Freeman

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Book Review: Discovery and the Capitalist Process by Israel M. Kirzner

FEBRUARY 01, 1986 by BRIAN SUMMERS

The University of Chicago Press, 5801 S. Ellis Avenue, Chicago, Illinois 60637 * 1985 * 192 pages, $22.50 cloth

Government creates barriers. In a market economy, it sets up barriers against fraud and coercion, so that people can go about their peaceful affairs without let or hindrance. Interventionist government, however, creates barriers which tax, regulate, subsidize and generally hinder peaceful exchange.

What are the economic effects of such government interventions? At first glance, the consequences seem clear. Tax something and you get less of it. Subsidize something and you get more of it. Set up barriers to entry and you have less competition.

On this basis alone, economists have made compelling arguments against government intervention. By examining incentives, supply and demand, and the availability of investment capital, they have shown that tariffs, regulations, and other barriers to free exchange can only harm consumers.

But underlying much of this analysis is the troubling assumption of perfect knowledge. For example, to delineate how people will react to a given set of incentives, most economists assume that people are completely aware of all their options. In the real world, of course, such assumptions are overly heroic, thus raising serious doubts as to the real world applicability of most economic analysis.

Professor Israel M. Kirzner of New York University addresses these questions in Discovery and the Capitalist Process. Kirzner, long noted for his pathbreaking work on entrepreneurial alertness, shores up the economic de fenses of capitalism, while providing fresh insights into the market process.

Suppose, for example, an entrepreneur discovers a new use for tin. Standard economic theory tells us that en trepreneurs will tend to stop using tin in old, 1ow-valued ways, and shift it to more highly valued uses. In this way, consumers are best served by the market process.

But why did the entrepreneur perceive the new use for tin in the first place? And why, in a world of imperfect knowledge, did his competitors notice his discovery and adapt their behavior accordingly?

The answer, according to Dr. Kirzner, is the heady scent of profits. People tend to notice what it is in their interest to notice. When they are free to pursue profits, they tend to notice discoordinations in the market, and move scarce resources to more highly valued uses. Freedom is not only essential for efficient production, it is also needed for entrepreneurs to first perceive that efficient production is possible at all.

By the same token, the absence of freedom prevents entrepreneurs from first perceiving that scarce resources may, in fact, have more valued uses. Thus, the total cost of a government intervention is not only immeasurable, it is also unimaginable, because no single mind or group of minds can perceive the opportunities which, in a very real sense, are hidden by the barriers of intervention.

It is difficult to assess the full impact of Dr. Kirzner’s work. For the economist, he has helped remove the crutch of perfect knowledge, and thus brought economic analysis one step closer to the real world. For public policy analysts, he has provided aricher, deeper understanding of the consequences of government intervention. And for students of liberty, he has provided a firmer foundation for free market economics. []

(Discovery and the Capitalist Process is available from The Foundation for Economic Education, $22.50 cloth, postage paid on prepaid orders.)

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February 1986

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