Saturday, September 24, 2011

Austrian Economics Forum Fall '11 #2--The Entrepreneur

This session's Austrian Economics Forum dealt with Chapter 2, "The Entrepreneur" in Israel Kirzner's book, Competition and Entrepreneurship.  We had a dozen people attend this session, in which there were three Austrian Economists with PhDs.  Additionally there was Dr. Margolis, who is a close fellow traveller, and who we are very happy to have join us each week.  (I wonder if there are many other regular Austrian discussion sessions with such a line up each time.)

Israel M. Kirzner
The opening question centered on whether Kirzner's construction of the "pure entrepreneur" is a useful concept.  While it is obvious that Kirzner is discussing an archetype and that no such purity must exist in the real world, the central points that we were wrestling with was whether the pure entrepreneur acts and the implications derived from our conclusion.  According to Mises, acting is the application of means to achieve ends.  Kirzner's entrepreneur does not use means at all.  Kirzner states that the entrepreneurial "decision was made before the original act of purchase...." (p. 50)  He simply recognizes profit opportunities.  So Kirzner's pure entrepreneur never acts, at least in the Austrian sense.  Is a non-acting entrepreneur a fruitful concept in Austrian Economics?  The discussion group has not reached a conclusion. 

Furthermore, Kirzner argues that the pure entrepreneur receives a return for recognizing the profit opportunity.  As I understand it, Kirzner argues that after all the factor payments are paid out, there is a residual.  From that residual must be subtracted the implicit return to the entrepreneur’s use of his own money and his time, the opportunity costs of these subjective factors.  So the amount that then remains (above the opportunity costs) is the return to the pure entrepreneur.

However, my question is, "How can a non-actor earn a return?"  We speculated that the pure entrepreneur "acts" by conveying information to the resource owner.  Under the Misesian definition, this is clearly a no, but even under the normal usage of "acting" it is a stretch.  Later in the chapter, Kirzner references Mises article, "Profit and Loss."  I found this curious because in it, Mises has sa very different definition of entrepreneur.  Mises states,

"There is a simple rule of thumb to tell entrepreneurs from non-entrepreneurs. The entrepreneurs are those on whom the incidence of losses on the capital employed falls. Amateur-economists may confuse profits with other kinds of intakes. But it is impossible to fail to recognize losses on the capital employed."

A key point is that the entrepreneur acts and opens himself up to potential losses.  Where's loss for Kirzner's Entrepreneur?  Where is the possibility of entrepreneurial error?  How does this error fit into the overall picture?  Furthermore, if we are looking at the structure of the firm, where is the responsibility within the firm?  Mises would say that it is the owner/entrepreneur, but it seems that Kirzner would split those functions.  So would the ultimate responsibility fall on the decision-maker, the resource owner and not the entrepreneur?

So, if the pure entrepreneur does not act, is this a step in the wrong direction?  The Austrians have consistently argued that the entrepreneur is central to coordinating the market.  Is creating this ideal type of a non-acting entrepreneur a direction that Austrians want to take?  I am not convinced that this is a proper course for Austrians.  It is clear that this issue will continue to develop as we progress through the book.  My thoughts are that under the standard definition of action (purposeful behavior), which is typically employed by Austrians, we should reject Kirzner's pure entrepreneur.  However, I might change my mind after we finish the book.

At this point the discussion turned to why Kirzner would employ such an abstract concept.  Our conclusion is that he was trying to draw the greatest possible distinction between his construct of the entrepreneur and Lord Robbins' maximizer (RM).  (While Kirzner uses the RM for comparison, I have been thinking that perhaps we might want to use the Walrasian auctioneer instead.)  It seems that the central reason why he wants to contrast with the RM is because the RM simply reacts and crunches numbers in response to changing conditions.  So here Kirzner is arguing that the entrepreneur is better because he is discovering new conditions about potential futures.  Without this recognition of discoordinations (profit opportunities) then we could at best stumble into superior (coordinating) moves.  The exploitation of the profit opportunities moves the market (unintentionally) toward a more coordinated state.

There was some discussion of moving the economy toward some "Ultimate Equilibrium" but that was quickly rejected.  On the other hand there is a discoordinating aspect of the actions of these owner/entrepreneurs.  Schumpeter's contribution to entrepreneurship theory is that the entrepreneur is essentially a destroyer of old methods of production and a creator of new equilibria.  Kirzner downplays this aspect and focuses on the coordinating role of the entrepreneur.  Contrasting with Schumpeter, Kirzner sees the entrepreneur as a responder to and "not as a source of innovative ideas."  (p. 74)  The entrepreneur must be alert to opportunities that already exist.  Cordato pointed out that in an open universe, inventing is equilibrating (in a sense), but the actions of the entrepreneur are not always coordinating, at least not in the short-run.
A causal reading of Kirzner might lead one to conclude that he rejects the creative feature of entrepreneurship, but the word Kirzner uses is "emphasis."  He states, "By contrast my own treatment of the entrepreneur emphasizes the equilibrating aspects of his role." [italics added]  I do not see Kirzner as completely rejecting Schumpeter’s creative-destroyer, but simply shifting the focus to the entrepreneur’s coordinating role.

We then shifted gears to address Mises’ claim that “every actor is always an entrepreneur.” (Human Action (1949), p. 253.)  The reasoning is this, if all ends are subjectively determined and since these ends are necessarily projections of potential future states, then there is uncertainty surrounding the means to employ to achieve these ends.  With the uncertainty, we move away from the perfect knowledge of the RM in the state of (so-called) “perfect competition,” and we move into the world of the Austrians.  With this uncertainty, there is an opportunity for pure gain to come from pure entrepreneurial insight.

Margolis posed the question, "Have we lost the separation with the Robbinsian maximizer if all are entrepreneurial?"  I would have to say yes.  There are no given payoffs and production functions without Kirznerian entrepreneur.  I do not recall who said it, but a wonderful insight was made, “Means are not given, they must be perceived.”  Additionally, there is a separation between acting and reacting.  The Robbinsian maximizer is clearly reacting.  There are outside stimuli and the maximizer adjusts.  "Robbinsian decision-making ... see ends and means as data."  (p. 78 fn 34)  The Austrian conception of the owner/entrepreneur is that he enters the market with knowledge and acts upon profit opportunities.  The unintended consequence is the addition of information into the market and a higher degree of coordination. 

So now we have it straight.  The Kirznerian pure entrepreneur stands in sharp contrast to the Robbinsian Maximizer in that the RM merely reacts to outside stimuli.  The Kirznerian entrepreneur differs with the Schumpeterian entrepreneur in that the primary role of the Kirznerian version is coordinating while the other discoordinates.  The Kirznerian pure entrepreneur differs from the Misesian concept because the pure entrepreneur does not act and only perceives.  Right?

And then we come to page 84 where Kirzner says, "It is the deliberate exploitation of perceived opportunities which is essential to the entrepreneurial role."  Does this radically change Kirzner’s pure entrepreneur?  Now he acts.  That implies using means, which implies resources.  Was the pure entrepreneur a long side step?  I argued that this statement should just be thrown out.  Cordato argued that the payoff is the distinction between Robbinsian maximizer and the pure entrepreneur.  However, I think Palasek got it right.  She pointed out that he is using “entrepreneurial role” here and not concept of the pure entrepreneur.  The use of the word role does indicate that he has taken a step away from his pure entrepreneur.  I am not sure exactly where this leaves us.  Clearly, reading Kirzner is difficult.  I am hoping that more will develop along these lines in the later chapters.

I had one further observation.  The definition of the entrepreneur from the French is from entreprendre, to undertake, one who undertakes a project, or an “undertaker.”  This definition of the entrepreneur follows in the tradition of Cantillon, Turgot, Say, Menger and the Austrian School.  The mainstream tradition of Smith, Ricardo, Mill, Walras, and Marshall has tended to neglect the entrepreneur and his function.  While Kirzner is clearly emphasizing the role of entrepreneur, his definition of the pure (non-acting) entrepreneur does not fit within older the Austrian tradition.  He has broken new ground.  For this reason alone, Kirzner is worth reading.


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