Organizations and Markets

A False Dichotomy?

20 December 2007 at 9:10 pm stevphel 1 comment

| Steve Phelan |

John Mathews recently sent me a conference paper on Kirznerian, Schumpeterian, and Ricardian approaches to entrepreneurial dynamics.

Aside from questioning the resource-based theory of entrepreneurship, the paper also attempts to resolve the Kirznerian/Schumpeterian schism in entrepreneurship — namely whether entrepreneurs drive the economy towards equilibrium (Kirzner) or disequilibrium (Schumpeter).

As a Schumpeterian, John solves the dispute by defining entrepreneurship as the discovery of new-to-the-world resource combinations (and thus new industries or lines of business, i.e. disequilibrium) and “strategic adaptation” as equilibrium-seeking within existing lines of business. Thus, “real” entrepreneurs create disequilibrium (I hope I paraphrased your argument correctly, John).

For me, the debate is a false dichotomy. In this sense, I am a Lachmannian (or is that Lachmaniac?). In the Lachmannian worldview, change is the only constant in the economy — changes in tastes, changes in technology, changes in competition, . . . and so forth. If change is a constant, it makes no sense to talk about an entrepreneur moving resources towards equilibrium because the “optimal” allocation of resources is always changing.

According to this argument, a Schumpeterian and Kirznerian entrepreneur are doing the same thing — pursuing a profit opportunity in response to changes in the economy. A new technology, for instance, moves the equilibrium point. The first mover may earn large profits but the level of profit will decline over time as competition increases — this, as we know, is the essence of creative destruction but also Kirzner’s market process.

That an inventor may create the change in technology is incidental to his or her role as entrepreneur. The invention changes the market equilibrium point and the entrepreneurial pursuit of profit acts as the market mechanism that reallocates resources towards the efficient frontier (which is a moving target).

It is only when we conflate the inventor with the role of the entrepreneur that we feel the need to distinguish between two types of entrepreneurs. Any change — local or global — demand or supply-side calls for resource reallocation.

(P.S.: We might want to reserve a special case for innovations that expand the efficient frontier, that is, we may want to incentivize activities that improve the productivity of society’s scarce resources – such as granting patents on R&D output).

Entry filed under: Austrian Economics, Entrepreneurship, Former Guest Bloggers, Management Theory.