Austrian Economics Forum Spring '12 #4--Kirzner & Cwik

For our fourth meeting, it was decided that we would discuss the paper that I presented at the Austrian Scholars' Conference in Auburn.  While I love to talk about myself, I decided to include a paper by Kirzner as well. 

The Kirzner paper is "The alert and creative entrepreneur: a clarification."  Basically, this is Kirzner responding to supporters and critics of Capitalism and Entrepreneurship, and then telling them that they are all wrong.

Kizner says that his work is not about how to become a successful entrepreneur.  Rather his work focuses on how the market process is set in motion be entrepreneurial decisions.

The interesting points he puts forward is an almost rewritting of his stance on Schumpeter.  He says that everyone knows of Schumpeter's creative-destroyer and so he did not want to dwell on that aspect of entrepreneurship.  He wanted to show how entrepreneurship coordinates the economy.

He then argues that many misinterpreted his writings to say that the entrepreneur was a passive noticer of opportunities.  He says that a false tension was created between the Schumpeterian "bold, disruptive, innovators or [the] passively alert, harmony-restoring responders to changes that have already occurred."  He then states,

[T]here must be scope for both a creative ("Schumpeterian") entrepreneur (one who generates pure profit) and a "passive," alert ("Kirznerian") entrepreneur (one who snuffs out given profit opportunities by promptly exploiting them.) p. 149 (italics in the original)

Cordato argued that his own work tends to connect the two positions.  He argued that we live in an "open-ended universe."  He means that there is no such thing as a final equilibrium to strive for.  In fact, as new information is added, the equilibrium point changes. 

It was based upon this point that we decided that the next week would center on Cordato's book, Efficiency and Externalities in an Open-Ended Universe.  And so we tabled further discussion on this point for the next week.

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Then the discussion turned to my paper, "Greed in Public and Private Institutions."

My paper, as is too often the case, was based upon frustration.  There is a general attitude that anything that happens in the private sector is due to greed, but when we switch to the nonprofit sector, motives are now made of pure light.  Indeed!

Of course people in every walk of life are greedy.  (As an aside, economists throw out the word "greed" because it cannot be precisely defined.  A typical definition of greed is the wanting of something too much.  However, what is "too much"?  Who decides?  As a result, economists use levels of self-interest.)  Self-interest is omnipresent and it propels Adam Smith's butcher, brewer and baker to serve others.  On the other hand, we have a separation of self-interest and the interest(s) of the overall organization.  It is a question of aligning incentives.  In other words, we are examining a principal-agent problem.  What if Bernie Madoff, Ken Lay or other suitable villain was in charge of the State Department or the US Treasury?  Would we even know what they would be up to?

My paper suggests that two questions arise: Can the institution efficiently allocate resources to satisfy the most intense wants and desires of consumers?  And can the principal-agent problem be overcome to ensure that the leadership will carry out its intended purpose or will the leadership use the entity as a means to a selfish (greedy) end?

In my paper, I looked at three institutional settings: for-profit companies, bureaucracies and nonprofits.  I conclude that the for-profit sector can answer both of the questions.  The bureaucracies cannot calculate efficiency, but it does issue rules, orders and regulations to control and guide the behavior of beaucrats.  It is in this way that bureaucracies have a chance of overcoming the principal-agent problem.  The nonprofit sector, on the other hand, is incapable of answering either question.

Overall, the discussion was friendly and supportive.  During the course of the discussion, Cordato asked a good question, "When it comes to bureaucracies, who are the principals?"  I did not have a ready answer for him.  When I wrote the paper, I had Mises' Bureaucracy in the back of my mind.  In it, he uses the model of a king that basically is in charge issuing orders.  And so in my mind, the king was the principal and the bureaucrat was the agent.  How that translates into a representative government is much more complex.  Although, the point that there is a potential solution remains.

Additionally, a student suggested that when it comes to the nonprofit organizations, we can split them into two groups.  The first group is primarily donation driven, while the second is endowment supported.  The first group "has its feet to the fire."  They must be very aware of what the donors expect, otherwise the funding disappears.  The second group is insulated from today's donors because an endowment has been built up.  (For example, think of colleges and universities that have large endowments.)  They are able to upset today's donors because they have the resources in place for tomorrow.  Of course, such an institution cannot upset significant donors forever, but they have a lot more room to be independent.  This insight certainly adds to the discussion that I make in separating the true-believers from the careerists.

Austrian Economics Forum Fall '11 #5--Chapters 5 & 6

I know that this should have been written up earlier, but life intervened.  I also think that I have been dragging my feet on this entry because I was not particularly impressed with the conclusion of Kirzner's book Competition and Entrepreneurship. 

Is it heresy to say that I did not think that his book was all that great?  Of course Cordato is right when he says that the book needs to be looked at in the context of the time it was written.  However, why hasn't Kirzner released a second edition?  There have been several objections raised about Kirzner's book, so why hasn't he written the second edition to clear up some of the misunderstandings?  I would find it interesting to know if anyone has ever asked him about this.  Anyway to the book...

Chapter Five is an odd chapter.  Eleven pages into it, he says that what you just read is prelude and that we can finally get to his point and the real purpose of the chapter.  Kirzner states:

"I will show that because market phenomena frequently represent the outcomes of long chains of decisions (each one a prerequisite for the later decisions), a market process which is seen as competitive from one point of view may turn out to be monopolistic when evaluated from a different vantage point.  This highly important insight is the real purpose of this chapter, and the discussions thus far are to be viewed as introductory."  p. 198.

Then why did I just bother to read the first eleven pages?  Why not just get to the point?  One of the frustrating things about reading Kirzner, at least for me, is that he is so verbose!  Can we not write a sentence without all the hand-waving and qualifications?  Perhaps this is a product of the time he was writing.  Perhaps it is written this way because this was written in a time where these ideas were not just going against the grain, they were moving in the completely opposite direction.  Okay fine, I'll accept this argument, but still it makes the book exhausting to read.

Okay the ranting is over.

The point that he does (eventually) make is a good one.  We should reject the standard usage of Long- and Short-Runs.  Instead, we should focus on decision points.  At each decision point there is a weighing of options and opportunity costs.  The "Long-Run" then becomes a whole stream of decision points.  It occurs "earlier" in a production process.  The "Short-Run" is a decision point "later" in the production process.  Of course, the terms "earlier" and "later" are problematic.  If we are looking at a production process that is a point-input and point-output, then we can make that distinction.  If the production process is a closed, one-time, system, then we can easily see "earlier" and "later."  Unfortunately, most production processes are not like this.  Most have continuous input and continuous output production periods filled with recursive loops. 

Nevertheless, this is a step in the right direction.  When we start to focus on the nature of the decisions, then instead of talking about Long- and Short- production runs, we can look at "Decision Horizons."  A decision horizon can either be long or short.  The point is that it is the entrepreneur (and the rest of the market indirectly) who is determining the time horizon.  The time horizon is then only useful within the context of the decision.  The result is that we can basically jettison the standard terminology and focus on the contexts without all the misleading verbiage.

Chapter Six's main contribution is to drive home the point that best way to judge the "efficiency" of an economic system is by how well it brings together and incorporates information into active plans and then how well it reacts and adjusts to changes as new information is revealed.  Thus, Kirzner makes the point that the absence of coordination is "inefficiency." (See page 216.)  Perfect Knowledge assumes away this problem.  Thus Kirzner is adopting and extending Hayek's argument in "The Use of Knowledge in Society." 

So when we are to examine the welfare implications of a policy, we need not create some fanciful social utility criterion.  Instead, we look to how well information is absorbed and acted upon.  The entirety of profit and loss calculation becomes the feedback mechanism that we use as the benchmark.  Government's incorporation (of information) and feedback mechanisms are slow and imprecise by comparison.  Thus, we (Auistrian economists) have a very different approach to governmental policies to "solve" market outcomes.  Instead of having some omniscient, god-like bureaucrat standing in judgement over outcomes and adjusting players like pawns on a chess board where every move is as correct as the chalk-board allows, we look to how well does the policy absorb new information.  Then we look to see how well it adjusts as conditions, such as taste and preferences, change. 

If the welfare policy criterion was the only point to come from the book, then I would say that it is worth reading.  Luckily there are many more good points in the book. 

One last dig, I find it odd that Kirzner continuously returns to the Natural Resource Monopolist case.  I think that such a case is so rare that one cannot actually list a historical example of one.  My point is that I think that if we edit those sections out, the book would be greatly improved.  In Kirzner's defense, these are my just my opinions looking at it from a perspective from 39 years after it was written. 

Overall, it must be read by anyone who claims to be an Austrian economist.  It can be a challenge, frustrating at times, and a bit of a slog through several sections, but it frames the debate through which the Austrians approach monopoly theory, welfare theory, entrepreneurship and the role of knowledge for most of the past 40 years.  Do not just read summaries like this to understand Kirzner.  Perhaps I have missed something.  Perhaps a $20-bill-of-knowledge is just sitting there.  You may be more alert to it than I, and then, you'll be able to take advantage of your entrepreneurial acumen and show me up. 

Austrian Economics Forum Fall '11 #4--Selling Costs, Quality and Competition

As you have noticed, I have fallen woefully behind in my commentary for the Austrian Economics Forum, The Austrian Readings Group that meets at North Carolina State University.  This was, in part, due to the birth of the third child.  Since then, my writing has dipped off a bit.  In fact, I was unable to attend the fourth session of the semester, because she was born that day.  So I asked Alex Gill, the Graduate Student who basically put together and runs the AEF, to write up a summary of what happened that session.  In his words…

This week we discussed Chapter Four, "Selling Costs, Quality, and Competition."  Kirzner spends much of the chapter arguing against i) Chamberlin’s (early) views on product quality determination and his distinction between production costs and selling costs and ii) Marshall’s (and Hicks’s) views on advertising.  Most of the chapter was non-controversial to the group since his arguments seem to follow rather directly from his notions of entrepreneurship and competition he developed thus far.  For instance, on product quality he writes:

     In the decision about which quality of product is to be produced the really significant aspect is not how to economize with given resources in attaining given ends, but the alertness with which the producer recognizes the kinds of goods consumers are eager to buy, the kinds of goods available technology and resources can create, and the kinds of resources that can be marshaled.  It is the successful identification of relevant ends and means (rather than the efficient utilization of means to achieve ends) which marks the “right” decision on product quality. (p. 139)

No surprises here.  In similar fashion, he argues that the distinction between production costs (“necessary for a particular product to be forthcoming”) and selling costs (which “alter the demand curve for that product”) is false.  We can’t discuss demand for a nonexistent product, and we can’t distinguish between actions that enhance demand and actions that change the product.  For the same reasons, it is a mistake to argue that advertising provides “a separate, distinct service” from the advertised product itself.  In the course of his argument, though, Kirzner seems to contradict himself when he explicitly concedes (p. 155) that a “substantial portion of advertising may…be viewed as providing a service quite distinct from the advertised product.” 

This statement, in fact, was the starting point for the forum’s discussion.  Kirzner’s theory states that “selling effort” does not allow the separation of information into categories based on relevance or irrelevance with regard to demand determination.  Indeed, the group could not even maintain that an individual could reliably make this distinction in his or her own mind.  When Kirzner says that “some of that information is to be considered as inseparable from the product itself,” perhaps he should have replaced the “some” with “all.”  After brief digressions on the relative merits of Kirzner and Ayn Rand’s personalities and RBC theory, we turned to page 168:

     For us, the crucial question (in evaluating the claim that advertising “monopolistically” differentiates the product in the eyes of the consumer) must always be whether the advertising activities engaged in by the differentiating “monopolist,” are or are not open also to his competitors. (p. 168)

Then can trademarks be anticompetitive?  Not if the trademark is viewed as a contract between the producer and the consumer and competitors are allowed to form their own trademarks.  In a sense, a trademark monopolizes a particular logo, but it also conveys information to the consumer.  A producer who uses another’s trademark is engaging in fraud and misrepresenting the origin of a product.

As would be expected at a gathering like this, the conversation then turned to intellectual property issues in general. 

I was able to attend the last two AEF meetings and will write up and post those after I finish grading Final Exams!

Austrian Economics Forum Fall '11 #3--Competition and Monopoly

This week’s forum focused on the third chapter “Competition and Monopoly” in Kirzner’s book.  Much of the chapter was not controversial to an Austrian audience and so there wasn’t the sort of discussion surrounding it as one might expect with a larger mix of mainstream economists.

In traditional theory, economists envision a continuum in which we place “perfect competition” on one end and “monopoly” on the other.  This method of organizing our thoughts says that the most important aspect of markets is the number of firms.  On the monopoly end, there is one firm, while on the other end there are so many firms that they all face horizontal demand curves.  (As an aside, we really need to get rid of the term “perfect competition” and replace it with “perfect equilibrium,” because there is no competition in that model. It’s an equilibrium-only model.)

Kirzner completely rejects this approach to defining competitive markets.  He wants to use “competition” in the same manner that the average person uses it: as a rivalrous process.  Competition describes actions.  It is a verb.  The mainstream uses competition to describe states of markets.  It is a noun.  The result is that the mainstream cannot communicate to laymen, which Kirzner says has been a “disservice.”

With competition defined as a process, we can then apply it to the entrepreneur.  When the entrepreneur recognizes a market opportunity, he is able to act.  He applies means to achieve ends.  If others wish to use those same means, a rivalry emerges.  In a market, a bidding process arises and the one who outbids the marginal rival is able to employ those means.  It is this process that coordinates the economy.  The move toward equilibrium is an unintended consequence.  The mainstream lacks this function in that the Robbinsian maximizer does not compete.  Kirzner states

Purely Robbinsian economizing activity is never competitive; purely entrepreneurial activity always is.  In other words, I am asserting, that entrepreneurship and competitiveness are two sides of the same coin: that entrepreneurial activity is always competitive and that competitive activity is always entrepreneurial (rather than Robbinsian). (p 94)

The Robbinsian maximizer merely chooses the course according to a given framework and a given set of economic relationships.  In contrast the Kirznerian entrepreneur looks at the unseen and chooses based upon some factors that may be hidden or absent.  The entrepreneur strives for profits and does so by out-competing his rivals.  The “pure Robbinsian decision-maker is not seeking to outdistance his rivals—he is not intent on learning what opportunities they are about to available to the market in order to attempt to make available still more attractive opportunities.” (p 95)

Later (p 108) Kirzner states, “As soon as we draw the cost and revenue curves facing the firm, no matter what their shape, we have created a theoretical case in which all competitive behavior has by definition been ruled out.  What is left is neither competitive nor monopolistic (in the process sense), but a problem in allocation.”  This means that as soon as we assume the structure of the cost curves or the type of demand curves, we have transitioned away from anything competitive and entered into the world of the Robbinsian maximizer.  I think that this analysis goes too far.  In one sense I see exactly what Kirzner is attempting to draw attention to, however I do not see why a sufficiently generic supply and demand graph has to be that way.  If we follow Kirzner, then even imagining curves sends us into the maximizing world.  I think that an economist can look at a static graph and recognize that it is an imperfect representation of a dynamic process.

Kirzner then examines how competition can be limited.  “[F]or us to speak freely of a lack of competitiveness in a market process, we must be able to point to something which prevents market participants from competing. … What is it, …, which might halt the competitive process? … Competition, …, is at least potentially present so long as there exist no arbitrary impediments to entry.” (p 97)  As we can tell, there are several reservations and qualifications in his definition.  Furthermore, we doesn’t define the areas of monopoly in a positive sense, e.g., “you’ll know monopoly when….”  Instead, he defines a potential absence of competition in a negative sense and assumes that the result is monopoly.  Personally, I do not like this approach.  It seems that there is too much hedging.  Is there a reason to be overly cautious?  I do not know.

Later on (p 99), Kirzner gives us a better definition: “When we assert that purely entrepreneurial activity is always competitive, we are then asserting that with respect to purely entrepreneurial activity no possible obstacles to freedom of entry can exist.  We can see this by recalling that purely entrepreneurial activity involves no element of resource ownership. … [B]lockage of entry into a particular activity must arise from restricted access to the resources needed for that activity. … All imaginable obstacles to entry can be reduced, in basic terms, to restricted access to resources.”

To summarize Kirzner’s position, the pure entrepreneur is a metaphysical concept.  It is simply the recognition of a profit opportunity.  There is no way that we can stop a person from recognizing an opportunity.  As a result, all entrepreneurship is competitive and short of direct brain control, it is impossible to curtail this recognition.  Thus, all anti-competitive restrictions have to occur on the level of access to resources.  The restriction of access to resources is a decrease in competition.  A complete restriction is a monopoly.

We talked about the implications of these concepts.  There arise two types of monopolies: one created by a government action and one created through the sole ownership of a resource. While we agreed with the first, the group debated the second concept.

As an aside, it arose that private property is a legal restriction to the access of resources.  I therefore have a monopoly over my car.  While Kirzner does argue that monopoly “diverts the entrepreneurial-competitive process into” other markets, I know that he would not argue that we should abolish private property. (p 107)  Kirzner states, “For us monopoly means the position of a producer who is immune from the threat of other entrepreneurs’ doing what he does.” (p 106)  However, it seems that for Kirzner, monopoly is not necessarily a bad thing.  I suspect that he will cover this in more detail later in the book.

Mises argues that intervention in the market distorts the market.  When the government buys pencils, it is not disrupting the normal market process and thus this is merely a shifting in supply and demand curves.  When the government imposes rules that prevent the market from doing its job, we have permanent discoordination.  For example, a maximum price set below the market price will create a permanent shortage.  I see Kirzner using the same logic in the background of his analysis.  When a monopoly exists due to legal barriers, we see the market unable to perform its job and this is bad.  If there is a monopoly that arises from ownership, then the market curves shift and the market adjusts.

The next item that we discussed was the idea of monopoly rent.  This is the return that a monopolist gains because he is a monopolist.  It is an addition to the return on the other factors of production, in which we are including entrepreneurial profit.  We found it difficult to separate these rents from the concept of entrepreneurial profit.  Luckily, Kirzner does not use it in his welfare appraisal of the monopoly.  Instead, he uses “the speed and smoothness with which misallocations can be discovered and corrected” (p 112) as his basis of comparison.  This definition directly parallels Mises’ definition on interventionism, where the focus (for monopoly) is directed to the obstacle to entry.

We then touched on some relatively random points.  We found them thought provoking and interesting enough to comment on.

Kirzner states, “for our notion of monopoly the shape of the demand curve facing the firm is of little significance. … [T]he significance of monopoly does not relate to the theory of the firm at all. (It is because of this that the shape of the demand curve is irrelevant.)” (p 108)  The importance of this comment is that the mainstream focuses on the firm (and the industry) and the consequent shape of the curves that the firms face.  Austrians have long rejected this static view of Industrial Organization.  Instead, we focus on the competitive process, on the action, on the verb.

Kirzner has a discussion on Monopolistic Competition, in which we basically throw the concept out.  In characteristic Kirzner fashion he cannot make a strong, direct statement and instead says, “The position developed thus far in this book makes it impossible for me to accept this approving judgment on the theory of monopolistic competition.” (p 113)  More directly he states, “the theory of monopolistic competition was on balance a decidedly unfortunate episode in the history of modern economic thought.” (p 114)  The problem was, of course, the fact that when it threw out the old perfect competition model, it left out the competition (in the Austrian sense).

Kirzner then has a nice discussion (pp 115-117) on how only in disequilibrium does product differentiation exists.  There is no reason to change product quality in a world of equilibrium.

Kirzner then delivers the one-two punch to monopolistic competition:

Thus far my criticism of the monopolistic competition view of the market has charged it (a) with overlooking the simplest available explanation of such phenomena as product differentiation …, and (b) with gratuitously advancing an alternative explanation ascribing these phenomena to the presence of monopolistic elements. … The explanation provided by the theory of monopolistic competition not only fails to recognize the disequilibrium character of the phenomena it seeks to explain, it fails even as an equilibrium theory. (p 117)

Nice.

Finally Kirzner compares his concept of the entrepreneur with that of Schumpeter’s concept. They both reject the model of perfect competition.  Schumpeter does so on the grounds that entrepreneurs are disruptive to all equilibria.  They create something new which then explodes all the old economic relationships.  Kirzner does not deny that this occurs, but is merely a subset of his “alertness to hitherto unnoticed opportunities.”  The difference then rests on Kirzner’s emphasis.  He says that the primary function of the entrepreneur is to coordinate resources, the result of which is the movement towards equilibrium.  For Schumpeter, the coordination process is secondary and mundane.

The next meeting has been changed. Instead of meeting in 2 weeks (October 14th), it will convene in 3 (October 21st).  This development is unfortunate for me since that is the day that we have scheduled the trip to the hospital for the new (girl) baby’s arrival.  Since the surgery is scheduled for the morning, in theory I could make it to the afternoon meeting. (Yeah, right!)  So I will try to recruit someone to write up a summary for that session.  We’ll see.

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.

Austrian Economics Forum Fall '11 #1--Competition & Entrepreneurship

We have finally kicked-off the new semester of the Austrian Economics Forum at NCSU.  About a dozen of us decided that the best thing to do at 4:30pm on a Friday afternoon was discuss Austrian Economics.  (I know that this is not normal behavior, but I still find that I have an overwhelming need to be there.)

We are reading Israel Kirzner's Competition and Entrepreneurship (1973).  There are six sessions scheduled for this semester and there are six chapters.  (That was just fortunate.)  The first chapter "Market Process versus Market Equilibrium" was this week's focus.  I found that I needed to remind myself several times that this is only the introductory chapter.  There are a number of points that need further clarification and refinement, but Kirzner doesn't (and shouldn't) go into an in depth explanation in the introductory chapter. 

The next point that I needed to remind myself was who the target audience was for Kizner.  Professor Cordato gave a brief overview of the state of the profession in 1973.  This was a time when General Equilibrium (price) theory reigned supreme and that all firms were either perfectly or imperfectly competitive.  So the target of this book is not me.  I was "raised" Austrian.  I was taught from the beginning competition is a verb and not a noun.  The target of the book is obviously not those professors who are locked into their ways.  Then who is the target?  My guess is that the targets are graduate students in economics.  They are still forming their opinions on which school is correct and will be more open-minded about the different approaches.

Kirzner sees the profession completely focused on equilibrium.  The dominant view is that we should be in equilibrium and, if reality differs from it, then there is an imperfection that needs to be studied and corrected (usually by government).  Kirzner suggests that there is an alternative.  Competition should not be studied as a state of being, for example, "the XYZ Market is in a state of perfect competition."  Rather the normal, vernacular, usage of "competition" as a rivalrous process should be adopted.  Competition is a verb and not a state of being.  Therefore, equilibrium, while an important tool, should not be the focus of the economist.  Instead the questions of "Why is there a change in prices?" and "What are the forces behind the price changes?" should dominate the economist's thinking.

Economists too often use phrases such as "market forces" to describe the market process.  "Market Forces" move the market to equilibrium.  Professor Margolis challenged the group by asking us to describe exactly what we mean by "market forces"?  He stated that we all like to tell a story that illustrates an example of market forces, but we tend to leave "market forces" as a fuzzy concept.  My thoughts are that it is shorthand for explaining how individuals have some sort of "felt uneasiness" (to use Mises' phrase) and think about how they can replace that state for a better one.  Then they act.  Within this analysis we are implicitly assuming time and ignorance (to use the title from Rizzo and O'Driscoll's book).

As buyers and sellers enter into the market they bring with them knowledge.  As the desires of the buyers confront scarcity, a price is generated and ignorance is lessened.  It is in this step-by-step manner that the market will equilibrate.  Contained in this notion is an implicit ceteris paribus assumption.  We need to realize that tastes, preferences, expectations, etc. need to be held constant.  When we (economists using this thought experiment) start to relax the ceteris paribus assumption, we are allowing supply and demand to change and thus equilibrium prices and quantities change.  Despite the fact that the equilibrium point (intersection of supply and demand curves) changes, the market forces are chasing that point around.  So while equilibrium is an important theoretical concept, we might never, ever be in equilibrium.  The important concept to focus on is that competition is always driving us toward equilibrium.

These driving forces then require the interaction of individuals with limited knowledge.  They require that this process takes time, meaning that we do not simply jump from equilibrium point to equilibrium point.  Finally, this is not an automatic or mechanical process; it requires actual people to move the market.  That person is called the entrepreneur. 

The Kirznerian pure entrepreneur is an ideal type.  This archetype has no physicality.  It is an observation of a profit opportunity.  This construction is fairly controversial within Austrian circles.  To me it seems strange to push it this far.  Without physicality, there is no action and it then falls outside of praxeology and is therefore not a market force.  (It is at this point I need to remind myself that this is the introductory chapter and there is a whole book to follow.) 

We argued about the implications of the pure entrepreneur.  A traditional manner of characterizing the Kirznerian entrepreneur is someone stumbles across money lying on the ground.  (If this is the case, then my son is a Kirznerian entrepreneur because he found 12-cents on the ground today!)  However, the act of picking up the money is a physical act and thus is not a pure entrepreneur.  After much discussion, the consensus of the group was that the pure entrepreneur is an observer and accumulates knowledge.  The action is separate and distinct.  An interesting question was raised and so I'll throw it out to you to ponder and comment...  "Is an entrepreneur only a person who finds Pareto Superior moves?"

The last issue that we discussed was the point on resource monopoly.  While he defines most monopolies are a "barrier to entry" problem, Kirzner argues that resource monopolies are "very real and significant."  In other words, a single owner of a resource can be a monopolist and this has consequences that are "very real and significant."  I disagree.  Rothbard disagrees.  In fact most of the people in the room disagreed.  (Some didn't vocalize one way or another, which was fine.)  We thought about who else (Austrian) thinks that a single resource owner is a real and significant problem, and the only one that anyone could think of is Sandy Ikeda, at SUNY - Purchase.  I like Sandy and he is usually fairly solid in his economics so I will have to ask him about this point.  Furthermore, this is still just the first chapter and there is a whole chapter on monopolies coming up and so we will see how "real and significant" this problem really is.

Unfortunately, we ran out of time and closed the meeting there.  If you are reading along (or even if you aren't) please feel free to post your comments and continue the discussion.

Austrian Economics Forum Fall 2011 #0--Prequel

Well we are getting closer to that time of the year again, the Austrian economics reading group at NC State University!  Yes more readings in Austrian economics!  Who doesn't look forward to this?  (Crazy people, that's who.)

For the Fall semester, we have 6 scheduled meetings starting on 4:30pm September 2, 2011 at Nelson Hall, Rm 3220. 

The group, the Austrian Economics Forum, has decided to read and discuss Kirzner's classic Competition and Entrepreneurship.  It was first published in 1973, the year that Mises died, the year before Hayek won the Nobel Prize and the IHS conference in South Royalton, Vermont.  It has been a centerpiece of the Austrian revival of the the last 35+ years.

Since the book has 6 chapters and we have 6 meetings, we will do one chapter per meeting.  I welcome you to the discussion.  I will post, as best I can, a summary of the discussion and my thoughts as well.  If you want to continue the discussion or bring up new points from the readings, please post them here and I will encourage the members of the AEF to comment and reply. 

I am looking forward to this series of readings and to your comments.