Monday, September 10, 2012

Peter Klein: I See No Objective Profit Opportunities

I picture Peter Klein as writing from a deep dark basement, but yet a basement where he closes the blinds, just to be sure. In a response to my thoughts on Kirznerian entrepreneurship, he is very concerned with uncertainties and risks and goes on to tell us that in our world, "there are no objective profit opportunities to be alert to."

Klein begins by writing:
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.
This simply, in my view, flies in the face of reality. Klein is using the word "uncertainty" in some type of absolute manner that ignores how acting man lives in a this world of "uncertainty." To get a better understanding of the situation, not only must it be considered how acting man handles "uncertainty" but it must be considered how acting man lives in a world of "impreciseness". In other words, we do not live in a world where acting man calculates every one millionth of possibilities and uncertainties every time action is taken. Our world is very imprecise. We ignore much.

For example, if we go to the store to buy a pound of meat. The butcher will put this meat on a scale to weigh out a pound. But is it really a pound? Or is it one pound plus .0000001 of a pound.  Or is it perhaps .99999999999999999 of a pound and not a pound? In either case, the butcher and the meat buyer will, in our world of "impreciseness", be satisfied with the transaction.

Let us consider this willingness to accept imprecissness when Klein plays with the term "uncertainty" in our world. He is using an exacting sense of the word that acting man does not use. Can he really be serious that in the real world there are no objective opportunities to be alert to, because of uncertainty?  If a man spots a ten dollar bill on the sidewalk on a calm windless day, is he in our world in any real sense uncertain that if he stoops down to pick it up there is a risk that he won't get it?

Yes, a meteor may fall from the sky that very moment and as he turns his head down, it could knock him dead. A truck could jump the curb and knock him dead. A swarm of bees could find him and sting him as he stoops. All these are indeed possibilities, but to acting man that will be satisfied with .9999999999999999 of a pound of meat when he has ordered a pound, the man most assuredly is not going to enter into his calculations that a meteor, truck or a swarm of bees will hit him just as he stoops for the ten dollar bill. In actuality, this was a riskless transaction, taken in the context that we must act within the realm of many minute uncertainties and much impreciseness.

Man simply does not live in a world of total preciseness. This does not mean man can ignore all impreciseness.  A meat buyer isn't going to be concerned about the impreciseness of that .999999999999999 of a pound of meat, but he is going to be very concerned if he is charged for a pound of meat and given only a quarter pound of meat.

In the same way, a ten dollar bill in the middle of traffic is not as riskless to grab as one on the sidewalk. The dangers of traffic must be taken into consideration when a bill is on the street, something that need not be of concern when the ten dollar bill is on the sidewalk. When we understand this, we understand that some uncertainties must be considered, while it is absurd to consider all uncertainties when acting. It is all about degree in an uncertain, imprecise world---and not about complete preciseness or complete consideration of all uncertainties.

Klein goes on:
  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. 
Here, again, we have Klein with his over emphasis on uncertainty. With a man seeing so many uncertainties in the world, I am amazed Klein ever turns his laptop computer on. Is he not afraid that the battery will blow up on him? Does Klein really think he is unsafe and taking his life into his own hands when he starts up his computer? If he is in a classroom or hotel lobby, does he announce and shout out to everyone around him, "Clear the area, I am about to start my laptop"? If Klein doesn't do so and he recognizes that the battery could blow and he really believes all uncertainties must be taken into account, I would like for him to explain, why he does not issue such a warning?

The fact of the matter is that acting man ignores many uncertainties and distant possibilities. In this real world manner in which man acts, the opportunity for objective profit does appear to exist, that is a world wear acting man does not take into consideration extremely distant uncertainties.

Klein goes on to accuse me of miscategorization, when it is what he is doing. He writes:
The issue isn’t what these entrepreneurs think they are doing, but what they are actually doing. 
In my original comment, I never say that it is what entrepreneurs think. I am looking at their actions  and classifying what they are doing. But Klein wants to turn the debate into some kind of  psychology discussion on what entrepreneurs think. He writes:
 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.
This is getting somewhat away from opportunities and alertness, but if Klein once to play here a bit, let's do so. Klein is simply wrong. Confidence has little to do with entrepreneurial ability. There may be plenty of entrepreneurs who are overconfident but there are certainly entrepreneurs who move ahead with very little confidence and worry all the way through. Indeed, fear, not confidence, may drive some entrepreneurs, causing them to pay attention to very many details that most of us would not tend to pay attention to, i.e. they are demonstrating more alertness because of their lack of confidence.

Maybe Klein in his entrepreneurial writing creations puts them together rapidly in slap-dash fashion with overconfidence, but  I somehow doubt that there are not some writers who pause over every word fearing error, until and beyond when a writing is published.

But, this is pushing us way off track from the concern of whether in our world, in any sense, objective profit opportunities exist.

We finally have this gem from Klein:
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.
Ah yes, when Mises seems to recognize a clear difference between entrepreneur and capitalist, he is  thus "uncharacteristically muddled."  It looks pretty clear to me what Mises is saying, that the entrepreneur and capitalist are two different categories:
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.
Mises gets muddled after that since he writes:
 Such an entrepreneur would, in fact, be an employee of the capitalists who speculates on their account and takes a 100 per cent share in the net profits without being concerned about the losses. 
But the part I quote is not muddled, and not taken out of context, i.e. what Mises writes appears to be what he means and that putting in more context would not change what Mises appears to mean.

His follow up sentence (which I did not originally quote) is muddled since it is contradicted by reality. Indeed, operations that are more significant now than in Mises' time, are on display and reported in the pages of financial papers on a daily basis. Private equity operators regularly spot opportunities, structure deals where they use only the capital of others, take part in profits, do little, or no, management and have no participation in losses. It would be difficult to consider these operators first and foremost "employees".

Klein then gets into an even deeper discussion of "what Mises meant," which simply takes us away from an understanding of what an entrepreneur is.  The fact of the matter is, and I repeat, there are people in the economy spotting opportunities, using no capital of their own, borrowing capital to advance their projects and capturing profit when their projects succeed. They, in short, appear to be looking for objective profit opportunities and acting on them.

My questions to Klein are:

1. Do you believe that a man picking up a ten dollar bill off a sidewalk is not taking advantage of a riskless objective profit opportunity in the sense that man acts in an imprecise world and ignores much that is imprecise with regard to risk and uncertainty when he acts?

2. Do you acknowledge that people exist, who are economic actors who spot opportunities and advance projects without using any capital of their own?

3. Do you believe economists should recognize the function these people play?

4. What do you believe it is best to call such people?


  1. If Klein is such an expert on entrepreneurship then why is he teaching at a podunk state school?

    1. Don't take this gutter route. Klein has a CV most people would kill for, and his work on entrepreneurship has won him mainstream plaudits and awards. Stick to the high road on this, and do not criticize Klein, a very good guy and economist, out of ignorance.

    2. Also, you could say that about all Austrian economists. You could say, if they're so smart and know all about the business cycle, why aren't they teaching at Harvard? Presumably you already know the answer. Don't stoop to this.

    3. My apologies to Peter for letting this "podunk state school" attack slip through. I usually catch such attacks and delete them. I missed this one, until the other commenters jumped on it.

      For the record, I have read Peter's work at regularly and find him to be an informed scholar. I have know idea where he teaches. Mises taught in a basement at NYU. I judge people on their output, not where they are standing for part of the day.

    4. "Mises taught people from a basement at NYU."

      Wenzel for the knockout. This is why I enjoy this site.

  2. I doubt Prof. Klein is talking about complete resolution of uncertainty before decisions are taken. I think he is referring to the fact that human decision making under uncertainty is entrepreneurial in essence.

    I think the primary difference as I understood is that Dr Klein argues the construct (drawn from Mises/Knight) 'judgement' is forward looking in the sense it talks about 'creation' of opportunities, and has economic calculation embedded in it. This conception of entrepreneurial function i.e. judgment focuses on uncertainty (here he refers to Knightian uncertainty meaning future is unknown). On the other hand he argues that Kirzerian notion focuses on 'existing' opportunities hence does not include economic calculation.

    I think the problem occurs because the conceptualization of an entrepreneur as not having capital/asset ownership is equated as him incurring no cost in case of failure.Hence only upside is assumed. If this is the basis of Dr Klein's assertion that economic calculation is not evident in Kirznerian entrepreneur and hence a new definition is needed then this might need some reconsideration. Because the entrepreneur even when others have invested always faces opportunity cost and hence has to make that calculation of profit/loss even when he has not invested capital and owns assets. As long as his profits are uncertain there is always a cost and hence economic calculation.

    I am looking forward to what comes out of these discussions.

  3. "In a world of uncertainty, there are no profit opportunities to be alert to" says the man that is obviously not an entrepeneur....


    1. I think he means that profit opportunities are created or discovered. If future is absolutely unknown we cannot ex-ante point to existence of opportunities. It is only after i.e. when the profit has been achieved can you say it was a profit opportunity. The primary focus of Dr Klein's thesis as I understand it is that entrepreneurial function does not rely on the identification of 'profit' opportunities rather on economic calculation. In that sense entrepreneurship is inherent in all decision making under uncertainty. This is a novel and much needed critique of current understanding of entrepreneurship. However my objection is that this is more of a critique of how Kirzerian entrepreneur has been used in academic research. A Kirzenerian entrepreneur engages in economic calculation as well(as I point in a comment above). Hence, trying to distinguish between alertness and judgement on that basis confuses the issue (or maybe I have not understood Dr Klein's thesis)

      On the sarcasm in the comment above -If it was true that one had to be an entrepreneur to talk about one then this whole discussion falls apart as the theories being discussed here have been proposed by those who have not done anything business-wise. I could talk about the market of ideas and role of researchers in it but instead I would just point out as per the above logic one has to be poor to talk about poverty, an assassin to talk about capital punishment etc.

    2. "If it was true that one had to be an entrepreneur to talk about one then this whole discussion falls apart as the theories being discussed here have been proposed by those who have not done anything business-wise. I could talk about the market of ideas and role of researchers in it but instead I would just point out as per the above logic one has to be poor to talk about poverty, an assassin to talk about capital punishment etc."

      Of course, assasiantion and capital punishment are two different things. But that aside, you don't have to directly experience/interact with a any subject discussed, but generally speaking it's usually just easier to do so in a manner with more accuracy if you have direct experience.

      Does that mean anyone without said experience will always be inaccurate? Obviously, no. But in a world of "calculation", if I'm calculating who has a better understanding of a topic-I'm going with the guy that has direct experience with it.


  4. This is a very spirited debate, but with my background in law, business and philosophy, I feel someone qualified to offer a counterpoint.

    In sum, I think Klein has the better argument. The world is in constant change. Robert has no choice but to cede this, but writes it off as "impreciseness". And he gives an example of a profit opportunity that is at the extreme end of certainty, although he is forced to acknowledge that even then, uncertainty (and therefore, judgment), plays a role.

    But let's change the facts slightly. Suppose the dollar was in a busy street? Suppose it was behind some people who may have dropped it? Is the profit opportunity still as existent?

    And are most entrepreneurial endeavors as simple as a dollar in the street? Of course not. Rather, Robert has taken an extreme example and used it to define away uncertainty as impreciseness.

    So here is the rub: Robert is very correct in emphasizing alertness as a key entrepreneurial trait. I hesitate to say "the key", because other traits may very well be necessary conditions to receiving a profit (like contacts, good communication etc).

    However, "alertness" is only an alertness to the correlation between people's current behaviors (as perceived by the entrepreneur) and one's judgment of the intended customers and how they would act in a specified situation.

    As an epistemological matter, a profit opportunity is only ever known once it has occurred. This is classic Misesian epistemology and is entailed from human action and demonstrated preferences. Any entrepreneur who has a "sure thing" may find that a split second before he gets the "sure thing", another entrepreneur beat him to it with an even better product/service, taking all potential value away from the first entrepreneur's idea.

    I fully understand why Robert is attracted to the Kirzerian conception, because is accords very well with Wall Street style arbitrage and trading, where ex-post a "good trade", one feels there was almost no risk, and there may very well have been almost no risk (like Wenzel's picking up the dollar example). But Kirznerian analysis goes to far if it states that opportunities are apodictically certain. You never know until you act, and people demonstrate their subjective preferences.

    Subjective preferences are inscrutable before they are acted upon.

  5. I understand where Klein is coming from though he did muddle it going off track. I do however understand where you are coming from as well. I think the difference may not be noted.

    "The fact of the matter is, and I repeat, there are people in the economy spotting opportunities, using no capital of their own, borrowing capital to advance their projects and capturing profit when their projects succeed. They, in short, appear to be looking for objective profit opportunities and acting on them."

    In your use of 'spotting opportunities' are you using it in the solely in the above context? If so, especially if they are employed in a firm, many do act solely looking for already existent 'opportunities'.

    Universally, however, one cannot say that there are objective opportunities to be alert to just as well as one can say there are none. It is situational. Some entrepreneuers create opportunities by creating wants that have not existed prior. As in my comment yesterday the want for literature did not exist before literature. The entrepreneur is not alert to the want of literature. He judges, with uncertainty, future wants for whatever he is producing and proceeds should he feel it worthwhile. Only if he is successful can then it be said he saw an opportunity that others haven't. If he failed does that not make him an entrepreneur? I say he is one, just of little skill in which he'll pay dearly for his ineptitude.

    The only universally applicable, can be applied to all entrepreneurs, is the fact that they are dealing with uncertainty. The skilled tend to profit while the lesser skilled experience loss.

    When it is said that all entrepreneurs act without being alert to profit, this is wrong. When it is said that all act being alert to profit, this is wrong as well. Both fail to be universally applicable.

    The best that can be said is uncertainty. That is the sense in which I think Klein should make clear.

  6. Bob, a brief reply. I was obviously unclear in my post. My point -- which I borrow from Cantillon, Menger, Knight, and Mises, among others -- is not that uncertainty prevents individuals from acting. Quite the contrary, human action, in the Misesian sense, *is* acting under uncertainty! The point is to define profit and loss. When action is successful, meaning that it brings about the results sought, the result is profit (monetary or psychological). When unsuccessful, the result is loss.

    Consider Mises's definition of the evenly rotating economy. In this imaginary construct, there are capitalists, earning interest, but no entrepreneurs, because there is no uncertainty, and hence no profit and loss. I.e., absent uncertainty, there are capitalists who are not also entrepreneurs. In the real world, the capitalist is always an entrepreneur, as Mises states in the passage I quoted in my post.

    To answer your questions:

    1. Yes, it is not riskless. He may be mistaken. It may be a counterfeit bill. Someone else may grab it. The wind may blow it away. Of course, in this example the uncertainty is trivial but, then, it's a trivial example. Real-world business opportunities are not like this. Indeed, I use this example all the time in my teaching. The Knightian-Misesian entrepreneur thinks he sees a ten-dollar bill, but it is partly buried under a rock. To retrieve it, he must buy a five-dollar shovel. If it really is $10 then (ignoring the opportunity cost of his time), he has earned a $5 profit. Otherwise, he has earned a $5 loss. This is a better metaphor for real-world entrepreneurship than Kirzner's idea of costless discovery.

    Of course, the question you have to answer is how, in your (and Kirzner's) framework, do you explain economic loss? Entrepreneurs lose money every day. Firms go bankrupt. Business debts go unpaid. If entrepreneurship is costless discovery, how can this happen?

    2. No, as long as the production process in question involves the use of some capital goods. Those capital goods are owned by someone, and the party on whom the residual profits and losses fall -- in modern organizational economics terminology, the party possessing the residual rights of control -- is the entrepreneur. The "idea man" who approaches the capital owners and offers to speculate on his account, in exchange for a fee, is not an entrepreneur, but a consultant or some other kind of agent of the owner. As Rothbard once put it, "ideas without money are mere parlor games until the money is obtained and committed to the projects."

    3. Sure, such people play an important economic function. It is labor. (Of course, to the extent that the agent is paid on a contingency basis, he is acting partly as an entrepreneur, because his return is uncertain. It all depends on the contract between the agent and the resource owner.)

    4. I call them "idea men," or "consultants," or sometimes "founders," depending on the context. It's confusing because the practitioner literature typically calls them "entrepreneurs." Mises was quite clear that this is a different category than the entrepreneur, noting that economics "also calls entrepreneurs those who are especially eager to profit from adjusting production to the expected changes in conditions, those who have more initiative, more venturesomeness, and a quicker eye than the crowd, the pushing and promoting pioneers of economic improvement" (Human Action, p. 255). He suggests the word "promoter" to describe this kind of agent, lamenting that the economics literature has used the same word to refer to the distinct functions of uncertainty-bearing and eagerness etc. Unfortunately, Mises's terminological suggestion didn't catch on, so we're stuck using the E word for both concepts.

    Hope this helps.

  7. "...the want for literature did not exist before literature."

    And people didn't know that they didn't want Edsels until they existed either. So what? Does that mean that the Ford company foisted them on the market willy-nilly while meekly hoping and praying for a good outcome from the pure chance of an uncertain market? Or do you suppose that there existed indicators of consumer behavior that told them that the opportunity to implement a new line of cars, and the potential profitability of that venture, outweighed the risk of failure for that line?

    1. There did exist indicators that consumers would WANT a ford, but this is not to say that they KNEW people would purchase the good at the price they were seeking to sell it for after costs were taken into account.

      Ford took a risk and his judgement paid off superbly. The market doesn't, and cannot, thrust goods onto consumers contrary to a Galbraithian notion (other than with government edict or violent force).

      Also consider that consumer preferences can CHANGE without indication and at any time. They may, and diversely, be affected bay many other factors or parameters that will affect their decision to purchase goods that are produced.

      If an entrepreneur only invests due to indicators, and we then assume he is operating without risk, this is nullifying the possibility for those indicators to be wrong as consumer preferences change. Thus even with such information the entrepreneur must judge UNCERTAIN future conditions in hopes he will experience a returning profit.

      Writes Mises:

      "There are, in the field of economics, no constant relations, and consequently no measurement is possible. If a statistician determines that a rise of 10 percent in the supply of potatoes in Atlantis at a definite time was followed by a fall of 8 percent in the price, he does not establish anything about what happened or may happen with a change in the supply of potatoes in another country or in another time. He has not "measured" the "elasticity of demand" of potatoes. He has established a unique individual historical fact. No intelligent man can doubt that the behavior of men with regard to potatoes and every other commodity is variable. Different individuals value the same things in a different way, and valuations change with the same individuals with changing conditions…"

      To say that entrepreneurs are ALERT to already existent demands of consumers to the level that they are operating without risk, or with very little risk, is to paint the entrepreneur with to broad a brush and leaves out the possibility of new innovations where uncertainty is the chief burden.

  8. Great debate going on, from both Wenzel and Klein, and it is really nice to see how forceful but respectful both parties are. There is an honest attempt to grasp the truth here-- maybe because the ultimate conclusion of the debate isn't one person getting to implement some coercive government policy for their efforts. Therefore, no incentive to lie, cheat and steal to gain advantage!