Klein on Hayek and Entrepreneurship

Thanks to Chris, Pete, Pete, and Fred for adding me to the roster. As regulars around here know, I've been in the comments from time to time and am now happy to be "up top" as a full-time contributor. Pete B. and I have known each other for more than 20 years, most of which I've spent trying to keep him from completely going off the rails, and it's a particular pleasure for me to be part of this endeavor with him.

On to business... In a recent post over at "Organizations and Markets," Peter Klein offers some musings about the absence of a theory of entrepreneurship in Hayek. He rightly notes that:

Kirzner’s theory of entrepreneurial discovery builds directly on  Hayek’s notion of an economy characterized by dispersed, tacit  knowledge, an economy in which “competition” is a process of  coordination and equilibration, rather than a set of conditions (as in  Walrasian competitive general equilibrium). However, Hayek did not  develop a theory of the entrepreneur per se.

He also notes that Hayek used the term "entrepreneur" in the writings on socialist calculation but Klein argues it was more a loose synonym for "businessman" and did not have the analytical precision of Kirzner (then again, who among us does?). Klein also claims "Certainly the Kirznerian metaphor of the “pure entrepreneur,”  performing a discovery function independent of ownership and  investment, does not appear in Hayek’s writings."

I think Peter is right (and, I might ask, how did Austrian economics get its current surplus of Peters - Boettke, Leeson, Lewin, and Klein?) about the lack of a real theory of the entrepreneur, but Hayek does recognize the discovery function that the entrepreneur must play. There is the famous passage from the 1940 paper about how

the method which under given conditions is the cheapest is a thing which has to be discovered, and to be discovered anew, sometimes almost from day to day, by the entrepreneur, and that, in spit of the strong inducement, it is by no means regularly the established entrepreneur, the man in charge of the existing plant, who will discover what is the best method. (Ind. and Econ. Order p. 196)

The word "discovery" appears elsewhere in that general area of the paper, as does the word "entrpreneur."

Hayek had the ingredients for a Kirznerian theory of the entrepreneur but did not put them all together in the way Kirzner eventually did. It is worth noting, in contrast to arguments sometimes made by the "de-homogenizers," that Hayek clearly has a theory of individual action here and that markets are not somehow mysteriously coordinated by prices without the involvement of intentional human action. In my SDAE presidential address (RAE 2004), I tried to make this point against the de-homogenizers while also still recognizing that Hayekians have sometimes left the impression that "it's all about prices" in a way that opened them up to this criticism.

I would also add that I think the best way to understand Kirzner's theory of entrepreneurship is as a "Misesian answer to a Hayekian question."  In "Economics and Knowledge" in 1937, Hayek defined the economic problem as explaining the process behind the empirical observation that prices tended toward costs. He further argued that the explanation would have to be in terms of knowledge, specifically the increasingly dovetailed expectations of market participants. How was it that market participants learned both about the objective state of the world and the expectations of other market participants? He offered no detailed answer to this question.

Kirzner's entrepreneur, who is in most ways Mises's entrepreneur, is the answer to that Hayekian question. One way of viewing Kirzner's whole project is that he brought Mises's entrepreneur into Hayek's epistemic conception of the market process. It is the enterpreneur who drives the social learning that characterizes the discovery process of the market. We cannot understand spontaneous order without entrepreneurship and monetary calculation, and a focus only on intentional human action misses the ways in which such action produces the unintended but orderly outcomes that are the benefits produced by markets. Kirzner's genius is not just in producing a very precise theory of the entrepreneur but one that, again, provides a Misesian answer to a Hayekian question and, in so doing, reminds us that Austrian economics needs both individual entrepreneurship and spontaneous order to be a complete approach.

Peter Klein ends his entry with a nice quote from David Harper that makes a similar point about the contrasting but complementary emphases of Mises and Hayek. Noting the absence of a theory of entrepreneurship in Hayek should only remind us that we need Mises and Kirzner (and plenty of others) to get the holistic understanding of market processes that Austrian economics promises.

Comments

[D.G. Lesvic]

However interesting the fine points between Hayek and Kirzner, they're just the preliminaries of economics. When do we get to the main event?

To Mises: "The essence of the interventionist policy is to take from one group to give to another."

And to Hayek: "Redistribution" was "the crucial issue on which the whole character of future society will depend" and "it would be disingenuous to avoid discussing" it.

When you get around to discussing it, wake me up.

[matthew mueller]

This is a great topic. I always enjoy reading up on the deepening split between Misesian and Hayekian economics. Now while I agree that Kirzner's role in the ongoing debate is essential, I feel that the views of Lachmann have been sadly neglected. Let me take this opportunity to respond to Dr. Horwitz's post with some of my observations.

First, in an uncertain world, it is improbable that the entrepreneur will ever come to introduce greater coordination and equlibration in the market process. As Lachmann observed many, many years ago, we can never be certain that the "spill-over effects" of an entrepreneurial act will always tend toward an equilibrating direction. These actions are far more likely to generate greater uncertainty (disequilibrium) as a result of the changes in expectations that the entrepreneur helped to bring about.

I think far more weight should be attached to economic factors that consider such things as the speed (and smoothness) of market adjustments, the availability (and likely permanence/durability) of information, and the extent to which an event consitutes a "real change" rather than a minor fluctutation.

However (and unfortunately for the Misesians/Kirznerians), the confirmation of an one of these considerations takes time --- a period in which a great deal could happen in the meantime.

So Kirznerian discovery in a dynamic market process is not sufficient to explain adequately the real-world which displays daily the fierce contest between disequilibration and equilibration. And it is misleading to suggest that the recognition of error by the entrepreneur will in all cases demonstrate the superiority of equilibrating forces.

One has to understand the role expectations play in the passage of time.

Where are all the Lachmanniacs at?

[Steve Horwitz]

Right here Matthew. My celebration of Kirzner's genius was not an unqualified endorsement. I've written in ways sympathetic to Lachmann for years (going back to my first real published paper in AE, the piece with Boettke and Prychitko in 1986). I absolutely agree that Kirzner's somewhat linear story is too simple and mechanistic for a truly kaleidic world. I would much rather talk about the market process as being "creative" than "discovering" what's "already out there." Everything I've ever written about the need to talk about "order" rather than "equilibrium" can be understood as an attempt to go from Kirzner to Lachmann without losing Mises and Hayek in the process.

In the end, Paris gets fed even if we don't tend toward equilibrium in a strict sense.

[Vilfredo Pareto]

Matthew, Steve,

At last, someone refers to Lachmann who is, for me, with Hayek, the most exciting Austrian economists, Kirzner (and Mises) being far behind them.

I have always had a problem with Kirzner: what we can read in Kirzner's "An essay on capital" is indigent: 140 hollow pages; his "theory" of entrepreneurship is hazy, to say the least, even if he re-wrote it so many times...; few things (if any?) about institutions, financial markets, or law; a weak epistemology. To sum up, Kirzner does not deserve a Nobel price (sorry Pete!!).

Hayek and Lachmann tried to tackle all these questions, even if one can find some deficiencies in both and even if their respective approaches are different. Their vision is definitely deeper than Kirzner's.

Comments will surely be numerous. My opinion is even worst concerning Mises, the all-purpose economist who manages to write so much pages with so few references to the developments of economics of his time...

Steve: In the end, we can eat (quite good BTW) in Paris.

[Brian Pitt]

Matthew,

What I like most about Lachmann, to paraphrase, is when (1970) he averred that spontaneous order theorizing must take note of social institutions outside of the market, or institutions related to the "common will." Or as Boettke and Storr (2000) note, scholars must take a look at economically relevant, economically conditioned, and economically oriented action.

Dr. Horowitz book review of Horton and Turner (1989) discusses these issues as well. However, being enrolled in a sociology program, I am a bit less optimistic than he is about the forthcoming rapprochment between economics and sociology.

[Alec]

I second Vilfredo's comments (even Schmoller agrees that one cannot eat for free in Paris): Austrianism will make little progress until the Lachmann-Kirzner dispute comes closer to resolution. We have made no further progress on Lachmann-Kirzner than was the state of play when Prof. Vaughan wrote her excellent paper on the tipc (early 90's?).

[D.G. Lesvic]

Reagrding the Lachmann issue, from my book, Intellectually Incorrect, The Amateur Science of Economics, and the Professional War Against It:

Since there is always entrepreneurial error, and disequilibrating as well as equilibrating action in the market, its critics cite the possibility of the disequilibrating outweighing the equilibrating. It's also possible that, if we get out of bed in the morning, we'll get hit by a truck. But that doesn't mean we shouldn't get out of bed. Economics is not a science of possibilities, for anything is possible, nor of certainties, for nothing is certain. It is a science of practical and reasonable assumptions, and the futility of human action is not one of them.

Error doesn't change the fact that the market tends to correct it, and nothing else could, that there could be no economic calculation and nothing but chaos without the market, that its tendency toward equilibrium, the Invisible Hand, is our only logical hope, and practical and reasonable assumption.

And, now, can we get to the main issue?

[matthew mueller]

D.G. Lesvic

I agree that economics should be understood as a "science of practical and reasonable assumptions." That is why I am puzzled that you think you have settled the Lachmann issue by saying that "[e]rror doesn't change the fact that the market tends to correct it." Not only do you fail to make an argument in favor of this "assumption", but, stated in this way, I don't see how you could possibly hope to prove Lachmann wrong after granting the existence of error. The market certainly can recognize and attempt to address and eliminate error, but that does not mean it will succeed. Human action takes place in time. Time makes possible the anticipation of the future which causes expectations to diverge, leading to uncertainty and disequilibrium.

Now if these assumptions are valid, which I believe they are, I don't think simple statements like "Paris gets fed" will suffice in refuting them. It is hopeless to concede the most fundamental of assumptions to your opponent
(the existence of error and uncertainty) and then hope to win by enunciating statements that abstract from the tenability of pure theory.

[Mario Rizzo]

"Kirzner's genius is not just in producing a very precise theory of the entrepreneur"
A *precise* theory? I wasn't aware that he had done so. I thought it was the broad outline of a theory. It seems to be that David Harper has done far more to produce a more nearly precise theory than anyone else. Kirzner refused as a matter of principle to give his theory more substance.

[D.G. Lesvic]

response to matthew mueller

My argument in favor of the assumption that the market tends to correct error and move toward equilibrium was the same as the argument in favor of getting out of bed in the morning: we have no practical and reasonable alternative.

Now, can we can get on to the main event?

[D.G. Lesvic]

One more digression, before moving on to the main event.

It is not just a theoretical assumption that the market works, but an empirical fact. We see the goods on the shelves. Are we to walk away from them because some college professor said the market may not work?

What are we to walk away to; what is the alternative? The fact that you yourself have not walked away from it is your own concession that it works.

And what other explanation for the fact that it works could there be, but the Invisible Hand, the tendency toward equilibrium?

[matthew mueller]

Positive statements involving observations of successful market activity like the availability of goods and exchange depend on some form of comparison in order to vindicate the inexorable tendency toward equilibrium. That is, just because we see goods on the shelves of supermarkets does not mean the market works (or moves in an equilibrating direction). Bruce Caldwell in a lecture at FEE once remarked that on his trip to Poland (which was still part of the Soviet Empire) he noticed that a lot of street vendors offered for sale pounds and pounds of laundry detergent. Does this prove that markets work? In order to make these normative judgments, we must have something to compare these "empirical facts" to. One must assess the opportunity costs involved in all market activity. The market does not invariably generate equilibrium outcomes.

But if we agree that opportunity cost plays an essential role in the appraisal of market activity, then it would seem to follow that greater importance should be attached to "theoretical assumptions" than "empricial facts". What cannot make the case for capitalism by pointing to the shelves of one's local grocer; the Soviets could do that.

[matthew mueller]

edit: "ONE" cannot make the case for capitalism....

[D.G. Lesvic]

Matthew:

Are pounds and pounds of laundry detergent all that you see on the free market's shelves?

If so, what are you waiting for? North Korea would be glad to have you. They're not keeping anybody out. Their problem is keeping people in.

[Steve Horwitz]

Mario,

I should have been more specific: a precise theory of the entrepreneurial function. How exactly individual entrepreneurs carry out that function was indeed left way too vague by Kirzner. And David's work certainly fills many of those gaps.

[Neel]

Mario,

Kirzner has always adhered to a 'strict' definition of the economic point of view. His theory of entrepreneurship might thus look incomplete from the perspective of economists who consider that we should import knowledge from psychology, sociology, philosophy, etc. to enrich our discourse.

This is what David Harper does in my view. In his preface to "Foundations of Entrepreneurship and Economic Development" (FEED), he writes that his "study applies Kirzner's theory of entrepreneurship and delves into the psychological, cultural, political and institutional contexts that frame entrepreneurial discoveries of unexploited gains from trade." In brillantly providing the psychological, cultural, political and institutional framework of Kirzner's theory, Harper certainly gives more substance to the latter theory. His 'wider' perspective on the economic point of view (than Kirzner's) allows him to 'deepen' Kirzner's theory of entrepreneurship.

Yet, would I be wrong if I said that Harper's writings leave the albeit narrowly-conceived economic substance of Kirzner's general (which I prefer to "precise") theory of entrepreneurship almost untouched?

[Neel]

On the issue raised by Peter Klein and Steven Horwitz, I think that the decisive influence on Kirzner was Mises. When one reads Kirzner's books like "The Economic Point of View" (1960), "Market Theory and the Price System" (1963), and his 1967 paper in Il Politico, "Methodological Individualism, Market Equilibrium and Market Process", the Misesian influence is striking.

As for Hayek and Kirzner, well, I wonder whether the influence did not run both ways. Kirzner does refer to Hayek's writings ("Economics and Knowledge", "The Use of Knowledge in Society" etc.) in the works I mentioned , but these writings do not refer to entrepreneurial discovery as Kirzner was to elaborate later. I agree with Peter Klein that the idea of entrepreneurial discovery is a Kirznerian one, that does, however, build upon the Hayekian notions of dispersed, tacit, knowledge. It's only in 1968 that Hayek elaborates explicitly on the idea of "competition as a discovery procedure" (and talks about entrepreneurship in this regard), but this is...one year after Kirzner presented his paper entitled "Methodologial Individualism, Market Equilibrium, and Market Process", in which he refers to "entrepreneurs discovering discrepancies between prices" and to the notion of "alertness", at the Mont-Pelerin Society Meeting in France . Maybe Hayek was a Kirznerian?!

[Neel]

I forgot to mention that Hayek was present at the MPS meeting in Vichy, France, in Sept. 1967.

[Adam Martin]

The entrepreneur certainly is not central to Hayek, but he is present in places. Constitution of Liberty chapter 5 section 7 lays it down Kirzner-like.

[D.G. Lesvic]

Aren't you people ever going to get to the main event?

[Steve Horwitz]

Mr. Lesvic,

In the real world, do you routinely attend social events and then constantly interrupt people's ongoing conversations to demand that they talk about what you want to talk about? If not, can you not see why it's equally rude to do so on a blog? If you're not happy with the conversations here, could you either:

1. Start your own blog where you can have the conversations you want

and/or

2. Stop interrupting the conversations here with your "demands"?

[D.G. Lesvic]

Mr Horwitz,

I'm sorry, I didn't realize that this was a tea party. I thought it was economics. And I didn't realize that it was private property. I thought it belonged to the public, and that the teachers were its servants, not its masters.

I see no sign that the public is primarily concerned with Hayek's differences with Kirzner, nor even that Hayek was primarily concerned with them.

To Hayek, "Redistribution was the crucial issue on which the whole character of future society will depend," and "it would be disingenuous to avoid discussing" it.

So tell him to get lost.

Economics is your job, and if you're not happy with it, why not get another one?

[Lesvic is a kook]

Bravo to Dr. Horwitz.
This Lesvic person is an idiot. Check out his self-published wacko book.

I second Prof H's comment: Go start your own blog. The readers here want to read the Austrian economists not Lesvic howling at the moon.

[D.G. Lesvic]

Mises, as usual, summed it up best:

"...economics...is a challenge to the conceit of those in power. An economist can never be a favorite of autocrats and demagogues. With them he is always the mischief-maker, and the more they are inwardly convinced that his objections are well founded, the more they hate him."

And whether they are emperors at Versailles or Oxford and Cambridge.

Your quarrel isn't just with me, but with our host, who has met my criticisms with unfailing kindness, courtesy, patience, and invaluable instruction.

Now, that's a scientist and a man. And you could do worse than to follow his example.

[Vilfredo Pareto]

You guys become rude with this poor Lesvic. His book is perhaps a bad one (I actually dont know Lesvic), but it is surely not the only one.

The question 'what is the worst book you have ever read?' would be fun. Personally, I think about the whole bibliography of Maurice Allais with a special mention to his General Theory of Surplus.

But the question: 'what book has been the most important in your intellectual development?' is surely more constructive. I would answer "The Pure theory of capital".