Kirzners theory of entrepreneurship

Israel Kirzner's work, with its explicit emphasis on the entrepreneurial role in economic interaction, is of particular interest in the present context because of Kirzner's (1985:7ff.) claim that his own "alertness" theory of entrepreneurship keeps a balanced middleground between "two extreme views," the neo-classical equilibrium view on the one side and Shackle's subjectivism on the other, or, in our terms, between a teleological and a non-teleological concept of the market process.19 As we shall argue, however, in spite of his emphasis on innovative entrepreneurial dynamics and in spite of his verbal recognition of the creative and open-ended nature of the market process, Kirzner's approach fails to escape the subliminal teleology of the equilibrium framework.20

There is, as Littlechild (1979) has pointed out in some detail, a disharmonious mixture in Kirzner's work between a basic affinity to and remaining disagreements with the radical subjectivist position. Kirzner explicitly recognizes the creative dynamics of the market process and, indeed, makes this the central theme of his work. He criticizes the neo-classical position for assigning "no role „.to the creative entrepreneur" (Kirzner 1985:13); he talks of the role of entrepreneurship "in an open-ended, uncertain world" (ibid.: 52), a world in which we "find scope for the unpredictable, the creative, the imaginative expression of the human mind" (ibid.: 58); and he talks of "new products," "new qualities of products," "new methods of production" and "new forms of organization" that are endlessly generated in the course of the entrepreneurial process.21 Yet, such emphasis on creativity, imagination and novelty is combined with a theoretical perspective that sees the essence of entrepreneurship in "the discovery of error" (ibid.: 50), and the scope for entrepreneurship "in the possibility of discovering error" (ibid.: 51), a combination that can hardly be called harmonious.

"Discovery of error" means, in the context of Kirzner's theory, such things as the discovery of "erroneously low valuation" (ibid.: 50) of resources, the "alertness to hitherto unperceived opportunities" (ibid.: 52), or the noticing of "situations overlooked until now because of error" (ibid.), phrases that all invite the same questions: if the essence of entrepreneurial discovery is to "provide protection" or "rescue" from "earlier" or "past error" (ibid.: 53), what is then the benchmark or the reference-base against which the failure to do something can be judged to be an "error"? And how does the notion of creativity square with such definition of entrepreneurial activity? Are creativity and imagination the same as "discovery of errors"?

There is, in our view, a fundamental inconsistency in Kirzner's attempt to integrate the innovativeness of entrepreneurial activity into an equilibrium framework—by modeling it as discovery of "erroneously overlooked opportunities."22 The critical step in Kirzner's argument, the step that is intended—unsuccessfully so, in our view—to establish a "middle ground" between a teleological and a non-teleological understanding of the market process, is his extension of the notion of a divergence between "different parts of the market" (Kirzner 1985:62) from a cross-sectional to an intertemporal interpretation.23 According to the cross-sectional interpretation, the entrepreneur acts essentially as arbitrageur, by taking advantage of hitherto unnoticed divergences between different parts in a present market, he helps to bring about greater consistency (ibid.: 61ff.). According to the intertemporal interpretation, the entrepreneur takes advantage of yet unnoticed divergences between today's market and tomorrow's market, thus helping "to coordinate markets also across time" (ibid.: 62).24

Whatever may be said about the "knowability" of divergencies in the cross-sectional interpretation, it should be obvious that the notion of intertemporal divergences between markets at different points in time is inherently problematic. If, as we must assume, "divergences" between today's and tomorrow's markets are typically associated with differences between today's and tomorrow's knowledge, what does it mean to say that entrepreneurial alertness corrects the "failure to realize" divergences between present and future markets? What sense does it make to describe today's failure to possess tomorrow's knowledge as error?15 If, to use Lachmann's phrase, "Time and knowledge belong together," a comparison between present and future markets cannot possibly be made in a sense that would make such terminology meaningful. The kind of comparison that can be made, at least conceptually, across contemporaneous markets cannot be made along the "inter-temporal dimension" (Kirzner 1985:62). Time is not simply another "dimension," similar to the spatial dimensions. Different parts of a present market exist, they are present, and differences in their characteristics can be "discovered." "Future parts" of a market simply do not exist, they are, by definition, not present. There are, at any point in time, many potential futures imaginable, based on more or less informed reflections. Yet, which future will come into existence will depend on choices that are yet to be made. Of course, human beings aim to be "prepared for the future" and they act upon their expectations of what lies ahead. The subjectivist argument on the unknowability of the future is certainly not meant as a recommendation to merchants not to anticipate the coming of winter in their storekeeping. Yet, if, and to the extent that, human choices and their complex interactions shape the emerging future, the latter can be a matter of speculation but not of foreknowledge.

The supposition that the future is foreknowable clearly seems implied when, in talking about the problem of intertemporal entrepreneurial alertness, Kirzner speaks of pictures of the future that may or may not "correspond to the truth as it will be realized" (Kirzner 1985:55), of man's efforts to overcome uncertainty "by more accurate prescience" (ibid.: 58), of "past failure to pierce correctly the fog of uncertainty" (ibid.: 53), and so forth. It is far from obvious how such insinuation of a preknowable future can be consistent with a genuine appreciation of the creativity of the human mind. Indeed, when arriving at this issue, Kirzner simply retreats to the ex cathedra claim that his approach does encompass the two notions, without actually showing how this can be done. He emphasizes that intertemporal entrepreneurial alertness "does not consist merely in 'seeing' the unfolding of the tapestry of the future in the sense of seeing a preordained flow of events" (ibid.: 56). Indeed, he insists, that such alertness must "embrace the awareness of the ways in which the human agent can.in fact create the future" (ibid.). Yet, as if the compatibility of the two arguments were obvious, he also insists that "the function of market entrepreneurship in the multi-period context is nonetheless still" that of "discovery of errors" in the sense explained above (ibid.).26 And he leaves undiscussed the issue of what one entrepreneur's creativity means for the "truthfulness" of another entrepreneur's "picture of the future."27

If, as Kirzner's construction seems to suggest, today's failure to possess tomorrow's knowledge qualifies as error from which entrepreneurial alertness is to provide rescue, one could conclude that the ultimate benchmark or reference base for such judgement is an imagined world in which everything that humans may ever imagine, think or know will be "revealed."28 Judged against such a benchmark, every act, however imaginative and creative, can be seen as a "discovery" of something that was already waiting to be found. And "failure to discover" may be discussed in terms of "error" and "overlooked opportunities." It seems questionable, however, whether the mental construct of such an imagined world is a helpful analytical guide when applied to the study of socioeconomic change, of human history.

What might be misleadingly suggestive here is the analogy to the scientific "discovery process." To the extent that science is concerned with an "objective" reality "out there," our conjectural knowledge of this reality can be expected to grow over time, through a process of discovery. Although we cannot know at present what we will know in the future, any future increase in knowledge can, in some sense, be viewed as a "finding" of something that could, in principle, be currently discovered. There is something "knowable" out there, to be discovered sooner or later. To be sure, such account of the discovery process in science may itself be seen to be challenged by the new conceptions advanced by Prigogine and others because of its neglect of real time. Yet, even if, for purpose of our discussion here, we should leave this issue aside, the analogous challenge advanced by the radical subjectivists to neo-classical equilibrium economics applies with full force to the concept of the market as a discovery process. Entrepreneurial activity, in particular, is not to be modeled as "discovery" of that which is "out there." Such activity, by contrast, creates a reality that will be different subsequent upon differing choices. Hence, the reality of the future must be shaped by choices yet to be made and this reality has no existence independent of these choices. With regard to a "yet to be created" reality, it is surely confusing to consider its emergence in terms of the discovery of "overlooked opportunities."29

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