Factors that disequilibrate the market

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Kirzner's emphasis on the equilibrating function of entrepreneurship naturally focuses attention on factors that disequilibrate the market. The very notion of equilibrium suggests an economy that will continue on its present path undisturbed until it is shocked out of equilibrium. Then the equilibrating forces of the market take over to put the economy back on its equilibrium path. A number of factors could disequilibrate the market. For example, preferences could change, requiring resources to be reallocated to conform to the new pattern of preferences. From the perspective of economic modeling, one might question models based on autonomous preference changes, because such models explain little.3 An explanation saying that some phenomenon occurred because preferences changed is not much different from saying one does not understand what caused the phenomenon to occur. The explanation is much more satisfying if it describes why people change their observed behavior based on some constant underlying utility function. Nevertheless, autonomous preference changes remain a possible disequilibrating force.

Other factors might be related to the environment within which production occurs. Farm production is affected by the weather, so that floods or draughts might lower farm output, and particularly good weather can raise it. Similarly, natural resources can be depleted, so that as oil wells run dry, continued production of oil is dependent upon the discovery of new reserves, which is an ongoing process. As landfills reach their capacity, new sites (or disposal methods) must be found. Thus, many factors can push an economy away from equilibrium, producing entrepreneurial opportunities. Despite the fact that the impending push away from the current steady state can often be foreseen, it is not always obvious what actions are appropriate to re-equilibrate the economy. One can foresee an oil well becoming exhausted or a landfill reaching capacity, but that does not make it obvious where the next landfill will be, or where new discoveries of oil, or substitutes for oil, can be made. Therefore, factors that disequilibrate the market call for entrepreneurship.

Entrepreneurial activities that respond to disequilibrating forces are vital to preserving the status quo, and thus are vital to the continued operation of the market. Yet taking a longer view, entrepreneurship results in much more than just maintenance of the status quo. When one thinks of entrepreneurs like Henry Ford, or Ray Kroc, or Bill Gates, one can see that entrepreneurship plays a crucial role in enhancing the status quo.

Kirzner contrasts his equilibrating view of entrepreneurship with Schumpeter's, which Kirzner characterizes as disequilibrating.4 "Schumpeter's entrepreneur acts to disturb an existing equilibrium situation. . . . The entrepreneur is pictured as initiating change and generating new opportunities."5 Kirzner then quotes Schumpeter as concluding that entrepreneurship is at odds with equilibrating activity. Kirzner, in contrast, argues that the entrepreneur ". . . brings into mutual adjustment those discordant elements which resulted from prior market ignorance."6 Kirzner raises the issue because he believes Schumpeter's discussion of entrepreneurship is ". . . likely to generate the utterly mistaken view that the state of equilibrium can establish itself without any social device to deploy and marshal the scattered pieces of information which are the only source of such a state."7

A key point is found in Kirzner's reference to the scattered pieces of information required to equilibrate the market. The necessary information is readily available in the form of market prices, but for entrepreneurship to equilibrate the market, there must be somebody with the knowledge required to take advantage of the information. If the market is disequilibrated through a shift in supply or demand, the change in the status quo should provide a relatively obvious signal of an entrepreneurial opportunity, and provides the most likely case that an entrepreneurial opportunity would be recognized. People who already trade in a market are likely to spot opportunities that are created by factors that disequilibrate the market as a by-product of their routine economic activity, so many people will have the required knowledge, and relatively little wisdom is required to spot such a profit opportunity.

Entrepreneurial opportunities are more difficult to spot when the disequilibrating factors occur in markets other than those an individual normally trades in. For example, if a product has been made of steel, but changes in the aluminum or plastics markets now make it more profitable to make the product out of a different material, an individual who does not see beyond the markets in which he trades would be unlikely to spot that profit opportunity. If the profit opportunity were not noticed, one could envision a situation in which all markets continue to clear, but in disequilibrium as Kirzner (but not Hayek) would use the term. Even though all markets in this scenario continue to clear, factors have disequili-brated the market, following Kirzner's terminology, creating an entrepreneurial opportunity.

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Responses

  • craig
    What factors disequilibrate market?
    3 years ago
  • leah trommler
    What are some market opportunities that runs through factors that disequilibrate the market?
    3 years ago
  • frida
    How to disequillibrate a market?
    3 years ago

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