Kirzners Theory Of Entrepreneurship

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Building on the work of Ludwig von Mises,1 Kirzner's theory of entrepreneurship elucidates the principal mechanism of the market process. His theory involves three central components: the costless discovery of profit opportunities, the subsequent actions that discovery initiates, and the successful exploitation of opportunities via price arbitrage. For Kirzner "the market process ... is set in motion by the results of the initial market-ignorance of the participants" and consists in "the systematic plan changes generated by the flow of market information released by market participation" (1973, p. 10). Only when no market ignorance is present (given tastes, technological possibilities, and resource availabilities) will the market process have eliminated all opportunities for further gains and thereby have reached an equilibrium in which all decisions and plans dovetail perfectly. Like Mises who used a stationary model, the evenly rotating economy, only as a "mental tool for comprehension of entrepreneurial profit and loss" (1966, p. 329), Kirzner's principal interest and theoretical analysis concern the process by which entrepreneurial activity exploits profitable opportunities and not the conditions stipulated by or consistent with a state of equilibrium. In disequilibrium, the successful execution of utility-enhancing plans by potential transactors remains unrealized and thus constitutes a field of opportunity for entrepreneurial activity. For Kirzner, the initial ignorance of market participants and their consequent failure to exploit all exchange opportunities does not reflect transactions or search costs and hence is not categorized as "rational ignorance"; instead, theirs is "sheer ignorance" (1997a) which can only be rectified by the interdiction of an entrepreneur alert enough to discover existing opportunities for profit.2

For Kirzner, it is this quality of alertness to previously unnoticed opportunities that is at the core of his theory of entrepreneurship. Alertness is an "attitude of receptiveness" (1997a, p. 72) and a disposition to "sniff out opportunities" (1979, p. 29) that itself involves no opportunity costs to the entrepreneur because it entails "the discovery of something obtainable for nothing at all" (1973, p. 48). If alertness refers to the entrepreneur's mental state of awareness, then discovery refers to the identification of something in the external world sufficient to activate entrepreneurial action. While those actions occur in time, discovery is timeless in that it constitutes an instantaneous recognition or "moment of realization" of the existence of a profitable opportunity. At one moment that awareness did not exist but at the next it does; the proverbial "flash of insight" has occurred. Although for Kirzner alertness and discovery induce an overhaul in the entrepreneur's perception of the field of action, it does not refer to action as such; alertness and discovery precede action and are a precondition for action.3 The argument that Kirzner's theory with its emphasis on discovery precludes a theory of choice, as Salerno (1993) suggests is, therefore, misplaced.

When alert entrepreneurs discover opportunities for profit (and presumably choose to thereupon embark on certain courses of action and not others),4 their actions initiate a market process characterized, as Hayek (1937) emphasized, by the progressive transmission of relevant knowledge to market participants that they "are themselves unable to obtain" (Kirzner, 1973, p. 15). For Kirzner this is achieved by entrepreneurs competing with other entrepreneurs by exploiting price differentials between inputs and outputs and through those actions inducing movements in market prices that increasingly become consistent with the coordination of participants' plans. As envisioned by Kirzner, this process, driven by "competition between the entrepreneurs as buyers, and again as sellers," will "communicate to market participants" useful knowledge enabling each to formulate a "correct estimate of the other market participants' eagerness to buy and sell" (p. 15). Prices move in the correct direction. The process ceases when no further discovery (i.e. profit opportunity) can be made - there is no relevant knowledge left to discover because all useful knowledge has, by virtue of the activity of entrepreneurs, already been utilized, exploited, and otherwise made available to all. The unintended byproduct of this process is the attainment of equilibrium market prices.5

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