Kirzner’s Tapestry

24 October 2008 at 3:14 pm Peter G. Klein 12 comments

| Peter Klein |

One of the points I make in my forthcoming SEJ paper is that Kirzner’s metaphor of entrepreneurial discovery is, like Freud’s cigar, just a metaphor. It’s invoked by Kirzner to explain the tendency of markets to clear, not to describe a particular behavior or personality type. Applied entrepreneurship studies aimed at identifying what kinds of people really “are” more alert to opportunities, in some sense we can measure with a survey or experiment, misses the point of the metaphor. Likewise, Kirzner does not mean that opportunities literally are given, objectively, in the environment, independent of human creativity. “Discovery” is an analytical construct, an instrumental device, not a description of behavior.

Kirzner explains all this in a 1997 interview:

Q: What do you mean in saying something is “waiting” to be discovered?

A: Philosophically, people have objected to that. I do not mean to convey the idea that the future is a rolled-up tapestry, and we need only to be patient as the picture progressively unrolls itself before our eyes. In fact, the future may be a void. There may be nothing around the corner or in the tapestry. The future has to be created. Philosophically, all this may be so. But it doesn’t matter for the sake of the metaphor I have chosen.

Ex post we have to recognize that when an innovator has discovered something new, that something was metaphorically waiting to be discovered. But from an everyday point-of-view, when a new gadget is invented, we all say, gee, I can see we needed that. It was just waiting to be discovered.

Q: Consumer demand was there, resources were there, and the technology was there. . .

A: Yes, so there was no reason why it wasn’t being done. The entrepreneur is alert to this reality, to the profit opportunity it represents, and responds creatively to it.

Notice the emphasis on opportunities “metaphorically waiting to be discovered,” not literally waiting to be discovered. Kirzner isn’t offering a particular ontology or epistemology, just proposing an analytical device, designed for a specific purpose (to understand market clearing). Some of the literature comparing “discovery” and “creation” as alternative conceptions of the entrepreneurial act seems to me to read too much into Kirzner.

Entry filed under: - Klein -, Austrian Economics, Entrepreneurship.

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12 Comments Add your own

1. Rafe Champion | 25 October 2008 at 5:35 pm

Are some people importing a hidden assumption, along the lines that something does not really exist unless we have an explanation for it?
This has caused problems in other fields: the theory of continental drift was treated with scepticism until a mechanism was found to account for the energy required to drive the process, and the doctor who located the cause of childbirth fever in the Viennese hospitals was dismissed becasue there was no germ theory of disease available to explain why hand washing saved the lives of patients.
2. matthew mueller | 27 October 2008 at 1:10 am

What a great post!

I think Rage Champion raises an important question, and is one that I have recently addressed in my new blog “Post-Austrian Economics.” Have a look:

http://post-austrianeconomics.blogspot.com/

I think Kirzner’s theory of entrepreneurship is flawed philosophically, although I also believe that it hasn’t been sufficiently developed. As I argue, Kirzner’s theory is currently in the same place as Coase’s theory of transaction costs was in the 1950’s — much cited and little used. Nobody has really “operationalized” this concept yet — and yes, I have read the work by people like Harper, Sautet and Randall Holcombe, and stick to my assessment, namely, no one has operationalized this theory of entrepreneurship yet.

I am going to make a stab at this in the upcoming Austrian Student Scholars Conference:

http://www2.gcc.edu/dept/econ/ASSC/#Schedule

(My secret weapon: Lachmann’s capital theory.)
3. Ivo Sarjanovic | 27 October 2008 at 5:58 am

Peter,
I think sometimes you’re unfair with Kirzner treatment of entrepreneurship. For example in the interview you linked he’s very clear saying that his theory accepts that entrepreneurs can make losses while you say in some of your articles that Kirzner’s entrepreneur cannot make losses. Why is that?

I think the “judgement” alternative you’re developing is very interesting and rich but the way you handle Kirzner is not always the best as u’re not presenting his best/strongest version in order to criticize it.
4. Peter Klein | 27 October 2008 at 11:43 am

Ivo, Kirzner certainly does address error and entrepreneurial loss in several places. E.g.:

“[E]ntrepreneurial boldness and imagination can lead to pure entrepreneurial losses as well as to pure profit. Mistaken actions by entrepreneurs mean that they have misread the market, possibly pushing price and output constellations in directions not equilibrative. The entrepreneurial market process may indeed reflect a systematically equilibrative tendency, but this by no means constitutes a guaranteed unidirectional, flawlessly converging trajectory. What the Austrian entrepreneurial discovery process seeks to explain is not any imaginary mechanical sure-fire convergence to equilibrium, but rather the existence and nature of those important tendencies which markets display toward continual discovery and exploitation of pure profit opportunities thus tending to nudge the market in the equilibrative direction. In this process the capacity of market participants to discover earlier error, is central” (Kirzner, 1997, pp. 72-73).

My position is that Kirzner is inconsistent here, that this is an ad hoc addition to the discovery-process framework that doesn’t quite fit. It is fine to say that some entrepreneurial actions are “correct,” i.e., profitable, ex post, and that some are incorrect. Metaphorically, Kirzner describes the former as gains that were “waiting to be discovered.” How, then, to describe the latter? “Ex post we have to recognize that when a firm goes bankrupt, the failure was metaphorically waiting to be discovered.” In my mind, this reduces to saying simply “When you’re right, you’re right, and when you’re wrong, you’re wrong.” The concept of discovery doesn’t add much value. I prefer to think in terms of uncertainty. Profits are never given, ex ante, even metaphorically, but may or may not be realized, ex post. Whether entrepreneurs are more likely to be successful than not is an institutional question, depending on the property-rights regime and other elements of the selection environment.

Anyway, my point above is that I think some of Kirzner’s critics have read too much into the discovery metaphor. Even in a “proper” reading, however, I think the metaphor is problematic!
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[…] Entrepreneurial Action, and Economic Organization (II) A propósito deste artigo leiam este post de Peter […]
6. Neel | 27 October 2008 at 4:29 pm

Peter, aren’t you neglecting Kirzner’s emphasis on the TENDENCY to discover? I think that the notion of “tendency” is as important as the notion of “discovery.” I am not referring to market-clearing tendencies, but to tendencies at the individual, entrepreneurial level. You mention these once in your paper (fn. 10), but only in relation to Mises, not to Kirzner.

P.S. I enjoyed reading the paper.
7. Peter Klein | 27 October 2008 at 5:08 pm

Thanks Neel. Kirzner does argue for a tendency at the level of the individual. But then you get into the whole Kirzner-versus-Lachmann thing about the subjectivity of expectations. I read Mises (in this context) as making a claim about the tendency of entrepreneurial forecasts to be correct at the level of the market, not necessarily the individual. (BTW in the SSRN version of the paper there’s a missing word in that footnote — “a kind of natural namely” should read “a kind of natural selection, namely”.)

In a different paper I argue that the Kirzner-versus-Lachmann debate can be avoided by focusing on what Mises calls the “plain state of rest,” and a secondary equilibrium construct that can be called the “fully arbitraged state of rest,” neither of which corresponds to the kind of long-run equilibrium that markets may or may not be “tending toward,” in the language of the K-L debate.

But to get back to your question, you’re right, I don’t say much about the tendency toward individual discovery, which strikes me as a different concept from Kirzner’s analytical construct of the pure entrepreneur. What do you think?
8. spostrel | 27 October 2008 at 6:37 pm

I don’t see why we should care about Kirzner’s intentions for the metaphor of discovery. Entrepreneurship as discovery of pre-existing opportunities either is or is not a useful concept, regardless of what Kirzner meant (assuming that he had thought through this particular distinction). It’s fine to avoid reinventing the wheel, but it’s not so fine to engage in scriptural disputation. It does seem to me like a very good idea to see how literally one can take one’s metaphors and to push them as hard as one can. That’s how atomic theory, which originally was just a metaphor, developed, for example.

On the substance of the matter, it is always possible to say that success or failure for a given entrepreneurial failure is “baked in the cake” before these outcomes actually occur. It’s a completely consistent viewpoint to say that given the situation at time X and the set of planned actions by agent Y, what happened had to happen. You can fuzz it up with sensitive dependence on intial conditions or symmetry breaking or some such device, but basically entrepreneurs are drilling holes into the ground and hoping to hit oil deposits rather than pockets of noxious exploding gasses. Once they decide to drill in a given spot, it’s either “We’re rich!,” “We’re just OK,” or “BOOM! Cough, cough, I’m dying now.”

On the question of how arbitraging entrepreneurs can ever lose money, think of each venture as an experiment in equilibrating the economy. Alert entrepreneurs are good at judging what lies beneath based on the surface terrain and are more prone to notice favorable spots to drill. All we need to get a net equilbrating force from aggregate entrepreneurial search is an environment that quickly terminates bad drilling decisions (“BOOM”) and rewards good decisions with more resources to do more drilling in that spot or similar spots.

Now this may not be a useful way of looking at things, and there may be other consistent perspectives, but I don’t see why such heavy weather is made of the issue. It’s not as though a search metaphor isn’t a pretty standard way of thinking about creative problem solving in artifical intelligence and cognitive psychology.
9. ZH | 27 October 2008 at 7:59 pm

Kirzner is still alive. You can just ask him to clarify what he meant.
10. Peter Klein | 27 October 2008 at 9:06 pm

ZH, I’m sure Kirzner has better things to do than talk to us. However, he’s scheduled to appear on a panel on Mises at the upcoming Eastern Economics Association meeting in NYC. Might be a good time to ask him!

Steve P., I certainly agree that analysis of What Kirzner Really Meant — scriptural disputation, if you like — isn’t the core issue in entrepreneurship theory. It is, however, the subject of this particular post. BTW, I like your drilling metaphor very much. I would place more emphasis on the required investment (buying a drill), but otherwise it’s a perfect illustration of the Knightian concept of entrepreneurship, combined with Mises’s idea of the entrepreneurial selection process. Note that it doesn’t require learning on the part of individual entrepreneurs, just a tight selection environment.
11. Neel | 28 October 2008 at 9:26 am

Peter, indeed, we can go into the K-L debate about the subjectivity of expectations, but the point I wanted to make is that the essence of Kirzner’s theory of entrepreneurship is not so much that entrepreneurs discover, but that they have a natural tendency to discover. For example, in his paper in the JEL (199&), he writes:

“What accounts for a systematic tendency toward that succession of wholesome surprises which must constitute the equilibrative process, is not any implausible series of happy accidents, but rather the natural alertness to possible opportunities (or the danger of possible disaster)
which is characteristic of human beings.”

“…although entrepreneurs can, as noted above, make
errors, there is no tendency for entrepreneurial
errors to be made.”

What does this change? If I consider your penultimate paragraph in post # 4, you conclude by saying that “the concept of discovery doesn’t add much value.” True. But, the concept of “tendency to discover” does. In both cases (ex post profit or loss), there was an entrepreneurial tendency to discover what entrepreneurs thought were profitable opportunities ex ante. IMHO, this is the crux of Kirzner’s theory of entrepreneurship, rather than the discovery of (what turn out to be) profitable opportunities. Individuals do have a tendency to be alert to what they think will turn out to be profitable opportunities. Kirzner would certainly not reply in the example you give of a firm going bankrupt that “the failure was waiting metaphorically to be discovered.” What he would say, I guess, is that this bankruptcy is, all things considered, not the result of a natural tendency of entrepreneurs to look for unprofitable opportunities! As he writes, there is no tendency for entrepreneurial errors to be made.

(I found your paper on the mundane economics of the Austrian school thought-provoking, and an original interpretation of the history of the Austrian school of economics.)

matthew, I’m impressed by the breadth of your knowledge and wish you good luck with your blog (and your research in general). But, my friendly suggestion would be that you avoid making bold statements like “Kirzner’s theory of entrepreneurship is flawed philosophically.” Flawed with respect to what philosophical framework? More importantly, Kirzner has never claimed that his theory of entrepreneurship builds upon some given philosophy. He considers his work as a contribution to ‘pure economics.’ Being myself interested in philosophical aspects of economics, I have discussed this issue with him a few times, and what he said to me is that he does “not know much about philosophy. Whatever I know, I owe it to Mises.”

However, he did like one (the only?) philosophical interpretation of his theory of entrepreneurship provided by Uskali Mäki (“”The market as an isolated causal process: A metaphysical ground for realism”, in Austrian Economics: Tensions and New Developments, edited by Bruce Caldwell and Stephan Boehm. Kluwer Publishers, 1992. Pp. 35-59″).

You can download it from his web page: http://www.helsinki.fi/filosofia/tint/maki/research.htm

Even though Uskali’s paper does not address the issues raised by Peter Klein, I think it does provide a philosophical interpretation of Kirzner’s theory of entrepreneurship that is not…flawed.
12. Bradbury on Bricolage « entrepreneurship@McQuinn | 6 June 2012 at 10:59 am

[…] — sounds like Alvarez and Barney’s notion of creation opportunities, as opposed to discovery opportunities. In any case, Bradbury was a great writer; may he RIP. Share this:Like this:LikeBe the first to […]