Hayek and Entrepreneurship

7 November 2007 at 11:45 pm 3 comments

| Peter Klein |

At the Kauffman data symposium participants were given little notebooks with the Kauffman logo and a quote from Hayek — “Society’s course will be changed only by a change in ideas” — on the cover. It’s a nice line and certainly in the spirit of Hayek’s views on social change as expressed in The Road to Serfdom, “The Intellectuals and Socialism,” and other works, though the exact quotation does not seem to appear in Hayek’s writings. (The line is attributed to Hayek by John Blundell, recounting a conversation between Hayek and IEA founder Antony Fisher. In “The Rediscovery of Freedom,” written in 1983, Hayek puts it this way: “A young English pilot who had returned from the war and had made a great deal of money in a few years as an entrepreneur came to me [around 1947] and asked me what he could do to thwart the ominous growth of socialism. I had considerable trouble persuading him that mass propaganda was futile and that the task consisted rather of convincing intellectuals.”)

The Kauffman Foundation focuses on entrepreneurship, not opposition to socialism, so I started thinking about the influence of Hayek on entrepreneurship research. Kirzner’s theory of entrepreneurial discovery builds directly on Hayek’s notion of an economy characterized by dispersed, tacit knowledge, an economy in which “competition” is a process of coordination and equilibration, rather than a set of conditions (as in Walrasian competitive general equilibrium). However, Hayek did not develop a theory of the entrepreneur per se.

Hayek does use the term “entrepreneur” in his writings on socialist calculation and capital theory. But he seems to mean simply “businessman,” and does not distinguish sharply among entrepreneurs, managers, capitalists, and other business professionals. Certainly the Kirznerian metaphor of the “pure entrepreneur,” performing a discovery function independent of ownership and investment, does not appear in Hayek’s writings. Nor does Hayek say much about Schumpeter’s theory of innovation and creative destruction, though he knew Schumpeter’s work well.

David Harper puts it this way in his Foundations of Entrepreneurship and Economic Development (p. 20):

In his magnum opus, Human Action, Mises analyses market processes rather than equilibrium states. . . . [T]he equilibrating properties of the market process depend vitally upon the activities of entrepreneurs. Entrepreneurs see opportunities for profit in the conditions of disequilibrium. Competition among profit-seeking entrepreneurs is the agency which would bring the market prices of all goods and services to their equilibrium levels if no further changes in market data were to take place. Indeed, Mises considers entrepreneurship to be analytically inseparable from the process of competition.

In contrast, Hayek did not focus explicitly upon the role of entrepreneurship in explaining the market process. Rather, he emphasized the role of knowledge an mutual learning. He examined how, in the course of the market process, market participants come to obtain more accurate knowledge of each other’s plans.

One can construct a theory of entrepreneurial learning that is more explicitly Hayekian (see Butos and Koppl, 1999, which builds on Hayek’s Sensory Order). On the whole, however, the entrepreneurship literature appears to treat Hayek as an important theorist of knowledge and the competitive process — important elements of the entrepreneurial story — but not a contributor to the theory of entrepreneurship per se.

Update: Steve Horwitz offers some commentary here.

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

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3 Comments Add your own

  • 1. Henrik Berglund  |  8 November 2007 at 9:12 am

    Regarding Hayek’s familiarity of Schumpeter.

    Hayek actually concluded his classic paper on the role of knowledge in society by explicitly attacking Schumpeter and his assertion that entrepreneurship can be seen as systematic discovery of objectively existing opportunities. Writes Hayek: “To him [Schumpeter] these phenomena accordingly appear as objectively given quantities of commodities impinging directly upon each other, almost, it would seem, without any intervention of human minds.”

    This is, according to Hayek, completely mistaken and the mistake rests on an inability to appreciate the tacitness and incompleteness of each individual’s knowledge (i.e. subjectivism), and the implications this has for the market qua process

    Hayek claimed to be startled that: “an economist of Professor Schumpeter’s standing should thus have fallen into a trap which the ambiguity of the term ‘datum’ sets to the unwary”, because like any approach: “which in effect starts from the assumption that people’s knowledge corresponds with the objective facts of the situation, [it] systematically leaves out what is our main task to explain. I am far from denying that in our system equilibrium analysis has a useful function to perform. But when it comes to the point where it misleads some of our leading thinkers into believing that the situation which it describes has direct relevance to the solution of practical problems, it is high time that we remember that it does not deal with the social process at all and that it is no more than a useful preliminary to the study of the main problem” (Hayek 1945: 91).

    In light of recent debates, regarding the ontological status of opportunities, many contemporary entrepreneurship scholars might benefit greatly from reading Hayek’s work, even if it does not focus on entrepreneurship per se.

  • 2. Rafe Champion  |  10 November 2007 at 7:19 am

    I think it was Mises who was most insistent that it was the intellectuals who had to be addressed in order to change the corse of history.

  • 3. Iguanaz » Hayek and Entrepreneurship  |  18 November 2007 at 2:17 am

    […] Check it out! While looking through the blogosphere we stumbled on an interesting post today.Here’s a quick excerptHayek and Entrepreneurship | Peter Klein | At the Kauffman data symposium participants were given little notebooks with the Kauffman logo and a quote from Hayek — “Society’s course will be changed only by a change in ideas” — on the cover. It’s a nice line and certainly in the spirit of Hayek’s views on social change as expressed in The Road to Serfdom, “The Intellectuals and Socialism,” and other works, though the exact quotation does not seem to appear in Hayek’s writings. (The line is attri […]

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