The Kirznerian Delta: FSR or Abundance?

• John Vandivier

This article argues that the several concepts of the entrepreneur on Austrian Economics are all lacking, but to varying degrees. I argue that the Kirznerian entrepreneur, partricularly understood, is the closest match to reality, but I attempt to further improve on the concept. Finally, I relate this entrepreneur to economic growth and point out the potential irony in which an Kirzner-derived model can lead to the superabundant economy described by Marx instead of the Final State of Rest described by Mises.

Austrian ideas of the entrepreneur:

  1. Entrepreneur as arbitrageur. Hayek: See p 522, AER, 1945, The Use of Knowledge in Society
    1. \"To know of and put to use a machine not fully employed...or the arbitrageur who gains from local differences in commodity prices...\"
  2. Entrepreneur as risk-taker
  3. Entrepreneur as judge of value. That is, one who conducts economic calculation instead of or in addition to technical calculation.
  4. [Allegedly] Kirzner's Entrepreneur as utility optimizer: JEL, vol 35, March 1997. P 60-85. Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach
    1. Allegedly: The Kirznerian individual is optimizing on \"felt uneasiness\" not simply monetary profits, which Mises emphasized.
      1. Therefore, this model of the entrepreneur is able to include the concept of innovation
    2. Allegedly: Kirznerian alertness is not allowed to vary
      1. Obvious empirical problem
    3. Kirzner still sees his entrepreneur as consistent with Hayek and Mises. On p 67 Kirzner refers to Mises, although Mises is describing the entrepreneur as arbitrageur.
    4. Kirzner says his entrepreneur acts to lead the market toward equilibrium (evenly rotating economy) and mutual knowledge (p 62).
Consistent with 1 - 3 is Mises's idea of the entrepreneur given in Human Action and elsewhere in the writings of Mises, Hayek, and many other Austrians. Mises in particular emphasizes that the entrepreneur is concerned with monetary calculation and arbitrage of monetary differences, as opposed to calculations on utility.

FSR vs Abundance:

  1. Read plainly, I don't see Kirzner as asserting anything other than the same entrepreneur described by Hayek and Mises. That is, the entrepreneur primarily as arbitrageur.
  2. The entrepreneur of Hayek and Mises is not an inventor. He does not come up with new ideas of goods and services.
  3. The fact that the Austrian entrepreneur engages in arbitrage but not invention allows the Austrian to construct an imaginary image of an evenly rotating economy which is equivalent to the neoclassical equilibrium.
  4. Mises himself notes that the evenly rotating economy is simple fiction, although a useful thinking tool in his view. On p 239 of Human Action he says it is out of the question to take the ultimate logical consequences of the model seriously. Of course, as a result, I would easily find it a sub-optimal model.
  5. The neoclassical model of aggregate supply and demand is able to achieve an equilibrium price in particular because it leaves out technological growth.
  6. With arbitrary technological growth the neoclassical model engages in arbitrary cheapening. This makes the evenly rotating economy and the final state of rest impossible as there would be no equilibrium price. Instead we would have technical abundance, although not economic abundance.
  7. Genuine invention is empirically associated with specialization in knowledge, not mutual knowledge.
  8. Behavioral economics note:
    1. Although humankind is getting technically wealthier by leaps and bounds, we don't report own-levels of satisfaction almost differently at all than prior generations.
    2. At the same time, there is plenty of evidence that real people have bliss points and exhibit satiation: So in theory some level of technical efficiency would satisfy all demand if there were no changing in the kinds of goods, eg, invention.
  9. Irony:
    1. Marx argued that a technically super-efficient / super-abundant economy would eventually allow people to overcome demands and basically do whatever they want.
    2. Of course, the Austrian project is primarily known for it's contribution contra the socialists in the calculation debate.
Conclusion:

If Mises, Hayek, and Kirzner do not pretend to explain innovation then they have an internally consistent model of entrepreneurship. Kirzner builds on the prior model of entrepreneurship by outlining the entrepreneurial competency of alertness which leads to discovery of profit opportunities and equilibration. In the absence of invention this would eventually allow an equilibration of knowledge in the economy and the economy could come to an evenly rotating state and finally a final state of rest.

However, if alertness is not allowed to vary there is an obvious empirical problem. There is also the obvious problem that invention happens in the real world, often by entrepreneurs. This is what I would call Kirzner's delta: He's missing something. Either Kirzner doesn't attempt to explain invention, in which case the whole model is missing a feature of the real world, or else Kirzner does attempt to explain invention, in which case he is empirically missing the fact that the real economy diverges to arbitrary cheapening over time. As even Mises makes clear, the real economy doesn't ever reach a final state of rest or any particular set of equilibrium prices.

I think Kirzner's entrepreneur is great, but I would add the entrepreneur as inventor. This entrepreneur does optimize on felt uneasiness or utility instead of simply optimizing on profit opportunities. As a result, this entrepreneur is more consistent with the idea of human action or praxeological action. My entrepreneurs are also able to vary in alertness, whether by differences in IQ, differences in focus or effort at some point in time, differences in the state of being well rested and fed, experience, education, learning-by-doing, or other reasons. My entrepreneurs are also able to influence their own-rate of discovery by intentional engaging in action or study of things they are particularly familiar or unfamiliar with, and the kind of discovery I'm talking about includes the discovery of new technologies in addition to simple arbitrage opportunities.

Finally, by virtue of optimizing on utility, my entrepreneur is more friendly to synthesis with common models of economics.