Lasse Lien asks whether judgement is measureable:how do we separate judgement from dumb luck?My comment (trying to prompt Fred Sautet into sharing his thoughts) was:Isn’t “alertness” (=costless discovery) just a theory of luck?Of course I don’t …

One response to this point is simply to concede it, in the following sense. Many of the “judgment theorists” we follow — certainly Cantillon and Mises, and to an extent Knight — weren’t really concerned with the ontological and epistemological basis of judgment. Rather, their objective was to characterize the return to the entrepreneurial function — in particular, to decompose business income into two constituent elements, interest and profit. Interest is a reward for forgoing present consumption, is determined by the relative time preferences of borrowers and lenders, and would exist even in a world of certainty. Profit, by contrast, is a reward for correctly anticipating the uncertain future (e.g., purchasing factors of production at prices below the eventual selling price of the product), and exists only in a world of “true” uncertainty. In such a world, given that production takes time, entrepreneurs will earn either profits or losses based on the differences between factor prices paid and product prices received. Whether these residuals are ”really” due to insight or to dumb luck doesn’t really matter, if the goal is simply to distinguish profit from interest.

If profits and losses are random, then there is little more to say. If, on the other hand, particular individuals are more adept than others, over time, at anticipating future market conditions, then we can draw conclusions about the coordinating properties of the market. Mises maintained that entrepreneurship was more than luck, and that competition among entrepreneurs tended to drive the unsuccessful ones out of the market, thus leading to a particular kind of market coordination.

As to Lasse’s question, under Mises’s concept of entrepreneurship it may indeed be impossible, empirically, to distinguish judgment from luck. (A very famous economist — a believer in the Strong Efficient Markets Hypothesis — once insisted to me that Warren Buffett is simply very lucky, that Buffet has gotten lucky many, many times in a row, but that he has no superior investment ability at all.) On the other hand, it’s worth noting that an a priori belief in some kind of entrepreneurial ability beyond pure chance is compatible with a wide range of ontological and epistemological beliefs.