Boldness, impulse, hunch are the raw materials of entrepreneurial success (and failure).
(Kirzner 1997b: 39)
It is important to examine the unique characteristics of entrepreneurial alertness if we are to appreciate this elusive concept and to understand the types of institutions and economic policies that are likely to be conducive to it. A general point is that entrepreneurship is not a factor of production, not even a special kind of productive factor (Kirzner 1979: 180-181). The characteristics of entrepreneurial alertness which distinguish it sharply from conventional economic resources can be summarised as follows:
1 entrepreneurial alertness does not represent the mere possession of superior knowledge of market opportunities;
2 entrepreneurial alertness is non-deployable and tacit;
3 no market exists for hiring entrepreneurial services, and entrepreneur-ship cannot be treated in terms of demand and supply curves;
4 entrepreneurship is costless.
Entrepreneurial alertness does not represent the mere possession of superior knowledge
Entrepreneurial alertness is 'the knowledge of where to obtain information (or other resources) and how to deploy it' (Kirzner 1979: 8). Entrepreneurial alertness is a kind of prior knowledge or foreknowledge. In this connection Kirzner is echoing the distinction between two types of knowledge recognised by Samuel Johnson: 'Knowledge is of two kinds. We know a subject ourselves, or we know where we can find information about it.' Entrepreneurial alertness refers to the latter kind of knowledge. More specifically, entrepreneurial alertness is defined as the knowledge of where to find market data rather than the knowledge of substantive market information per se.
An important implication of this definition is that alertness does not represent the possession of superior knowledge concerning market opportunities. The entrepreneur is not necessarily privy to specific or localised information that other agents do not possess. 'What the entrepreneur possesses rather is a sense for discovering what is around the corner' (Kirzner 1984b: 3). Alertness does not involve simply knowing more than others do where inputs can be purchased most cheaply or where outputs can be sold at the highest prices.
Hence, entrepreneurship is alertness to the opportunities presented by new and existing information rather than the possession of information by itself. This distinction may be clarified by considering the example of an entrepreneur who hires a marketing manager. It is granted that the marketing manager may possess superior knowledge concerning market conditions — for example, by having specific or localised information on changes in the marketing environment, including changes in the problems faced by particular market segments. However, since the manager cannot see how his or her knowledge can be successfully employed (if the manager had done, he or she would have acted as his or her own employer), it is the entrepreneur who exhibits the higher level of alertness in perceiving the opportunity presented by the information possessed by the manager. '[T]he alertness of the entrepreneur is the abstract, very general and rarefied kind of knowledge which we must ultimately credit with discovering and exploiting the opportunities specifically unearthed by those whom [the entrepreneur] has been wise enough to hire, directly and indirectly' (Kirzner 1973: 69).
If entrepreneurship were conceivable in terms of superior knowledge, there would exist a factor market in which the services of people who possess such entrepreneurial knowledge could be hired. However, no such market exists (see below).
Hence, public policy proposals to increase the supply of market information and technical information (e.g. trade commissioner services, information bureaux and statistical data) cannot be considered to increase entrepreneurship directly. Entrepreneurial alertness is still required to perceive any profit opportunities that may be presented by such information. Entrepreneurship can also be argued to be pushed back to an earlier stage: the stage at which public policy-makers decide on where to find relevant information and when they choose the information they consider worth collecting in the first place. The completion of any possible mutually beneficial transactions that are suggested by publicly provided or publicly funded information is by no means inevitable, and it is very definitely not automatic or instantaneous. People may still not be aware of that information, even if the government were to make it available at zero cost; they must still perceive the opportunity to learn that information (Kirzner 1973: 227).
Entrepreneurial alertness is non-deployable and tacit
It is argued that entrepreneurial alertness differs fundamentally from conventional economic resources, such as technical knowledge, in that, unlike technical knowledge, it is not possible to make deliberate decisions concerning the deployment of entrepreneurial alertness. The entrepreneur is not able to decide whether or not to deploy it, for which competing purposes to deploy it, and how and in what quantity to deploy it (Kirzner 1983b: 64). In the course of their decision-making, entrepreneurs do not consider their hunches as a means (i.e. a stock of knowledge) available to achieve given ends. Individual entrepreneurs cannot decide to allocate, say, 10 per cent of their alertness to the discovery of opportunity A, and the remaining 90 per cent to the discovery of opportunity B. Entrepreneurial alertness is not a resource that can be acquired deliberately like other aspects of human capital.
A major factor which gives rise to the non-deployability of entrepreneur-ship is its tacit nature. An essential difference between entrepreneurial and technical knowledge is that the entrepreneur lacks self-consciousness concerning the former. Rather than being aware of their hunches, entrepreneurs' actions simply reflect their hunches. A further aspect of this tacit quality is that entrepreneurs are not able to articulate or explain their alertness.
Kirzner's conception of entrepreneurship as non-deployable and tacit stands in stark contrast to that in neoclassical treatments of entrepreneurial supply, such as Baumol (1990), Casson (1982), Murphy et al. (1991) and Schultz (1975). They rely on the idea of entrepreneurship as a resource that can be allocated like any other factor of production. They contend that the institutional context and the rules of the game (the reward structure of the economy) affect the allocation of entrepreneurial resources between productivity-increasing activities, such as innovation, and largely unproductive, redistributive activities, such as rent seeking and organised crime.
No market exists for hiring entrepreneurial services
The implication of the previous arguments is that no market exists for the hire of entrepreneurial services because the market and the entrepreneur are unaware of the need for (or the existence of) entrepreneurial alertness for any particular opportunity (Kirzner 1979: 174). Furthermore, the market does not recognise that any particular individuals possess entrepreneurial alertness. It does not identify any specific ability for discovering price discrepancies or profit opportunities, even though individuals differ in their ability to perceive entrepreneurial opportunities. Were the market to recognise entrepreneurial alertness in the sense of an available useful resource, there would be 'markets in which this factor service was hired, with its price rising to reflect its full productivity, ruling out scope for pure market profit' (Kirzner 1979: 181).
Consequently, strictly speaking, it is not possible to treat entrepreneur-ship in terms of demand and supply curves.7 The market does not demand (in the ordinary sense) the services of entrepreneurs. For any instance of imperfect plan coordination about which market participants are supposed to be ignorant, it is not possible for these same market participants then to demand a service that is supposed to discover that very maladjustment. It should be noted that to hire 'an entrepreneur' is to be an entrepreneur. (On the other hand, if they are aware of a particular opportunity, then they do not need to hire alert entrepreneurs to discover it.) Market entrepreneurship reveals to market participants imperfect coordination and opportunities that they did not realise existed and that they did not recognise as needing correction.
The implication for public policy-makers is that identifying entrepreneurs ex ante is very problematic. Furthermore, if public policymakers subjectively believe that they can discover opportunities to improve the existing structure of the economy, then they are also trying to act as entrepreneurs by spotting possibilities for better coordination.
An essential characteristic of entrepreneurial knowledge is that it is spontaneously learnt, spontaneous in the sense that it is acquired entirely without being planned. Entrepreneurial alertness is the ability to discover unex-ploited profit opportunities without deliberate search for information:
What distinguishes discovery (relevant to hitherto unknown profit opportunities) from successful search (relevant to the deliberate production of information which one knew one had lacked) is that the former (unlike the latter) involves that surprise which accompanies the realization that one had overlooked something in fact readily available. ('It was under my very nose!')
(Kirzner 2000: 18; emphasis added)
When entrepreneurs make surprising discoveries, their discoveries are not the result of any prior deliberate search for a missing piece of information —
they do not know beforehand how much information they lack, the value of the missing information or the cost of obtaining it. Alertness may, however, include the discovery of previously unrecognised opportunities for deliberate search (e.g. market research), but this initial discovery is itself not the product of deliberate search activity by the entrepreneur. (For further discussion on the differences between deliberate search and entrepreneurial alertness, see Reekie 1984: 93-100.)
The cost of using technical knowledge is measured in terms of opportunity cost: the cost of using technical knowledge for a particular purpose is the value of the best forgone alternative. In contrast, entrepreneurial alertness does not involve opportunity costs because hunches are learnt spontaneously. No resource inputs are involved in acquiring them since no deliberate act of learning or of search is undertaken.
However, in describing entrepreneurial knowledge as costless, Kirzner provides clarification to avoid potential misunderstanding: 'To be sure, the spontaneous learner has incurred no cost or sacrifice through his learning. But this is not so much because the knowledge was costlessly available as because the knowledge was simply not deliberately sought' (Kirzner 1979: 143).
Klein (1999) develops a similar line of thought. He writes that, rather than regard the cost of an entrepreneurial hunch as zero, it is better to regard the concept of cost as not applicable to pure entrepreneurship (at least not to the 'deep level of mind' where Klein argues entrepreneurial 'epiphanies' occur). Opportunity cost relates to choice, and in Kirzner's eyes, entrepreneurial discovery is not an object of choice. 'Kirznerian entrepreneurship is costless in the sense that sound is weightless - not that sound weighs zero pounds, but that the concept of weight does not apply to sound' (Klein 1999: 54).
Demsetz (1983) does not agree that entrepreneurship is costless (though he does concede that in many cases the costs of alertness might not be significantly different from zero). First, Demsetz regards the time and mental energy that an entrepreneur devotes to considering a prospect and judging its potential as a cost of maintaining alertness, because the entrepreneur's mind is diverted from other tasks. Second, costly prior acquisition of knowledge may be necessary in order to discover opportunities.
This latter viewpoint appears to be supported by a recent empirical study. In the first phase of a three-part investigation, Shane (2000) undertook an in-depth field study of eight sets of entrepreneurs who exploited a single MIT invention (a three-dimensional printing process). The range of ventures included ceramic casting, drug manufacture, the manufacture of ceramic filters and orthopaedic applications. He tested hypotheses to do with whether entrepreneurs discover those opportunities that are related to the information that they already possess. In particular, he examined the effects of entrepreneurs' prior knowledge of markets, of ways to serve markets, and of customer problems, on the process of entrepreneurial discovery. His results showed not only that prior knowledge influences the discovery of opportunity,8 but also that much of the prior knowledge is developed through costly and idiosyncratic education, research and work experiences. For example, in one venture to manufacture ceramic filters for the power generation market, the education and work experience in ceramic engineering of the entrepreneurial team enabled them to see how the MIT invention would solve problems with filter geometry and could make uniform-porosity ceramics.
The results of Shane's field study do, however, indicate that the entrepreneurial-discovery process is one of recognition rather than a search for information. None of the eight entrepreneurs believed that their respective opportunity was obvious from information about the MIT invention alone. Nor did any of the entrepreneurs believe that they were searching for the opportunity prior to its discovery. As one entrepreneur in the study put it: 'For whatever reason ... I just intuitively saw the opportunity in chronopharmacology. I certainly wasn't searching for the opportunity.'
It should also be noted that not all theorists who emphasise superior perception as the defining characteristic of entrepreneurship are in agreement with Kirzner's exclusion of search activity from the entrepreneurial function. In contrast to Kirzner, for instance, Casson (1982) includes the search for information within the entrepreneurial function and emphasises that entrepreneurial search does not just involve the extensive collection of facts. A synthesis of information is also required in identifying opportunities for coordination. Furthermore, Casson regards the judgemental decision-making of the entrepreneur as having a positive opportunity cost.
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