kirzner

Entrepreneurship: From Opportunity Discovery to Judgment

Chapter three of Nicolai Foss and Peter Klein’s book Organizing Entrepreneurial Judgment: A New Approach to the Firm takes a detailed look at the opportunity discovery view of entrepreneurship put forth by Kirzner (as we discussed in part 2 yesterday) and compares and contrasts it with the views of those in the Austrian School of economics.

Kirzner is an economist within the tradition of Austrian economics and has had perhaps the largest influence on the management literature on entrepreneurship. A popular definition for entrepreneurship research among those in the field is “the scholarly examination of how, by whom and with what effects opportunities to create future goods and services are discovered, evaluated and exploited.” The opportunity as explained by Kirzner has become the unit of analysis for many studying entrepreneurship. Foss and Klein put forth a different approach to entrepreneurship within the Austrian school which they see as superior Kirzner’s and also provide the history of thought regarding the entrepreneur within the school.

The Austrian School of Economics and the Entrepreneur

Carl Menger is considered the founder of the Austrian school of economics. He described the entrepreneur as a coordinating agent who is both a capitalist and a manager. The entrepreneur owns resources and decides how they will be used. Menger emphasized that entrepreneurs bear uncertainty and take purposeful, decisive action according to the knowledge they have. John Bates Clark and Frank A. Fetter are economists who followed in Menger’s approach to economics. Clark believed the entrepreneur must also be the owner of a business. Fetter saw uncertainty-bearing as the key entrepreneurial function. He asserted that an entrepreneur organized and directed production while possessing superior foresight. It is clear that the Austrian school did not start with an emphasis on the entrepreneur as an opportunity discoverer.

While those in the Austrian tradition have always seen the entrepreneur as having a central role in economic affairs, two different strands emerged within the Austrian tradition which led to different conceptions of the entrepreneur. Friedrich von Wieser and F.A. Hayek branched off in emphasizing knowledge, discovery and market process. Wieser saw the entrepreneur as owner, manager, leader, innovator, organizer and speculator. Hayek emphasized that knowledge is dispersed to individuals throughout the economy. He argued that market competition makes the best use of this dispersed knowledge and brings it to light. Influenced by this strand of thought, Kirzner argues that a competitive market is superior because it best generates entrepreneurial discoveries.

Economists Eugen Bohm-Bawerk, Ludwig von Mises, and Murray Rothbard are considered to compose a different branch of thought than Wieser and Hayek. They emphasize monetary calculation and decision-making under uncertainty. Mises emphasized that the entrepreneur has an anticipative understanding of an uncertain future. Rothbard critiqued Kirzner for not emphasizing the role of entrepreneur as uncertainty-bearer. He also questioned Kirzner’s notion that the entrepreneur need not own any resources to perform his function. Rothbard asked, “In what sense can an entrepreneur even make profits if he owns no capital to make profits on?”

Understanding Kirzner’s Concept of Entrepreneurship

Foss and Klein take the time to clarify Kirzner’s position on entrepreneurship. It should be understood that Kirzner is making theoretical abstractions in his explanation of the entrepreneur. Kirzner himself has made much effort to emphasize this. FK show him respect in clarifying this themselves. Kirzner does admit that real-world businessmen who own and allocate resources may be somewhat entrepreneurial.

However, Kirzner makes abstractions to establish that the “pure” entrepreneur is an individual who only performs a discovery function. He discovers new resource uses, new products, new markets and new possibilities for arbitrage. Entrepreneurship is the act of grasping and responding to profit opportunities. The pure entrepreneur is one who owns nothing at all. Kirzner is not arguing that this is how entrepreneurship is manifested in the real world. In fact, Kirzner uses the abstract notion of market equilibrium to define the entrepreneur. Market equilibrium is, in essence, an imaginary construct in which individuals have perfect knowledge, resources are dispersed perfectly according to everyone’s preferences. Therefore profits and losses do not exist in market equilibrium. Kirzner argues that the entrepreneur’s main effect is to push the economy closer to market equilibration. He is an equilibrator.

Kirzner’s approach has been much debated within the Austrian school of economics. The Austrian school is known for taking into account the real causes and effects of human action in the world we live in. They are averse to focusing on theoretical abstractions which draw economics away from the study of real world phenomena. Thus Kirzner’s conception of the entrepreneur is by no means the dominant one among Austrians. In fact, many question whether market equilibrium is meaningful or useful in explaining entrepreneurship. FK argue that Mises did not see the critical market process as a movement towards market equilibrium. Rather, Mises emphasized that the preferences and decisions of consumers eliminate unsuccessful entrepreneurs from the market. Mises emphasizes that the entrepreneur is a resource allocator, not an equilibrator. Good entrepreneurs earn profits while less capable ones earn losses. They attempt to anticipate the future demands of consumers and satisfy them.

Evaluation

Kirzner’s explanation of entrepreneurship should be recognized for what it is; an abstract metaphor to help explain why markets clear. His focus is on the abstract, aggregate effects of acts of alertness. The abstract “entrepreneurial opportunity” is Kirzner’s unit of analysis. He does not take uncertainty into account.

A sound understanding of Kirzner’s entrepreneur seriously challenges whether those studying entrepreneurship in the real world should focus on Kirzner’s conception. Those studying entrepreneurship should seriously consider the alternative explanations presented by the Austrian school; by economists such as Menger, Fetter, Mises and Rothbard. They make human action the unit of analysis, not abstract “opportunities”. Foss and Klein state, “It is the real-world, flesh and blood entrepreneur, who not only bears uncertainty in his judgments about deploying the resources he owns and controls but is also alert, creative, and leader-and not some abstract, hypothetical discoverer- who is the ‘driving force of the market’.” It is very questionable whether Kirzner’s conception helps us understand the real world entrepreneur.

Chapter 4 will give a fuller explanation of the judgment approach to entrepreneurship within the Austrian school which Foss and Klein argue to be the best approach.

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