object
or resource in a new and different way. And, thus, the profit earned by bringing such an
opportunity into existence rightly belongs to the discoverer.
The entrepreneurial element in action is the element that makes individuals
capable of coping with (genuine) uncertainty and limited knowledge. This is not to say
that the entrepreneur in one stroke overcomes the limitations implied by subjectivity.
And it is not to say that entrepreneurs cannot be mistaken and ventures fail. But, in
small steps, the actions of entrepreneurs tend to make the market more coordinated.
Kirzner argues that just as the entrepreneurial element in individual decisionmaking leads to a more efficient personal allocation of resources, or coordination of the
individual's plans, so also does entrepreneurship in the market economy (arbitrage) lead
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to economic coordination, or the more efficient allocation of resources in the economy.
Stated differently, he says that entrepreneurship in the market economy initiates a
tendency toward economic equilibrium.
From
a
purely
logical,
or
definitional,
standpoint
Kirzner's
notion
of
entrepreneurship as equilibrating combines three ideas. The first is that subconscious
learning is equilibrating to the isolated actor. The second is that subconscious learning
about arbitrage opportunities is equilibrating in markets. The third is that subconscious
learning would lead to a general equilibrium if there were no changes in the nonentrepreneurial determinants of demand and supply.
First, equilibrium corresponds to greater coordination. Second, he says that we can
actually observe something akin to equilibrium in those societies where the conditions of
the market economy prevail. Specifically, we observe a kind of coordination that is the
result of human action but not of design, a spontaneous order4.
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Kirzner vs. Shumpeter
This entrepreneur who brings the economy towards equilibrium is usually
contrasted to the Schumpeterian entrepreneur who disrupts existing equilibrium5. This
difference is better understood if innovations are introduced. A key characteristic of
Schumpeter’s entrepreneur
is
the boldness
and resolve that enables him or her to
introduce innovations despite social resistance and skepticism. These characteristics do
not appear in the Kirznerian entrepreneur. In fact, Kirzner (1999, p. 13) writes: “If (the
entrepreneur) has not seen that opportunity in so shining a light that it drives him to its
implementation in spite of the jeering skepticism of others, and in spite of the possibility
of its ultimate failure—then he has not really “seen” that opportunity”6.
Here it appears that the characteristics that Schumpeter ascribed to the
entrepreneur are not needed. According to Kirzner, what is essential to the
4
Hayek, F. A. "The Results of Human Action but not of Human Design," chapter 6 in Studies in
Philosophy, Politics, and Economics. Chicago: University of Chicago Press, 1967.
5 Kirzner, Israel M., 1999, “Creativity and/or Alertness: A Reconsideration of the Schumpeterian
Entrepreneur”, Review of Austrian Economics 11(1–2), 5–17.
6 Kirzner, Israel M., 1999, ‘Creativity and/or Alertness: A Reconsideration of the Schumpeterian
Entrepreneur’, Review of Austrian Economics 11(1–2), 5–17. P. 13.
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entrepreneurial act is not boldness, self-confidence
and
vision.
a
In practice,
that would dispel
Kirzner
admits
every trace
that
such
of doubt is
courage
but
a
kind
clear entrepreneurial
of
insight
virtually impossible. Once more,
we must bear in mind the level of abstraction of Kirzner’s analysis and
that
the entrepreneurial element is only present to some degree in real actions. It is
also important to see that Kirzner’s main interest is to pinpoint the essence
of
the economic function of the entrepreneurial act, not to put it in a social context.
Shumpeter
The entrepreneurial act is
one of…
Entrepreneurial acts occur
relatively…
The entrepreneur’s effect on
the market is…
In the larger corporation, the
entrepreneur is most like…
Kirzner
creativity
perceiving opportunity
infrequently
frequently
disruptive,
harmonizing,
disequilibrating
equilibrating
anyone who innovates
marketing
A good illustration of the difference vis-à-vis Schumpeter is found in Kirzner’s
“Creativity and/or Alertness: A Reconsideration of the Schumpeterian Entrepreneur”
(1999). Here, he discusses the introduction of automobiles and the effects of this on
the
horse-carriage industry. His analysis diverges sharply from that of Schumpeter.
According to Kirzner, it is not correct to say that the introduction of automobiles
disrupted an existing equilibrium. On the contrary, the market was at a severe
disequilibrium at the time when automobiles were introduced because too many
resources were allocated to the obsolete horse-carriage industry.
Schumpeter stressed the role of the entrepreneur as an innovator who implements
change in an economy by introducing new goods or new methods of production. In the
Schumpeterian view, the entrepreneur is a disruptive force in an economy. Schumpeter
emphasized the beneficial process of creative destruction, in which the introduction of
new products results in the obsolescence or failure of others. The introduction of the
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compact disc and the corresponding disappearance of the vinyl record is just one of
many examples of creative destruction: cars, electricity, aircraft, and personal
computers are others.
In contrast to Schumpeter’s view, Kirzner focused on entrepreneurship as a
process of discovery. Kirzner’s entrepreneur is a person who discovers previously
unnoticed profit opportunities. The entrepreneur’s discovery initiates a process in which
these newly discovered profit opportunities are then acted on in the marketplace until
market competition eliminates the profit opportunity. Unlike Schumpeter’s disruptive
force, Kirzner’s entrepreneur is an equilibrating force. An example of such an
entrepreneur would be someone in a college town who discovers that a recent increase
in college enrollment has created a profit opportunity in renovating houses and turning
them into rental apartments.
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Government regulation
From this conception of the market process, Kirzner has forcefully warned of the
dangers resulting from government intervention, regulation, and taxation. Such
government infringements on the freedom of the market stifle and close off the
opportunities and incentives for entrepreneurial alertness and discovery, thereby
hindering an effective coordination of many potential peaceful and mutually beneficial
possibilities for gains from trade that any number of people might have happily taken
advantage of.
It also retards or prevents the entrepreneurial experimentation with new and
innovative methods of production that could improve the quality and variety of life, if only
the open, competitive market is left free from the heavy hand of various government
controls and fiscal burdens.
In his analysis of the market process and the dangers inherent in government
regulation, Kirzner has explained that many of the gains from market competition and
the problems arising from government intervention are not always clearly appreciated
because of the type of model of the market used by many economists.
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In the textbook model of “perfect competition,” it is assumed that all market
participants already possess perfect knowledge, that producers all are manufacturing a
product exactly like their rivals in the same market, and that any attempt by a seller to
influence the market price or to differentiate his product from that sold by his
competitors is “proof” of “market failure.” And that any such “failure” can have only one
cure: a wise and well-informed government intervening to “correct” the market.
Kirzner has vehemently argued — as did Mises and Hayek before him — that
government regulators and planners have neither perfect knowledge nor sufficient
wisdom to direct the economic affairs of millions of people. Indeed, it is precisely
because of the limited and imperfect knowledge that we all possess that there is no
institutional alternative to the market economy. The purpose of both price and product
competition in the market is for entrepreneurs to constantly “test the waters” to discover
exactly what it is that consumers want, in what varieties and quantities, and how best to
produce and sell those things at the lowest costs possible.
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The Role of the Policymaker
For
the Austrians in general,
overestimated.
The
purposeful
the
role
individuals
of
the
ruled,
government was
or
hugely
rather should rule, and
centralization was anathema. Many of the institutions that facilitated market processes
were
not really the
creation
of government,
been spontaneously created in the market
they
argued,
but had
and then been monopolized by
the government, most often to the detriment of their functionality.
Kirzner provides a concise summary of his view on government interventions in the
free
market7.
But the most important point
was
made
already in
Kirzner’s
“Competition and Entrepreneurship” (1973) and is that standard welfare economics
views policy as a choice between an ideal, known norm and an existing “imperfect”
(institutional)
arrangement.
The
ideal
norm
is
assumed
to
be known to the
policymaker. Hence, there will be no way for the market to beat a centralized
7
Kirzner, Israel M., 1985. Discovery and the Capitalist Process, The University of Chicago Press:
Chicago and London.
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policymaker. The central planner will always win the theoretical contest. But the ideal
norm, or optimum allocation, is not always known. Indeed, in Kirzner’s writings, it is
imperative that Nirvana is unknown, and not even knowable. The role of the
entrepreneurs is to push the economy in the direction of a possible Nirvana.
If we consider Soviet-style central
planners as entrepreneurs, then the problem
with central planning is that a social planner lacks the computational power to gather
and process all necessary
information. No single actor is capable of this. But the
market works differently, through a process of
of
knowledge
scattered
throughout
the
coordinating
economy
the
and
bits
and
pieces
to “communicate
information”. The largest problem, though, and the one that Kirzner emphasizes, is that
there does not exist an equilibrium to compute. There is information that is
not only unknown to the planner, but that is still unknown to the individual
agents – these are the entrepreneurial opportunities. Therefore, the question is who
is most able to discover these opportunities: a central planner or millions of agents with
entrepreneurial abilities.
There may certainly be innovations in the Soviet Union, Kirzner argues. But he
warns us that we must not commit the fallacy of ”glorifying innovation for
its own because without the market guidance of profit and prices, we cannot know if
innovations are “socially worthwhile”8. In a planned economy agents act, not on market
incentives but on the directives and incentives from higher levels of the hierarchy. In
effect, superior bureaucrats make the entrepreneurial decisions about which
opportunities are important to heed. But what guides their judgment about what to
reward? The answer must be the orders from still higher levels in the bureaucracy.
Besides drastically reducing the number of entrepreneurial decisions,
the
error-
correcting market process is completely circumvented in the socialist hierarchy. There
is nothing per se that contradicts that centralized planners can introduce innovations.
The chief problem is instead to ensure that the innovations are socially beneficial, and if
not to find ways of correcting judgment. Another problem that Kirzner mentions is that
since profit incentives are largely absent in the government sector, the process of
Kirzner, Israel M., 1982, “The Theory of Entrepreneurship in Economic Growth”, in C. A. Kent. David L.
Sexton and K. H. Vesper (eds.), Encyclopedia of Entrepreneurship, Englewood Cliffs. N.J.: Prentice Hall.
P. 275
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discovery of new opportunities will be hampered and this sector will lag behind in
productivity.
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Conclusion
Wherever pure entrepreneurship is possible and no government restrictions to
entry or private aggression exist, such entrepreneurship is necessarily competitive. In
the realm of policy, Kirzner’s theory implies that any and all antitrust regulations in the
name of “protecting competition” are inherently futile and self-defeating, because they
create artificial barriers to entry and interfere with a free-market system in which no
such barriers exist.
These insights about the market process are part of the legacy that Israel Kirzner
leaves us as he steps down from the rigors of daily academic life. But we can still hope
that he will occasionally “drop in” and share with us his thoughts and wisdom on the
benefits and importance of the free market for the preservation of the free society.
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References
Hayek, F. A. (1967) "The Results of Human Action but not of Human Design," chapter 6
in Studies in Philosophy, Politics, and Economics. Chicago: University of Chicago
Press.
Kirzner, Israel M. (1999) “Creativity and/or Alertness: A Reconsideration of the
Schumpeterian Entrepreneur” Review of Austrian Economics 11(1–2), 5–17 P. 13.
Kirzner, Israel M. (1985). “Discovery and the Capitalist Process” The University of
Chicago Press: Chicago and London.
Kirzner, Israel (1979) “Perception, Opportunity, and Profit” Chicago: University of
Chicago Press 146, 170.
10
Kirzner, Israel M. (1982) “The Theory of Entrepreneurship in Economic Growth”, in C. A.
Kent. David L. Sexton and K. H. Vesper (eds.), Encyclopedia of Entrepreneurship,
Englewood Cliffs. N.J.: Prentice Hall. P. 275.
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