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Menger and Entrepreneurship

Israel M. Kirzner

• New York University

What contribution to entrepreneurial theory can we find in the writings of the founder of the Austrian School of economics, Carl Menger? Frank Knight claimed that Menger, his contemporaries, and even his successors in the Austrian School were of little help to later economists in the subject of entrepreneurship. Eric Streissler, on the other hand, contends that no less an entrepreneurial theorist than that of Joseph Schumpeter built his own theory of innovative entrepreneurship on Mengerian foundations. W. Jaffe, too, stresses the entrepreneurial element in Menger's work. Schumpeter, however, dismissed Menger's work on entrepreneurship as practically non-existant. Streissler's focus on Menger's preoccupation with the information problem in economics, nevertheless, may give the investigator a promising lead with which to discover Menger's own position of entrepreneurship, if one is to be found.

Menger, it is true, specifically mentions entrepreneurship only briefly in his Grundsatze. Perhaps, however, it is possible to find an implicit understanding of the entrepreneurial function. If so, it will depend on how he treats the following: knowledge, error, and uncertainty.

Knowledge is the constant theme found throughout the Grundsatze—especially knowledge in relation to the activity of economizing. The individual must first perceive that his needs are greater than his means. Second, he must gain specific knowledge about his given circumstances and knowledge of the means to improve his condition.

Knowledge is of course necessary to overcome ignorance, and the market process can be seen as a vehicle for the modification of error over time. W. Jaffe argues that Menger does see the market as such and that therefore Menger's perception of the market was an entrepreneurial one. In reading Chapter Five of the Grundsatze, however, one finds that Menger has completely eliminated error from any role in the determination of prices. The truth is that Menger's price theory was entirely an equilibrium theory in which error and the consequent entrepreneurially driven learning processes were considered an abnormality.

How is this apparent inconsistency to be cleared up? By understanding Menger's differentiation between “economic prices” and “uneconomic prices” one can understand how Menger could place such an emphasis on information, change, and knowledge and at the same time set forth a static equilibrium notion of price determination. For Menger economic prices are those that would obtain under conditions of complete knowledge on the part of all relevant market participants. Uneconomic prices are those found in the real world. It is these prices which ignite the spontaneous development of market institutions which improve the environment within which prices are set and which, over time, modify the “uneconomic” character of these very same prices.

Although Menger posits a theory which is infused with the dynamics of the real world, he never specifically points to the precise element in the process that tends to push the system from uneconomic or distorted prices to economic prices or to prices which correctly reflect the underlying valuations of market participants. As such he never did develop an entrepreneurial theory. Nonetheless, economists as diverse as Schumpeter and Mises working at least in part on the foundation laid by Menger did see the central role of the entrepreneur and did much to develop and clarify the theory of the entrepreneurial market process.