Friday, October 5, 2018

Some Serious Confusion About Kirznerian Entrepreneurship

Israel Kirzner
At the post, Why Israel Kirzner Should Be Awarded the Nobel Prize in Economics, I see in the comments that there is some serious confusion about what Kirznerian entrepreneurship is.

Consider these comments that were made under the post (My comments are in blue).
Robert, I've never understood your point on the practical need to resolve the competing theories on entrepreneurship. It seems to be a highly academic argument with no practical implications. A poor entrepreneur could lift himself out of poverty regardless of which theory of entrepreneurs is correct.
There are very serious policy implications. If it is believed that capital is needed before a person can become an entrepreneur than it pretty much eliminates people coming out of the gate until they earn enough to invest their own capital and then they are limited in size to the amount of their own capital. Thus, small projects under the "lift himself perspective by accumulating small amounts of capital" are the only projects that can be undertaken. 

Kirzner's insight is that the above is not true and that the provider of capital and the entrepreneur are two separate operators in a free market economy.

Thus there is no need from a policy perspective to coddle the poor because of their lack of capital. If they have Kirznerian-style entrepreneurial alertness they will be able to succeed.

My point is, which poor entrepreneurs and/or financial backers are reading Austrian economics debates about the definition of an "entrepreneur," and changing their actions based on the various arguments? If they have an idea, they will pursue it, regardless of whether Kirzner or his critics are right.
All kinds of acts take place based on supply and demand with few understanding supply and demand. This is not about poor potential entrepreneurs understanding Kirznerian entrepreneurial alertness theory before they take on entrepreneurial projects, but whether welfare policies, and handouts that coddle the poor, kill the incentive for the poor to be entrepreneurial--based on the incorrect policy view that the poor cannot be great successes without capital of their own.

I agree with Kirzner and I agree with your conclusion that the poor can lift themselves from poverty by keen entrepreneurial awareness.

But doesn't the highly regulated economy tend to put the entrepreneur with no capital of his own at a disadvantage to one who does have capital to navigate this morass? The Institute for Justice does pro bono work for some entrepreneurs in removing the regulatory shackles. How many more are stymied?
The highly regulated economy plays a role in creating disincentive by welfare handouts to the poor but not because of a lack of capital to overcome regulations. Kirzner's insight does not suggest that capital is not needed for projects just that it is not part of the role of the entrepreneur that he provides it himself.

To be sure, regulations that require capital to maintain a phalanx of lawyers to proceed does prohibit many projects from moving forward but this is  not limited to the poor,  it is not at the essence of entrepreneurship from the Kirznerian perspective. Alertness to Kirzner means opportunities that can be executed in the given environment. 

Also see: More Confusion on Kirznerian Entrepreneurship



  1. I'm probably way out of my depth here, but count me among those who are a bit confused about this distinction.

    It seems obvious that someone with more funds at his disposable finds himself in a superior position to act on an entrepreneurial idea than someone with fewer funds.

  2. A holder of capital's decision to invest with one or another "Kirznerian entrepreneur" is itself necessarily an entrepreneurial act. That being the case, it has always seemed to me that Kirzner overstates his point. One is reminded of Rothbard's comment on Keynes' advocacy of the euthanasia of the rentier by his noting that even the most inactive rentier serves a positive market function by deciding on the allocation of scarce resources.

    1. I also think that Kirzner's view of entrepreneurship is too narrow. I have never liked his notion of "alertness to opportunity," because it seems to imply that entrepreneurship only involves existing opportunities growing on trees waiting for an entrepreneur to come along and pick them off; while some in the population walk by these trees without noticing the hanging fruit, entrepreneurs are very attune to the existence of this unpicked fruit. It also seems to imply that entrepreneurs cannot make losses, as they're only taking advantage of existing profitable opportunities.

      I prefer the alternative "Knightian" formulations (developed by Peter Klein, among others), whereby entrepreneurship involves decision-making under uncertainty. To continue with the tree/fruit analogy, the entrepreneur would anticipate that fruit will be in demand in three years, and would plant the tree now, and tend to it, to hopefully satisfy this anticipated demand when the fruit ripens, hopefully at a profit. Of course, along the way, the tree or fruit might be damaged, or the demand might dissipate, such that the entrepreneur could make a loss.

    2. You misunderstand. Kirzner himself that is not his version of entrepreneurship. He states is has to do with creativity, rather than just discovering something that's out in plain view.

      I've read both him and Klein. Klein is unfair to Kirzner in the same way Salerno mischaracterizes Hayek.

  3. Entrepreneurship requires capitol but to be an entrepreneur does not require an entrepreneur to supply capitol directly.

    Acting on a potential opportunity can be accomplished in different ways. Most would consider a person that supplies no funds entrepreneurial if they supply their labor and or ideas at reduced or no cost during the startup period of a venture.

    Of course an entrepreneur with little or no capitol has the additional work to find others to capitalize a project. Most would consider this a disadvantage to an entrepreneur that can capitalize their own project. The extent of this disadvantage is the argument. A very complicated argument.

    For example, who is at more of a disadvantage: The unfunded entrepreneur with a great idea but doesn’t know how to sell it to investors or the unfunded entrepreneur with a silver tongue and a mediocre idea? Change idea to plan. Now change it to work ethic. There is a lot that goes into a successful business.

  4. So if I understand your thesis, Robert, it is that if policymakers become convinced that Kirzner is right, then they will stop welfare handouts to the poor. But if only some people have the natural ability to be an entrepreneur, doesn't your thesis require policymakers to be able to differentiate between the poor who are entrepreneurs and the poor who are not? Or, if everyone is regarded as a potential entrepreneur, then is your thesis any different in effect from the broader one espoused by "limited government" types, namely, that if you subsidize sloth you get more of it?

    (And doesn't your thesis require policymakers to evolve from jellyfish to vertebrates and come out publicly saying "We're cutting welfare to the poor, as they can lift themselves up through entrepreneurship"?)

  5. There is no stand-alone entrepreneur or capitalist. A capitalist who advances funds to finance a given line of production exercises future-oriented judgement regarding present resources (entrepreneurship). Entrepreneurs act now to create something in the future by engaging in the process of forgoing present consumption in order to reap future rewards (capitalism). This is why Rothbard (correctly) identified the role of the capitalist-entrepreneur. You can't have one without the other.