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Perception, opportunity and profit
183 COMPETITION
AND
ENTREPRENEURSHIP.
By
Israel
M.
Kim;ner. Chicago: The University of Chicago Press,1978. Pp. 242. Price (Paperback): $5.95. PROFIT. Studies in the Theory of Entrepreneurship. By Israel M. Khmer. Chicago: The
PERCEPTION,
OPPORTUNITY
AND
University of Chicago Press,1980. Pp. 23P. Price: $15.00. Israel Kirzner has made a major intellectual commitment to the task of deepening our understanding of entrepreneurship.The major lines of his thinking on the subject were first presented in COMPETITION AND ENTREPRENEURSHIP which appearedin hard cover form in 1973 and is now available as a paperback. Since 1973 Kirzner has developed several fascinating variations on his main theme and these have now been conveniently collected in the collection of articles entitled, PERCEPTION, OPPORTUNITY
AND PROFIT.
Kirzner deals with those aspectsof entrepreneurship which were first called to the profession’s attention by Schumpeter in THE THEORY OF ECONOMIC DEVELOPMENT (1) and later highlighted in CAPITALISM, SOCIALISM AND DEMOCRACY (2). Indeed, Kirzner flirts with simply restating Schumpeter’s ideas. However, in this reviewer’s opinion, Kirzner does succeed in establishing a significant conceptual difference between his view of entrepreneurship and that of Schumpeter. Kirzner’s writings revolve around two main themes. The first is the distinction between market equilibrium and market process. Neoclassical economics, of course, focuses its analytical attention on the properties of static market equilibrium or a comparison of static equilibria. In contrast stands the Austrian tradition which emphasizes the process which leads actors in the market to move price and quantity toward equilibrium. Kirzner, like Schumpeter before him, takes the Austrian view. By conceptualizing markets in this fashion, Schumpeter and Kirzner
184 create an analytical entrepreneurship.
framework
for
the
appearance
of
The second major theme in Kirzner’s writings is the nature of entrepreneurship. There are, in his view, two essential characteristics of the entrepreneurial act. One is alertness. The entrepreneur is the economic agent who is alert to untapped profit-making opportunities. The other is Kirzner’s view that the activities of the entrepreneur are equilibrating. Market equilibrium is not established by some mythical Walrasian auctioneer, but is, instead, produced by the actions of real life entrepreneurs. Kirzner’s view differs from that of Schumpeter in both dimensions. Schumpeter’s entrepreneur is alert to what does not yet exist, whereas Kirzner’s entrepreneur is alert to what already exists. Schumpeter’s entrepreneur disrupts the existing equilibrium with an innovation, whereas Kirzner’s entrepreneur enters a disequilibrium situation and, by being alert to existing profitmaking opportunities, helps establish the true equilibrium. The typical market, says Kirzner, teems with untapped opportunities and is, therefore, not in equilibrium. Schumpeter’s entrepreneur is the innovator who conceptualizes a hitherto nonexistent product, technology, source of supply, market or management technique. Kirzner’s entrepreneur may do so, but to Kirzner, those business leaders who imitate the original innovator are also entrepreneurs. Furthermore, Kirzner seems to believe that what the imitators do is as important, if not more important, than what the Schumpeterian innovator does. Both Schumpeter and Kirzner agree that the role of the imitators is to propel the process whereby the market moves toward equilibrium. Kirzner’s broader definition of entrepreneurship allows him to deal with the topic of X-inefficiency in a thought-provoking manner. To Kirzner, the entrepreneur’s major social role is precisely that of reducing X-inefficiency.
185
Armed with his distinctive view of entrepreneurship, Kirzner analyzes a number of public policy issues. Separate chapters in COMPETITION AND ENTREPRENEURSHIP are devoted to the monopoly problem, advertising and other selling effort, and welfare economics. Essays dealing with the concepts of error, profit, private property, economic justice and economic freedom are presented in PERCEPTION, OPPORTUNITY AND PROFIT. In every discussion, Kirzner uses his concept of entrepreneurship to cast new light on these familiar topics. Kirzner’s views on the monopoly problem are superficially close to those of Schumpeter. Both men see as socially desirable those temporary monopoly positions which are created by the entrepreneurial activity. However, by emphasizing the market process, Kirzner gives us a broader definition of entrepreneurship and, hence, he accepts a wider range of monopoly situations as reflecting entrepreneurship. What most economists would label as a monopoly situation, Kirzner would define as competitive activity. He convincingly argues that since entrepreneurship itself involves absolutely no ownership of economic resources, then entrepreneurship in and of itself cannot create a barrier to market entry. Since freedom of entry is a necessary and sufficient condition for competition, says Kirzner, it follows that entrepreneurship and competition are compatible. On the topic of selling costs, Kirzner offers the fascinating suggestion that such costs are a necessary part of the entrepreneurial role. This is so because the consumer must be alerted to the availability and desirability of the product. Without the activities financed by selling costs, the consumer would have to become his own entrepreneur. On the topic of private property, Kirzner offers us Chapter Six in PERCEPTION, OPPORTUNITY AND PROFIT. There he deals with the question, “Is private ownership of capital essential for an effectively functioning competitive market system? Several authors have responded with a loud, “No!” In 1973 Lancaster
186
analyzed the issue and concluded that private property is not a necessary condition for a competitive market system (3). And in 1979 Yunker offered a powerful argument to the effect that his brand of market socialism would produce greater microeconomic efficiency than a system based on private ownership of the means of production (4). Kirzner’s basic argument is that under a market system with private ownership of capital, the owners compete in an entrepreneurial fashion to select the potential entrepreneurs who will use the capital resources. This competition, “Reduces the special trading costs associatedwith the entrusting of capital into entrepreneurial hands.“’ If the state were to be the sole source of capital, such competition would be eliminated, thereby raising the costs which the entrepreneur must bear in order to convince the suppliers of capital that the entrepreneur should be entrusted with the use of the resource. Kirzner’s essaywas written prior to the publication of Yunker’s work and it appears to this reviewer that each author would benefit from reading the other’s essay. The topic of the separation of ownership and control of the means of production is also covered by Kirzner in Chapter Six. He suggeststhat such separation actually encouragesentrepreneurial activity. His reasoning appears to merit serious attention by all serious students of the subject. One minor problem with Kirzner’s two books is his persistent implication that his view of entrepreneurship is an improvement over the Schumpeterian concept. It would be unfortunate if Schumpeter’s insights were lost, for the real world offers numerous examples of the equilibrium destroying entrepreneurial activity which he describes. Iowa Beef Processor’s disruption of the meat packing industry in the nineteen-sixties is one example. Texas Instruments’ domination of the semiconductor industry
of Chicago
‘See I. Kinner. Perception, Press, 1979, p. 105.
Opportunity
and
Profit.
Chicago:
University
187
in the nineteen-seventiesis another. There has even appeared a popular management consultant firm that preaches an entrepreneurial gospel that sounds like the Schumpeterian view. Known as The Boston Consulting Group, this firm definitely seesdisruption of existing equilibria as the major entrepreneurial activity (5). But there are also numerous examples of the Kirzner type of entrepreneurship at work. Both Schumpeter and Kirzner offer conceptual frameworks which deepen our understanding of the way in which the market system functions. Both authors deserveto be read and discussed. Richard E. Hattwick WesternIllinois University
188
REFERENCES
1.
Schumpeter, J .A. The Theory of Economic Cambridge: Harvard University Press, 19 34.
Development.
. Capitalism, Socialism and Democracy. New York:
2.
Harper and Row, 1962. 3.
Lancaster, K. “The Dynamic Inefficiency of Capitalism,” Journal of Political Economy, September/October, 1973, pp. 1093.
4.
Efficiency Argument for Yunker, J.A. “The Microeconomic Socialism Revisited,” Journal of Economic Issues, March 1979, pp. 73.
5.
Hattwick,
R. The Economic Implications of Corporate Strategic Planning. Macomb, Illinois: Center for Business and Economic Research, Western Illinois University, 1978.
AND
ENTREPRENEURSHIP.
By
Israel
M.
Kim;ner. Chicago: The University of Chicago Press,1978. Pp. 242. Price (Paperback): $5.95. PROFIT. Studies in the Theory of Entrepreneurship. By Israel M. Khmer. Chicago: The
PERCEPTION,
OPPORTUNITY
AND
University of Chicago Press,1980. Pp. 23P. Price: $15.00. Israel Kirzner has made a major intellectual commitment to the task of deepening our understanding of entrepreneurship.The major lines of his thinking on the subject were first presented in COMPETITION AND ENTREPRENEURSHIP which appearedin hard cover form in 1973 and is now available as a paperback. Since 1973 Kirzner has developed several fascinating variations on his main theme and these have now been conveniently collected in the collection of articles entitled, PERCEPTION, OPPORTUNITY
AND PROFIT.
Kirzner deals with those aspectsof entrepreneurship which were first called to the profession’s attention by Schumpeter in THE THEORY OF ECONOMIC DEVELOPMENT (1) and later highlighted in CAPITALISM, SOCIALISM AND DEMOCRACY (2). Indeed, Kirzner flirts with simply restating Schumpeter’s ideas. However, in this reviewer’s opinion, Kirzner does succeed in establishing a significant conceptual difference between his view of entrepreneurship and that of Schumpeter. Kirzner’s writings revolve around two main themes. The first is the distinction between market equilibrium and market process. Neoclassical economics, of course, focuses its analytical attention on the properties of static market equilibrium or a comparison of static equilibria. In contrast stands the Austrian tradition which emphasizes the process which leads actors in the market to move price and quantity toward equilibrium. Kirzner, like Schumpeter before him, takes the Austrian view. By conceptualizing markets in this fashion, Schumpeter and Kirzner
184 create an analytical entrepreneurship.
framework
for
the
appearance
of
The second major theme in Kirzner’s writings is the nature of entrepreneurship. There are, in his view, two essential characteristics of the entrepreneurial act. One is alertness. The entrepreneur is the economic agent who is alert to untapped profit-making opportunities. The other is Kirzner’s view that the activities of the entrepreneur are equilibrating. Market equilibrium is not established by some mythical Walrasian auctioneer, but is, instead, produced by the actions of real life entrepreneurs. Kirzner’s view differs from that of Schumpeter in both dimensions. Schumpeter’s entrepreneur is alert to what does not yet exist, whereas Kirzner’s entrepreneur is alert to what already exists. Schumpeter’s entrepreneur disrupts the existing equilibrium with an innovation, whereas Kirzner’s entrepreneur enters a disequilibrium situation and, by being alert to existing profitmaking opportunities, helps establish the true equilibrium. The typical market, says Kirzner, teems with untapped opportunities and is, therefore, not in equilibrium. Schumpeter’s entrepreneur is the innovator who conceptualizes a hitherto nonexistent product, technology, source of supply, market or management technique. Kirzner’s entrepreneur may do so, but to Kirzner, those business leaders who imitate the original innovator are also entrepreneurs. Furthermore, Kirzner seems to believe that what the imitators do is as important, if not more important, than what the Schumpeterian innovator does. Both Schumpeter and Kirzner agree that the role of the imitators is to propel the process whereby the market moves toward equilibrium. Kirzner’s broader definition of entrepreneurship allows him to deal with the topic of X-inefficiency in a thought-provoking manner. To Kirzner, the entrepreneur’s major social role is precisely that of reducing X-inefficiency.
185
Armed with his distinctive view of entrepreneurship, Kirzner analyzes a number of public policy issues. Separate chapters in COMPETITION AND ENTREPRENEURSHIP are devoted to the monopoly problem, advertising and other selling effort, and welfare economics. Essays dealing with the concepts of error, profit, private property, economic justice and economic freedom are presented in PERCEPTION, OPPORTUNITY AND PROFIT. In every discussion, Kirzner uses his concept of entrepreneurship to cast new light on these familiar topics. Kirzner’s views on the monopoly problem are superficially close to those of Schumpeter. Both men see as socially desirable those temporary monopoly positions which are created by the entrepreneurial activity. However, by emphasizing the market process, Kirzner gives us a broader definition of entrepreneurship and, hence, he accepts a wider range of monopoly situations as reflecting entrepreneurship. What most economists would label as a monopoly situation, Kirzner would define as competitive activity. He convincingly argues that since entrepreneurship itself involves absolutely no ownership of economic resources, then entrepreneurship in and of itself cannot create a barrier to market entry. Since freedom of entry is a necessary and sufficient condition for competition, says Kirzner, it follows that entrepreneurship and competition are compatible. On the topic of selling costs, Kirzner offers the fascinating suggestion that such costs are a necessary part of the entrepreneurial role. This is so because the consumer must be alerted to the availability and desirability of the product. Without the activities financed by selling costs, the consumer would have to become his own entrepreneur. On the topic of private property, Kirzner offers us Chapter Six in PERCEPTION, OPPORTUNITY AND PROFIT. There he deals with the question, “Is private ownership of capital essential for an effectively functioning competitive market system? Several authors have responded with a loud, “No!” In 1973 Lancaster
186
analyzed the issue and concluded that private property is not a necessary condition for a competitive market system (3). And in 1979 Yunker offered a powerful argument to the effect that his brand of market socialism would produce greater microeconomic efficiency than a system based on private ownership of the means of production (4). Kirzner’s basic argument is that under a market system with private ownership of capital, the owners compete in an entrepreneurial fashion to select the potential entrepreneurs who will use the capital resources. This competition, “Reduces the special trading costs associatedwith the entrusting of capital into entrepreneurial hands.“’ If the state were to be the sole source of capital, such competition would be eliminated, thereby raising the costs which the entrepreneur must bear in order to convince the suppliers of capital that the entrepreneur should be entrusted with the use of the resource. Kirzner’s essaywas written prior to the publication of Yunker’s work and it appears to this reviewer that each author would benefit from reading the other’s essay. The topic of the separation of ownership and control of the means of production is also covered by Kirzner in Chapter Six. He suggeststhat such separation actually encouragesentrepreneurial activity. His reasoning appears to merit serious attention by all serious students of the subject. One minor problem with Kirzner’s two books is his persistent implication that his view of entrepreneurship is an improvement over the Schumpeterian concept. It would be unfortunate if Schumpeter’s insights were lost, for the real world offers numerous examples of the equilibrium destroying entrepreneurial activity which he describes. Iowa Beef Processor’s disruption of the meat packing industry in the nineteen-sixties is one example. Texas Instruments’ domination of the semiconductor industry
of Chicago
‘See I. Kinner. Perception, Press, 1979, p. 105.
Opportunity
and
Profit.
Chicago:
University
187
in the nineteen-seventiesis another. There has even appeared a popular management consultant firm that preaches an entrepreneurial gospel that sounds like the Schumpeterian view. Known as The Boston Consulting Group, this firm definitely seesdisruption of existing equilibria as the major entrepreneurial activity (5). But there are also numerous examples of the Kirzner type of entrepreneurship at work. Both Schumpeter and Kirzner offer conceptual frameworks which deepen our understanding of the way in which the market system functions. Both authors deserveto be read and discussed. Richard E. Hattwick WesternIllinois University
188
REFERENCES
1.
Schumpeter, J .A. The Theory of Economic Cambridge: Harvard University Press, 19 34.
Development.
. Capitalism, Socialism and Democracy. New York:
2.
Harper and Row, 1962. 3.
Lancaster, K. “The Dynamic Inefficiency of Capitalism,” Journal of Political Economy, September/October, 1973, pp. 1093.
4.
Efficiency Argument for Yunker, J.A. “The Microeconomic Socialism Revisited,” Journal of Economic Issues, March 1979, pp. 73.
5.
Hattwick,
R. The Economic Implications of Corporate Strategic Planning. Macomb, Illinois: Center for Business and Economic Research, Western Illinois University, 1978.