Wenzel on Kirzner

Robert Wenzel offers a spirited defense of Israel Kirzner’s concept of entrepreneurial alertness in a response to Danny Sanchez. I admire Wenzel’s enthusiasm and his appreciation for Mises, but I think his defense misses the mark. Indeed, there is a growing awareness among scholars working in the Austrian tradition that the essence of entrepreneurship is not alertness, but uncertainty-bearing, what Frank Knight and Mises both called judgment. I’m hardly an impartial observer in this debate, so I’ll offer only a few brief remarks here.

First, the critical construct in Kirzner’s approach to entrepreneurship is not alertness (or discovery), but opportunities. What is it, in other words, that the entrepreneur is alert to? A skilled baseball hitter is particularly alert to the speed and position of the ball; a watchful mother is alert to the cry of her child; the successful hunter is alert to the movements of the deer; and so on. The problem with Kirzner’s metaphor is not the idea that certain people are especially quick to notice things, but the idea that profits exist out there, objectively, waiting to be noticed. In a world of uncertainty, there are no profit opportunities to be alert to.

Of course, Kirzner recognizes that his metaphor is just that, a metaphor. My argument is that the metaphor is unhelpful and misleading. It takes our attention away from the uncertainty inherent in all human action, particularly regarding commercial behavior that involves the ownership and deployment of heterogeneous capital resources. Wenzel counters with examples of real-world entrepreneurs who don’t think about uncertainty. “[T]hey aren’t rolling case or class dice. They aren’t taking much risk. They are seeing Kirznerian opportunities.” But this is simply a category mistake. The issue isn’t what these entrepreneurs think they are doing, but what they are actually doing. Real-world entrepreneurs tend to be highly confident — overconfident, according to most of the research literature — in their judgments about the future. When they act, they have a particular image of the future in mind, and they are often sure their actions will bring about this particular future. But this is a statement about the entrepreneur’s psychology, not the economic function of the entrepreneur. The entrepreneur may believe he is seizing an objectively existing profit opportunity, but he isn’t. There are no such things to be seized.

Second, Wenzel misreads Mises on entrepreneurship and resource ownership (partly by quoting Mises out of context). This is understandable, because Mises’s own treatment of the distinction between entrepreneur and capitalist is uncharacteristically muddled. Mises virtually always associates entrepreneurship with judgment under uncertainty, but he has a lone reference to “pure entrepreneurship,” where he discusses the “imaginary construct of functional distribution” mentioned by Wenzel. I’ve written about this before, so I’ll just quote myself:

Mises clearly associates entrepreneurship with uncertainty-bearing: “The term entrepreneur as used by [economic] theory means: acting man exclusively seen from the aspect of the uncertainty inherent in every action” (Mises, 1949, p.254). Of course, all human action involves uncertainty, as Mises emphasizes by quoting the English proverb: “There’s many a slip ’twixt cup and lip” (Mises, 1949, p.254). Hence, capital owners, landowners, and even laborers (who own their own minds and bodies) act as entrepreneurs under conditions of uncertainty. Mises goes on, in the passage noted above, to describe a “pure entrepreneur” who is neither capitalist, landowner, or laborer, but his discussion is confusing, describing a hypothetical agent who borrows funds from capitalists, invests them, reaps any subsequent profit, and passes losses on to the lenders. But, as he notes: “Such an entrepreneur would, in fact, be an employee of the capitalists who speculates on their account and takes a 100 percent share in the net profits without being concerned about the losses” (Mises, 1949, p.254). But clearly such an agent is an employee of the capitalists, paid with a contingency fee. The uncertainty-bearer – the entrepreneur, according to Mises’s own definition – in this example is the capitalist, not the employee. Mises agrees, writing just two sentences later: “To the extent that the losses incurred cannot be borne out of the entrepreneur’s own funds, they fall upon the lending capitalists, whatever the terms of the contract may be. A capitalist is always also virtually an entrepreneur and speculator. He always runs the chance of losing his funds” (Mises, 1949, p.254). What, then, is a “pure entrepreneur”? The concept makes little sense in Mises’s own formulation.

My 2008 article “Opportunity Discovery, Entrepreneurial Action, and Economic Organization” offers a more detailed critique of the opportunity construct, particularly as used in contemporary entrepreneurship research. I think the entrepreneurship research literature is starting to move away from Kirzner. For example, the best paper award at this year’s Academy of Management conference (Entrepreneurship Division) went to Professor Per Davidsson for a paper arguing that that the entrepreneurship field should drop the concept of “opportunity” altogether.

Comments

  1. What caught me was in Wenzel’s analysis was this sentence as a defense of the reasoning employed:
    “Koch brothers, Sheldon Adelson or Donald Trump, I surmise that it would be hard to spot them taking great risks.”

    Sheldon Adelson has gone broke several times on risks. Jobs lost his job. Koch and Trump I’m not too familiar with but I’m sure they’ve had theirs. But I think that to say that ‘opportunities’ exist to be alert for violates Occam’s razor. Of course ‘opportunities’ exist, man’s wants are unlimited as are his choices. Would not the entrepreneur be the one whom bests acts with the given resources bearing the uncertainty (risk) of whether or not the wants they seek to fulfill will result in a profit? They are also ones who clearly understand that cost is ephemeral, or rather, they understand that they are acting in the present with present resources.

    If they are ‘alert’ to already existent profit potentialities (what I’m guessing is meant by opportunities), that is akin to saying they have a hard gauge on other’s subjective preferences and value scales which guide them to the best possible use of the given resources (including time). It also is to say that wants are already existent and waiting to be discovered.

    I think that’s an overreach.

    I say that this would be an example of judgment which is based solely on the subjective evaluation of the ‘environment’ on behalf of the entrepreneur and his given resources. This is not done because an opportunity has been spotted, per say, but because they are in hopes of satisfying a want. Whether it is existent or not is not for the economist to question nor investigate. To say the want already exists may in many cases fall short of an accurate analysis as it cannot be applied to all cases of entrepreneurial action and violates Occams razor through confusing the issue at hand.

    This reminds me of Hayek’s critique of Galbraith in Non-Sequitor:

    “Professor Galbraith’s argument could be easily employed, without any change of the essential terms, to demonstrate the worthlessness of literature or any other form of art. Surely an individual’s want for literature is not original with himself in the sense that he would experience it if literature were not produced. Does this then mean that the production of literature cannot be defended as satisfying a want because it is only the production which provokes the demand?”

    I realize it’s a bit of a stretch in this context but I thought about this passage because the entrepreneur in many cases is not certain whether or not they are already satisfying a want or will create one. In fact sometimes they are sure of one or the other completely; or a mixture of the two.

    Basically uncertainty cannot be avoided in the process. The entrepreneur thus fulfills the function of best allocating their resources (means) in the present in hopes of attaining a higher outcome in the future. They understand that they are only acting with present means, within tolerance of their own individual time preference, towards what they hope (or assume) to produce a higher rate of return than other endeavors. If this were not so they would not act on their impulse as it would be known not to produce a favorable result. Keep in mind that for some this return may be psychic, in any number of ways, and is to be determined by the actors themselves based on their own individual valuations so far as cost/benefit are concerned.

    If there is any alertness it is to the possibility of risk given uncertainty. With the cost, time preference, and expectations taken into account the entrepreneur acts, and the more adept entrepreneur acts responds quickly to their judgements and impulses. They are those who best trust their judgments. If there is any reward it is given to the entrepreneurs who best utilize their resources (keep in mind this includes time as it is scarce).

    I firmly do not believe that there are ‘good’ or ‘bad’ entrepreneurs in a certain sense, merely more or less skilled. There are only acting men and women in the present with their given resources and the environment in which they will use them. We are all then entrepreneurs to some extent. We are all unsure as to the future conditions therefore we must make judgments. ‘Opportunities’ are nothing more than ‘better’ judgments of future conditions and are only observed as such ex-post and if successful.

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