All Commentary
Tuesday, April 1, 1980

Book Review: Perception, Opportunity, and Profit: Studies in the Theory of Entrepreneurship by Israel M. Kirzner

(University of Chicago Press, 11030 S. Langley Ave., Chicago, Ill. 60628), 1979 274 pages • $15.00 cloth

If economics is to be of any practical use, it must relate to the real world. But most economists make unrealistic assumptions—equilibrium, perfect competition, and the like—which, if not handled with great care, lead to absurd policy conclusions.

Perfect knowledge is implicit in many of these assumptions. If we assume that individuals have perfect knowledge of all available opportunities, then nothing remains to be discovered. With the assumption of perfect knowledge, human action is reduced to a mechanical allocation of given resources among a given hierarchy of ends.

But, Israel Kirzner points out, people do not instantly perceive all opportunities. There are always opportunities for mutually beneficial exchanges waiting to be discovered.

For example, a basket of oranges may be available in the market for $5, while consumers may be willing to pay $12 for the same oranges converted into marmalade. The entrepreneur who perceives this, and who keeps his other costs below $7, brings about a mutually favorable trade between orange growers and marmalade users while earning a profit for himself.

This insight—that the free market profit and loss system facilitates the discovery of opportunities for mutually beneficial exchanges—sheds new light on the workings of the market economy.

For instance, advertising is seen not as a device for manipulating consumers, nor merely as a means of conveying information. Rather, advertising alerts consumers to the availability of products. If an advertisement is colorful, funny, or noisy, it is because the advertiser believes that this is needed for consumers to notice that a purchase opportunity exists.

Besides casting new light on the free enterprise system, Professor Kirzner offers profound insights into the consequences of government intervention. For example, in a thought-provoking chapter on individual liberty, he points out that freedom is usually “identified with the power to achieve chosen goals. Loss of freedom quite similarly, comes to be identified with thwarted desires. Freedom comes, from such a perspective, to be something whose curtailment triggers immediate pain. One cannot lose freedom, in this view, without feeling its loss. The matter is seen quite differently from the entrepreneurial perspective on freedom.

“The entrepreneurial view of freedom permits us to see how freedom to choose may inspire the discovery of opportunities that may be invisible to those to whom this freedom is denied. Those to whom the freedom to choose has been denied will, in such cases, have no inkling that they are being denied an otherwise attainable goal. One denied the right to choose to enter college may never realize that he possesses the intellectual potential to be admitted to college. Denial of freedom to choose, from this perspective, does not necessarily inflict the pain of thwarted desires. In fact, one may lack freedom and be convinced that one’s well-being is wholly unaffected by its lack.”

Thus, the very nature of government intervention precludes a concrete specification of all the liberties which have been impaired by the growth of the state. Similarly, it is impossible to know—much less measure—all the costs of intervention. We simply cannot know what exchange opportunities might have been noticed had government intervention not removed the means of exploiting them.

Perhaps the most important chapters in this book deal with property rights. Rather than viewing property rights as arising solely from (1) “mixing labor” with unowned resources and (2) voluntary transactions, Kirzner offers a finders-creators-keepers approach. According to this view, entrepreneurs discover and hence create new values. An entrepreneur who discovers that he can buy a product for $8 and sell it for $10 can be thought of as creating the $2 profit.

Perception, Opportunity, and Profit is replete with such profound insights. The style is easy to follow, but where Kirzner has broken new ground, the reader had best proceed with careful deliberation. And when the reader is finished, he may find that some of his old assumptions have been dropped along the way.