Saturday, September 8, 2012

Israel Kirzner on Ethics and Entrepreneurship

In the clip below, Israel Kirzner provides one of the best expositions of his views on entrepreneurship, which are at odds with the views of some other Austrian economists.

I tend to fall into the Kirznerian camp, in that what Kirzner describes as "alertness" to opportunities certainly exists and, I believe, is the key to what entrepreneurship is about.

Kirzner's focus on  alertness being the essence of entrepreneurship rather than entrepreneurship being mostly about risk taking, I believe, is a very important insight---Nobel Prize worthy .

Pay attention to the very end of Kirzner's speech. During the Q & A, Kirzner makes it most clear when he states that he believes that it is an error that college professors emphasize risk as the key to entrepreneurship. Indeed, if you think of the major players that have created massive wealth for themselves, from Steve Jobs to Donald Trump to Carl Ichan to Sheldon Adelson to the Koch brothers and the Forbes family, it is hard to think of these people as people who simply roll the risk dice and see what comes up. They are very calculating men, who although they can make errors, generally act when they believe they are alert to an opportunity that others don't see---and the less risky that opportunity the more they are going to jump at it.

I bring this discussion up now because in tomorrow's The Robert Wenzel Show, I start off with a discussion of entrepreneurship with Steve Forbes. In his new book he states that the key to a free market economy is John Maynard Keynes' view that it is about "animal spirits". Forbes, incorrectly, states:
The motivation of individuals and companies to solve problems and meet needs ---what John Maynard Keynes called "animal spirits" --- is the heart of free enterprise. 
Keynes' comment was about throwing alertness and calculation to the winds ( a terrible thing) and, according to Keynes, the key being simply ignoring risk in manner similar to one were to decide to venture to the South Pole. Here's Keynes in his own words (my bold):
 Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits—of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere. Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die;—though fears of loss may have a basis no more reasonable than hopes of profit had before.
Thus, I present Kirzner's lecture below as a prelude to my discussion with Forbes, that will be posted tomorrow, and also for those who may want to understand from a scholarly perspective the nature of entrepreneurship. And, further, I post this for those who may desire to be entrepreneurs, so that they understand that entrepreneurship is not about blindly rolling the dice and hoping things come up right, but about looking for opportunities where profit is right in front of you.


  1. Hi Robert,
    The objections to Kirzner's "alertness" position concerns the catallactic function of entrepreneur, not the "ideal type" of entrepreneur-promoter. It is the latter that is what people think of when they think of Steve Jobs, etc. The entrepreneurial function is much broader, and deals with all human action insofar as it deals with uncertainty. Get rid of the Misesian idea of entrepreneurship and you get rid of the entire Misesian/Rothbardian system of functional distribution. Moreover the dice issue you raise is inappropriate because that is an instance of class probability (risk), whereas entrepreneurship has to do with case probability (uncertainty).

    1. Note: I have replied to Danny Sanchez's comment here:

  2. I never read the Keynes's full paragraph on the "animal spirits" stuff before, I've only seen it referenced in sarcastic tones in various liberty oriented blogs/writing.

    It's astounding how ridiculous it is now that I have the full context. To think that he dismisses calculation & planning as a factor in entrepreneurship is absurd.

    Thanks for the write up Wenzel.

  3. At 1:01:30 Fr. James A. Sadowsky, S.J. asks a question. Fr. Sadowsky died yesterday. R.I.P.

  4. Something has bothered me for, oh, 40 years. If entrepreneurs are so dumb and ignorant, from where did Keynes and his authoritarian bureaucrats get all of their superior information and how did Keynes know a priori that those bureaucrats would invariably have superior information to that of entrepreneurs?

  5. Well DUH!!
    Anybody who has done start-ups in silicon valley (or anywhere) knows it's about spotting an opportunity, NOT risk.. The whole idea of the garage legend implies poverty. And as Bob Dylan said: "If you ain't got nothin' you got nothin' to lose". So what's to risk???
    Jeez, these academic economists should pull their heads out of their collective posterior orifices and look around once in a while.
    Good for Kirzner.

    1. We can probably do without the duhs. Mises was not an idiot. If entrepreneurship is about spotting opportunities as opposed to uncertainty bearing, how do we account for entrepreneurial loss? Did that person spot a negative opportunity?

    2. Tom,

      If an person spots what he sees as an opportunity, and borrows the money to go forward on a project, and has no downside risk but tremendous upside if his vision is correct, what would you call such a person?

    3. Tom, Really?
      Is it not self-evident that an entrepreneur is an opportunist?

      Hey, no disrespect to Mises. The "Duh" was not aimed at him.

      But I AM an entrepreneur. And I know a LOT of other entrepreneurs. And NONE of us looks down when we're dealing. Risk is just not a factor. It helps that we're usually playing with house money.
      To me, that's the heroic part of entrepreneurship. Reckless, fearless, aggressive yadda yadda.

      I've re-read RW's post and plucked THIS out.

      "Let us try to think the imaginary construction of a pure entrepreneur to its ultimate logical consequences. This entrepreneur does not own any capital. The capital required for his entrepreneurial activities is lent to him by the capitalists in the form of money loans. The law, it is true, considers him the proprietor of the various means of production purchased by expanding the sums borrowed. Nevertheless he remains propertyless as the amount of his assets is balanced by his liabilities. If he succeeds, the net profit is his. If he fails, the loss must fall upon the capitalists who have lent him the funds."

      He clearly differentiates the entrepreneur and the capitalist.
      I have often held up the capitalist as a sort of secular saint in debates with commies. He risks his own hard-earned cash on somebody else's (an entrepreneur, perhaps?) cockamamie dream.
      So I agree. Mises was NOT an idiot. He agrees with ME!