Schumpeterian and Kirznerian entrepreneurs

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Israel Kirzner's book Competition and Entrepreneurship contrasted his view of entrepreneurs who equilibrate markets with Schumpeter's entrepreneurs who generate economic progress through creative destruction, disequilibrating markets. This section considers in more detail the differences between Schumpeter's and Kirzner's depiction of entrepreneurial activity. Chapter 4 argued that at least part of the difference depends upon how equilibrium is defined, but even if this terminological difference is settled, there remains a fundamental difference between the functions that entrepreneurship accomplishes in Schumpeter's and Kirzner's analysis. Schumpeter's entrepreneurs change the nature of the underlying equilibrium in the economy, and Kirzner's entrepreneurs act to keep the economy close to that equilibrium. While Kirzner did find more commonality between his and Schumpeter's ideas in his later work, it does not appear that Kirzner made this distinction between these effects of the entrepreneurship that they both were discussing.

Kirzner distinguishes his view of entrepreneurship, which he envisions as equilibrating, with Schumpeter's, which he depicts as disequilibrating, saying "Schumpeter's entrepreneur acts to disturb an existing equilibrium situation. ... The entrepreneur is pictured as initiating change and generating new opportunities."3 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."4 Kirzner takes issue with Schumpeter because his 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."5

When Kirznerian entrepreneurship is considered within the framework of economic progress, there may be more common ground between Kirzner's and Schumpeter's views on entrepreneurship than Kirzner implies in the above passages. Kirzner's entrepreneurs explicitly begin their activity within a disequilibrium situation.

It is necessary to postulate that out of the mistakes which led market participants to choose less-than-optimal courses of action yesterday, there can be expected to develop systematic changes in expectations concerning ends and means that can generate corresponding alterations in plans.6

In such a situation, entrepreneurial insights would bring individuals closer and closer to their optimal courses of action, eventually causing entrepreneurial opportunities to vanish. However, new opportunities could arise from Schumpeterian entrepreneurship, as Chapter 6 described, which would create a disequilibrium situation with new profit opportunities for Kirznerian entrepreneurs to act upon.

From the entrepreneur's standpoint, there is no real distinction to be drawn. In both cases, the entrepreneurs are seeking opportunities to reallocate resources to realize a previously unexploited profit opportunity. The distinction arises because of the differences in the nature of the profit opportunities that Schumpeter and Kirzner were envisioning. In Schumpeter's case, one can picture an economy in Hayekian equilibrium, where everyone's plans are mutually consistent. The entrepreneur spots a profit opportunity, and unless the entrepreneur's actions were anticipated by others in the economy, other people's plans will be disrupted by the entrepreneur's actions and some people will not be able to realize the plans they had previously made. The entrepreneurial act is disequilibrating. At this point there is an opportunity for Kirzner's entrepreneurs to step in and seize profit opportunities to reequilibrate the economy. The entrepreneur is acting on a previously unnoticed profit opportunity in both instances. But in Schumpeter's case, the entrepreneur disturbs an existing Hayekian equilibrium, whereas in Kirzner's case the entrepreneur moves toward Hayekian equilibrium.

The distinction between the two cases becomes somewhat more obscure in practice if one admits that an economy is never in Hayekian equilibrium, but the distinction remains clear in theory. In this context, Schumpeterian entrepreneurs have the effect of making individual plans less consistent with each other, whereas Kirznerian entrepreneurs have the effect of making them more consistent. There is a more important distinction to be made between the two cases, however. The key element Schumpeter was describing was the innovative activity of bringing a new product or production process to market, whereas the key element Kirzner was describing was spotting profit opportunities that would make people's plans more consistent and bring the economy closer to equilibrium. Because of the way Kirzner defined equilibrium, as discussed in Chapter 4, his vision of entrepreneurship encompasses the activities of Schumpeterian entrepreneurs, but Kirzner describes them differently, so the equilibrating nature of entrepreneurship is emphasized over the entrepreneur's innovative activities. Although neither vision of entrepreneurship excludes the activities described by the other, it seems descriptive to refer to the innovative activities of entrepreneurs that make it less likely for people to be able to realize their plans as Schumpeterian, and the equilibrating activities of entrepreneurs that make people's plans more consistent as Kirznerian.

In fact, there is no difference between the actions of Kirznerian and Schumpeterian entrepreneurs. Both are seizing unexploited profit opportunities, and in both cases the market environment will be different for all market participants in the future. One must note, however, that in any advancing economy, the equilibrium toward which the economy tends changes from day to day, and when the Kirznerian model is expanded to recognize this, the tendency toward equilibrium in a static sense is less important than the exploitation of new profit opportunities which implies greater gains from trade and economic progress. The difference that Kirzner emphasizes between his and Schumpeter's views largely arises because of the different objectives of the two writers. Schumpeter was discussing directly the role of entrepreneurship in economic growth, while Kirzner was interested in showing how entrepreneurship is an essential but underrecognized element in the allocation of economic resources.7

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