Entrepreneurial Discovery: Who Needs It?

     

Pete Boettke provides an engaging and accessible summary of Israel Kirzner’s contributions to the analysis of competition and entrepreneurship. Kirzner’s work has inspired several generations of Austrian economists, and he is an articulate and persuasive spokesperson for the Austrian approach and for free markets and individual liberty. I remember considering New York University for graduate studies in the late 1980s and receiving a phone call from Kirzner himself, encouraging me to join the Ph.D. program directed by him and Mario Rizzo, a program that Pete Boettke would also later join. What a thrill for a budding Austrian economist! I ended up studying elsewhere but enjoyed many conversations and interactions with Kirzner over the years. He is a kind and gracious person as well as a penetrating and original thinker.

I appreciate Pete’s essay but want to challenge him on two points. First, he gives a misleading account of Kirzner’s influence, and second, while Pete effectively summarizes Kirzner’s claims, he doesn’t persuasively argue for them. Is Kirzner’s explanation of the market process correct and, if so, is it useful? 

Pete begins with citation data. I would be as thrilled as anyone to see Kirzner get the Nobel prize, with or without Baumol (not least because it would recognize the entrepreneurship field, my main research area!). But I can’t imagine it happening, for the simple reason that Kirzner’s influence in economics is quite small. To be sure, Kirzner’s stature as the most important living Austrian economist is beyond dispute. However, as Per Bylund and I have shown elsewhere (Klein and Bylund, 2014), the majority of Kirzner’s many citations are in management and entrepreneurship journals, not economics journals.

In the academic entrepreneurship literature, Kirzner is considered a key figure in entrepreneurship theory, along with Knight and Schumpeter. Kirzner’s understanding of entrepreneurship as alertness or opportunity discovery, as popularized by writers such as Scott Shane (Shane and Venkataraman, 2000; Shane, 2003), is one of the most influential ideas in the field. (Lately the opportunity construct has been under fire from a variety of perspectives; see Foss and Klein, 2015, 2017.) But I cannot discern any influence of Kirzner’s understanding of the entrepreneurial process on the mainstream literature in microeconomic theory, industrial organization, welfare economics, regulation, or innovation. These literatures are still dominated by general and partial equilibrium modeling, the use of perfect competition as a welfare benchmark, and so on. To be sure, since Kirzner’s Competition and Entrepreneurship was published in 1973, these fields have paid much greater attention to issues of information and incentives, transaction costs, property rights, learning, competitive dynamics, and so on. But these influences come from Chicago/UCLA property-rights economics, transaction-cost economics, information economics, and, most of all, game theory, not from Austrian economics, Kirznerian or otherwise.

This is unfortunate because, as Bylund and I note, Kirzner understood his work—as did his contemporaries such as Henry Hazlitt and Murray Rothbard—as a contribution to price theory, not entrepreneurship theory. But price theory goes on, to paraphrase Tolkien’s Gandalf, much as it has this past age, scarcely aware of the existence of Kirznerian microeconomics. Indeed, Austrian insights remain mostly absent from the elite journals, the NBER working-paper series, and the top academic departments. The discovery-process view has not influenced the mainstream understanding of competition or industrial structure.

What about Kirzner’s influence on Austrians? Here I want to suggest that the impact of Kirzner’s writings may be more rhetorical than substantive. Certainly, terms like “competitive discovery process” (not to mention “hitherto”) appear early and often in the contemporary Austrian literature. But recall that Coase (1972) once described his own work as “much cited, little used.” What exactly does Kirzner’s approach accomplish? Is discovery more than a mantra?

I once referred to Kirznerian microeconomics as “Walrasian price theory with a twist” (Klein, 2017), and that was perhaps too glib. Yet there’s an important sense in which Kirzner, and Boettke, start with what Pete describes as Fisher’s challenge: “Franklin Fisher pointed out in his very important book The Disequilibrium Foundations of Equilibrium Economics (1983) that unless we have good reasons to believe in the systemic tendency toward equilibrium we have no justification at all in upholding the welfare properties of equilibrium economics. In other words, without the sort of explanation that Kirzner provides the entire enterprise of neoclassical equilibrium is little more than a leap of faith” (Boettke, 2005).

In this view, to do economics—price theory, industrial organization, the theory of the firm, labor economics, international trade, financial markets, and perhaps even monetary and business-cycle theory—we must start with some version of neoclassical equilibrium theory. Otherwise, how do we know that Paris gets fed? Austrians reject Marshall, Walras, and Arrow-Debreu, so they need an alternative justification for what Boettke calls the invisible-hand postulate. Enter Kirznerian discovery, which asserts that because of entrepreneurial alertness, markets are “close enough” to their (neoclassical) equilibrium states that we can do neoclassical economics, along with all its desirable welfare properties, without worrying about the rest. Indeed, I would claim that this is exactly what most modern Austrian economists do. They talk the talk about process and alertness and knowledge and so on, but when it comes time to do applied work, they mostly rely on conventional, neoclassical price theory (albeit of the Chicago/UCLA variety rather than cutting-edge formal theory).

But what if we don’t need neoclassical equilibrium as an analytical device or welfare benchmark? What if there is another reading of Menger and his followers in which the tendency toward equilibrium plays a minor role? Here I have been influenced by Joe Salerno, who has argued (e.g., Salerno 1993, 1999) that there is an alternative Austrian tradition in which market coordination takes place continually using ordinary day-to-day prices that obtain in real markets, in what Mises calls the “plain state of rest” (see Klein, 2008a, and Foss and Klein, 2010). In this view, the “market process” is not the convergence to equilibrium, via the discovery of profit opportunities, but the selection mechanism in which unsuccessful entrepreneurs—those who systematically overbid for factors of production, compared to the eventual consumer demands—are eliminated from the market. This is the process described by Mises in his important but overlooked essay “Profit and Loss” (Mises, 1951).

Kirzner says little about this kind of market process because in Kirzner’s system, there are no losses, only profits—the result of successful discovery—and missed profit opportunities. Interestingly, while Kirzner positions his work as an extension of Mises’s important contributions, there is very little about alertness or discovery in Mises and a lot about uncertainty—a concept that plays almost no role in Kirzner’s oevre.[4] Mises describes entrepreneurship not as seeing something that is already there, that others fail to see, but as peering into an uncertain future. “The term entrepreneur as used by [economic] theory means: acting man exclusively seen from the aspect of the uncertainty inherent in every action” (Mises, 1949: 254). In the broad sense, all human action is entrepreneurial, because outside imaginary constructs like Mises’s “evenly rotating economy,” we never know for certain if our efforts will bring about the ends desired. In his analysis of the market economy, Mises focuses on a narrower type of commercial profit-seeking entrepreneurship, namely, the deployment of heterogeneous capital resources under uncertainty (Foss and Klein, 2012). As Ludwig Lachmann (1956: 16), another great exponent of the Mengerian tradition, put it: “We are living in a world of unexpected change; hence capital combinations … will be ever changing, will be dissolved and reformed. In this activity, we find the real function of the entrepreneur.”

If market coordination is the process of entrepreneurial experimentation with capital combinations, typically in the form of business venturing, and competitive selection pressures are strong, then we can posit a long-run tendency toward a more “rational” allocation of resources, without strong assumptions about knowledge and learning, and without any reference to alertness or discovery. Kirzner (1999) recognizes the problem in one of his (to me) most difficult essays, where he tries to reconcile Mises’s view that consumer sovereignty requires only plain-state-of-rest prices with Kirzner’s own view that we cannot justify the welfare properties of markets without believing in a systematic tendency toward long-run equilibrium. But what if we don’t need the latter belief? In my reading of Mises, the adjustment processes by which factors are reallocated to more urgent needs, forecasting errors are reduced, and so on, take place in analytical time, not in calendar time. Consumer sovereignty (Mises’s version of “optimality”) requires only private property, unhampered markets, and a monetary system that permits economic calculation. In other words, Kirzner may be offering a solution to the wrong problem.

Even so, is the solution correct? Pete articulates Kirzner’s position clearly, but doesn’t really defend it; discovery is asserted, not explained. Foss and Klein (2010) discuss this and a number of additional problems with Kirzner’s system (e.g., the confusing and contradictory notion of the “pure entrepreneur” and the tenuous connection between discovery and institutions). In my own work I have defended an alternative understanding of entrepreneurship, which Nicolai Foss and I call the judgment-based view (Klein, 2008; Foss and Klein, 2012, 2015). This view builds on Mises, Knight, Lachmann, and others to articulate a vision of entrepreneurship as judgmental decision-making under uncertainty which, along with competitive selection processes ex post, is sufficient to explain the key phenomena of interest to entrepreneurship research. Discovery makes sense only ex post (if entrepreneurial action is successful). As such, it is at best redundant, at worst misleading, because it implies (to researchers, practitioners, and students) that entrepreneurship is somehow about finding things that already exist (which is easy), rather than judging an uncertain future (which is hard).

To sum up: I continue to find Kirzner’s discovery metaphor intriguing, but have become increasingly convinced that discovery is not the most accurate or useful way to understand markets, prices, and competition (Klein, 2017). I was hoping that Pete’s essay would persuade me to give Kirzner’s model another chance, but so far I haven’t seen anything to change my mind.

[4.] The idea of discovery or alertness appears in Friedrich von Wieser’s treatment of the entrepreneur, and of course in Hayek’s famous idea of competition as a “discovery procedure” (Foss and Klein, 2010). Mises (1949:255) briefly mentions the idea of entrepreneurs as “those who are especially eager to profit from adjusting production to the expected changes in conditions, those who have more initiative, more venturesomeness, and a quicker eye than the crowd, the pushing and promoting pioneers of economic improvement.” But here is referring not to the economic function of the entrepreneur, but the historically contingent ideal-type concept of the “promoter.”