Purposeful Human Action and Entrepreneurship: Kirzner’s Misesian Contribution

     

Ever since I heard Israel Kirzner give a talk in the early 1990s at the université d’été seminar in Aix-en-Provence, France, I became convinced that he had a lot more to say about economics than many economists I knew of then. Along with Murray Rothbard, he is clearly the major figure in the so-called revival of Austrian economics of the last 40 years.

It’s hard for me to disagree with Pete Boettke’s view, but — perhaps by way of clarifying or even challenging Kirzner’s thought — I want to explore one important aspect of Pete’s paper: the notion of purpose and, I will add, its relation to the entrepreneurial function. My contention is that it is only with the entrepreneurial function (and particularly with Kirzner’s view of it) that one may speak of “purposeful human action.”

Pete explains that the essence of human action rests on the notion of purpose. First, this is what makes economics unique as a human science. Human beings have purposes, which are things matter doesn’t have, and this has implications for the respective studies of these objects. Second, and as Pete explains, “We understand the purposeful behavior of ‘the other’ because we ourselves are human.”

The proposition that human action rests fundamentally on the notion of purpose is unique, in the modern era of economic science, to Austrian economics. Indeed, the elimination of anthropomorphism in 19th-century science led to a view of economics as populated by human actors without purpose. The stress put on the economizing principle by scholars such as W. S. Jevons, F. Edgeworth, M. Pantaleoni, and L. Robbins brought forward the “mechanics of utility and self-interest” and the “economic calculus” as the foundations of human action. Purpose and other “metaphysical considerations” (to use Schumpeter’s words) became irrelevant in a science that came to focus on functional relationships and not on causal ones.

When Kirzner wrote in the 1960s, he was (as far as I can tell) very much aware of two issues.[5] First, one of the main propositions of classical economics is that the social world follows certain laws that economics has discovered, and if one wants to have social harmony rather than chaos, one should understand the lessons of political economy. In other words, economics, in its analysis of the free-market system, explains social harmony. Second, classical economics established four fundamental factors of production: land, labor, capital, and entrepreneurship. Several (mostly French and German) authors saw this last “factor” as the driving force of change.[6] With a few exceptions, the last factor disappeared, along with purposeful action, from economic theory sometime around the beginning of the 20th century.

Hence classical economics gave us, among other things, two fundamental propositions about harmony and change. In modern economics (after 1920), the first proposition came to be translated (mostly) as the idea of equilibrium as a description of the world. The second proposition dropped out of the picture. Because Kirzner was highly cognizant of these two issues, he realized that economics could not do without the second lesson of classical economics, regarding change. He also understood that the two propositions are inextricably linked in the sense that one cannot explain harmony without entrepreneurial change and, similarly, one cannot explain entrepreneurial change without understanding its contribution to harmony.

These two realizations constituted almost a research program for Kirzner, with Competition and Entrepreneurship fulfilling the first part of the program by explaining how harmony emerges under the constant pull of entrepreneurial action.[7] His later works look deeper into the second part of his program, i.e., the impact of entrepreneurial change, innovation, and the like on the social order.

This view of Kirzner’s research program parallels his theory of human action. He explains human action as the result of a dual process: the economic principle on the one hand (homo economicus or Robbinsian maximizing) and what Kirzner calls the “entrepreneurial element” on the other. These two components, taken together, define human action, but were not explicitly mentioned in the work of Mises (although they form, according to Kirzner, the notion of homo agens, as found in Mises). The important point here is the parallel with classical economics: the notion of harmony (or equilibrium) stems from the Robbinsian side of human action, whereas the notion of change originates from the entrepreneurial element.[8]

Why does Kirzner insist on defining human action this way? It could be said that Kirzner misconstrues the view of homo agens in Mises’s work: Mises really only talks about (what Kirzner labels) the entrepreneurial element (there is no Robbinsian maximizer involved). Not so. In Competition and Entrepreneurship,[9] Kirzner stipulates two situations in which market participants are either pure Robbinsian economizers or pure entrepreneurs. Through this method of contrast, Kirzner shows that both functions are necessary in the market if we are to explain how harmony comes about (i.e., resource allocation is not automatic). Mises takes the same view, except he refers to the imaginary construct of the pure entrepreneur that he establishes using the stationary economy as a foil.[10]

This brings us back to the idea of purpose in human action. Kirzner sees the entrepreneurial element in human action as discovering a new framework of action (i.e., a new ends-means framework in Robbinsian terminology). My proposition is that the purposeful aspect of human action can only be defined by the entrepreneurial element of homo agens. In other words, a Robbinsian maximizer does not act purposefully. Here is why: While Kirzner’s use of Robbins’s terminology may have been misleading, it is not by chance that Robbins talks of “ends” and “means” in his definition of economics, and not of “purpose.” True, it is in part because Robbins emphasizes the scarcity of means. But the real reason is that man seen as a machine cannot establish purposes; he can only execute a plan according to his (given) preferences. The Robbinsian maximizer is not a purpose-oriented being when he or she acts.

Some philosophers (mostly in the natural-law tradition) have insisted on this very point. According to Francis Slade, for instance, “end” does not mean “purpose.”[11] Agents and actors have purposes and motives, whereas ends can be characteristic of all kinds of things (e.g., the end of a knife is in its cutting). Agents have purposes (or intentions) by which they determine themselves to certain actions. Purposes are, to use Aristotelian-Thomist language, the efficient cause of action. Ends are not, for they exist independently of our willing them and irrespective of our actions and decisions.

All this matters because without the resurrection of the entrepreneurial function in human action the way Kirzner establishes it in Competition and Entrepreneurship, there would be no genuine human action in economics. Kirzner (following Mises) brings purpose back into economic science by resurrecting the entrepreneurial function. And it is only through the entrepreneurial function that the notion of purpose can be the defining element of human action. Thus, a more perfect Misesian approach could be for Kirzner to define homo agens as a combination of the optimizer (defined as man acting with an already established purpose) and the entrepreneurial element (defined as man capable of defining a new purpose).

While it has been criticized, Kirzner’s view of human action (incorporating both optimization and the entrepreneurial element) puts purpose back at the center of praxis. Kirzner’s understanding also parallels the two propositions of classical economics (harmony and change). Economics could neither explain harmony nor change without this purpose-centered view of action. Kirzner builds on the Misesian framework by specifying precisely what Mises meant by human action. I do not see any contradiction or incompatibility between Mises’s and Kirzner’s works on that point. On the contrary, Kirzner’s theory of human action is fully Misesian and helps explain the two propositions of classical economics, namely, that the free market is an orderly system that experiences constant change.

[5.] Here Kirzner’s Ph.D. dissertation, The Economic Point of View, The Collected Works of Israel M. Kirzner, vol. 1, ed. Peter J. Boettke and Frederic Sautet (Indianapolis, IN: Liberty Fund, 2009 [1960]), is a key work to understanding his intellectual path. Online version from 1976 </titles/304>.

[6.] For instance, J-B. Say states that “it is the entrepreneur who decides to create independently, to his benefit and bearing his own risks, a given product.” See the French edition of J-B. Say’s Traité d’économie politique (1841, book II, chapter V, p. 79), republished in 1966 by Otto Zeller.

[7.]  Competition and Entrepreneurship, The Collected Works of Israel M. Kirzner, vol. 4, ed. Peter J. Boettke and Frederic Sautet  (Indianapolis, IN: Liberty Fund, 2013 [1973]).

[8.] As Kirzner puts it: “Human action in its totality is made up of an entrepreneurial element (to which is attributable the decision maker’s awareness of the ends-means framework within which he is free to operate), and an economizing element (to which we attribute the efficiency, with respect to the perceived ends-means framework, of the decision taken)” (pp. 197-98). “Producer, Entrepreneur, and the Right to Property,” in Israel M. Kirzner, Perception, Opportunity, and Profit: Studies in the Theory of Entrepreneurship (Chicago: University of Chicago Press, 1979).

[9.] See chapter 2, especially the sections “The Entrepreneur in the Market,” and “The Producer as Entrepreneur.”

[10.] See Mises’s Human Action, ch. XIV, sec. 7 (Auburn, AL: Ludwig von Mises Institute, 1998). Liberty Fund's online version: </titles/1894#Mises_3843-02_105>.

[11.] See Slade’s “Ends and Purposes,” in Final Causality in Nature and Human Affairs, Richard Hassing (ed.), Washington, D.C.: Catholic University of America Press, 1997.