On Competition and Entrepreneurship
The third pillar of the Austrian revival.
SEPTEMBER 27, 2012 by STEVEN HORWITZ
Filed Under : Austrian Economics, Entrepreneurship, Competition
In this final installment of my tour of the three books that have defined the modern Austrian school of economics, I explore Israel Kirzner’s Competition and Entrepreneurship. Published in 1973, the book is of major importance in two ways. First, as a work of theory it laid out a research agenda for Austrian economics that is still being pursued nearly 40 years later. That agenda was a combination of insights found in both Ludwig von Mises and F. A. Hayek and the two books I discussed in the previous columns.
Second, Kirzner’s book remains a model of patient, high quality scholarship and engagement with the mainstream of economics. That formula has been crucial to the recent success of Austrians in academic economics and the growing respect those ideas are getting.
When I lecture about this book, I often characterize what Kirzner was up to in the following way: He provides a Misesian answer to a Hayekian question. What I mean is that in Individualism and Economic Order, and in “Economics and Knowledge” specifically, Hayek argued that markets were social learning processes in which knowledge was communicated, enabling people to better coordinate their plans. What Hayek did not explain there, and started to explain in “The Use of Knowledge in Society,” is exactly how that learning process takes place. What causes knowledge to change and spread in such a way as to generate that learning? Prices are the medium, Hayek argued, but what is the agent of change?
Kirzner’s answer is to pick up on Mises’s emphasis in Human Action on the entrepreneurial element of human action and apply it to Hayek’s argument. What causes knowledge to grow and spread is our alertness to opportunities that permit us to, in Kirzner’s words, “grasp pure profit.” He’s referring to our ability to see ways of doing things that others have overlooked. Where everyone sees a pile of nails and pieces of wood, the entrepreneur sees a ladder. When Ted Turner imagined a 24 hour-news channel delivered by cable companies, he took the first step toward turning existing resources into something no one had thought of before.
Seeing Overlooked Possibilities
Kirznerian entrepreneurship is not just finding the most appropriate means to a given end. It is not the sort of maximization problem that populates economics textbooks, where firms have given cost and revenue curves and have only to find the profit-maximizing point. Entrepreneurship is about seeing possibilities not given by the data. It is the act of seeing a new means-ends framework rather than optimizing based on a given one.
In the market these moments of entrepreneurship amount to the discovery of knowledge that would otherwise not exist. When Ted Turner envisioned CNN, that moment of insight (which is the entrepreneurial act, according to Kirzner) eventually provided knowledge to the marketplace that had not previously existed. In Kirzner’s system this sort of entrepreneurship brings the expectations of market actors into greater coordination by using resources in ways that better satisfy wants. It is Misesian entrepreneurship that explains how markets make use of knowledge in society.
Kirzner also emphasizes that entrepreneurship and competition are two sides of the same coin. As long as people are free to envision alternative uses of resources and act on their visions, markets are competitive. What we mean by competition, Kirzner argues, is not the perfectly competitive market of mainstream economics, but instead the process by which people constantly engage their entrepreneurial alertness to see new and better ways of doing things that others have not seen before. Much of his book is devoted to explaining how this Austrian conception of competition as a “discovery procedure” (to use Hayek’s phrase) is more helpful than the very different conceptions of competition and monopoly used by many economists.
Competition and Entrepreneurship appeared the year before Hayek won the Nobel Prize in 1974, which was also the year of the first major conference on Austrian economics in the postwar era. That period marked the rebirth of Austrian economics, and Kirzner’s book, in many ways, defined the research agenda for the post-revival Austrians. In the succeeding 40 years most of the microeconomic questions that have kept Austrians busy are ones that emerged out of the vision Kirzner laid out in that book. Even on the macroeconomics side, my own work and that of Roger Garrison, for example, are rooted in the importance of price coordination and the ways in which macroeconomic disturbances are revealed in the microeconomic discovery process.
Finally, Kirzner’s book also mapped out a professional strategy for the succeeding generations of academic Austrian economists. The power of Kirzner’s book, and a reason it actually is read by non-Austrians, is that his knowledge of the mainstream arguments is thorough and he never accuses other economists of anything more than intellectual error. He doesn’t question their intelligence or motives or politics. He just patiently, carefully, and thoroughly explains where he thinks they have gone wrong, and why the Austrian perspective is to be preferred.
If Austrian economics, and classical liberalism more generally, are to win minds and hearts in the world of ideas, it will be by doing as Kirzner does, not by demonizing those who disagree, nor by distorting their arguments. Competition and Entrepreneurship remains a guide to both good economics and good scholarship.
As noted earlier, this week marks the end of almost three years of “The Calling.” I will continue to write for The Freeman and lecture for FEE, and you can follow me online at Bleeding Heart Libertarians and Coordination Problem, as well as on Facebook. I thank all of you for reading every week and sharing both this column with others and your kind words with me. I also thank FEE for providing this platform. Finally, I thank deeply my good friend and the best editor ever, Sheldon Richman, for bringing me on board and making me look like a better writer than I am.