“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.

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.

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.

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?

P.S. I enjoyed reading the paper.

“[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!

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.

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.)