My Response to Shane (2012)
| Peter Klein |
Peter Lewin blogged earlier on the ten-year retrospectives by Scott Shane and Venkataraman et al. on the influential 2000 Shane and Venkataraman paper, “The Promise of Entrepreneurship as a Field of Research.” As Peter mentioned, Shane acknowledges critics of the opportunity construct such as Sharon Alvarez, Jay Barney, Per Davidsson, and me, but dismisses our concerns as trivial or irrelevant.
The January 2013 issue of AMR includes a formal response by Alvarez and Barney, as well as rejoinders by Shane (with Jon Eckhardt) and Venkataraman (with Saras Sarasvathy, Nick Dew, and William Forster). The dialogue is well worth reading. I didn’t participate in the symposium but do have a brief response to Shane.
My critique of Shane’s work, and the opportunity-discovery perspective more generally, is that the scientific understanding of entrepreneurship has been held back by the focus on opportunities. The basic idea is simple: “opportunities” do not exist objectively, but are only only subjective images, or conjectures, about future possibilities. They exist in the mind of the entrepreneur, who takes actions to try to bring them about. The very concept of opportunity makes sense only ex post, after actions have been taken and future outcomes realized, leading to realized profits and losses. Under uncertainty, there are no opportunities, only entrepreneurial forecasts, which may turn out to be correct or incorrect. (My critique is slightly different from that of Alvarez and Barney, who argue that some opportunities are “discovered,” but others are “created.” My position is that the whole idea of opportunity is at best redundant, and at worst misleading and harmful.) I maintain that the unit of analysis in entrepreneurship research should be action (investment) under uncertainty, not the discovery (or creation) of profit opportunities.
These arguments are laid out in my 2008 SEJ article and in the Foss-Klein 2012 book. They also came to the fore in a recent exchange with Israel Kirzner, the intellectual father of the opportunity construct.
In his January 2012 essay, Shane mischaracterizes this substantive critique as a terminological one. He says that subjective entrepreneurial perceptions of the future can be labeled “business ideas,” and are distinct from “opportunities,” which are objectively existing configurations of resources that generate potential gains from trade. As in the 2000 paper, he ignores the role of uncertainty. He claims, bizarrely, that without objectively existing opportunities, there is no way to explain objective profit. But this confuses an epistemic concept — entrepreneurial perceptions of an uncertain future — and an ontological concept — realized money profits and losses. Of course ex post profits and losses are objective. Why, then, call them “opportunities,” a forward-looking concept, rather than profits and losses? As I’ve argued before, every entrepreneurial phenomenon that can be described using the language of opportunities can be described even better in the language of beliefs, actions, and results. “Steve Jobs discovered an opportunity to make money by producing iPads” is misleading, because it implies that the future was known when Steve Jobs made his initial iPad investment. Far better to say “Steve Jobs believed he could make money producing iPads, so he started producing them, and he turned out to be right, earning huge profits.” What do we gain from using the concept of “opportunity,” rather than investments that will hopefully pay off?
Moreover, there is simply no way to explain losses in opportunity language. Shane (2012) dances around this point with some sleight-of-hand:
Venkat and I also argued that an entrepreneur’s conjecture about what will happen if resources are recombined and the output sold can turn out to be correct or incorrect. If it is correct, then the entrepreneur earns a profit. If it is incorrect, then the entrepreneur incurs a loss. Thus, our definition of entrepreneurial opportunities does not require them to be profitable; rather, our definition suggests only that the probability new goods, services, raw materials, and organizing methods could be introduced and sold at greater than their cost of production exceeds zero.
But, if opportunity simply means conjecture — what Shane now calls “business idea” — then the term is redundant. Using the same word for beliefs and for realized profits is obscurantist. If Shane now wants to use the term “business ideas” for beliefs well, fine, that is certainly an improvement in clarity. But then there is no role whatsoever for the term “opportunities.” There are simply the results of action.
I was amused that Shane mangled a quote from my 2008 article, making me appear to say the opposite of what I actually said. He writes:
If, as Klein explains, “opportunities for entrepreneurial gain are . . . inherently subjective — they do not exist until profits are realized” (2008: 180) — then unsuccessful entrepreneurship is a logical impossibility. No entrepreneur can fail to generate an entrepreneurial profit. And if entrepreneurs always generate a profit, then we cannot have failed entrepreneurs. If, however, objective opportunities make it possible for entrepreneurs to formulate subjective new business ideas, which are uncertain, then unsuccessful entrepreneurship can exist.
Of course, what I was criticizing in this passage was the concept of unsuccessful opportunities, not unsuccessful entrepreneurship! If entrepreneurship is defined, as I do (following Knight and Mises), as action under uncertainty, then of course it can be successful or unsuccessful. If entrepreneurship is defined, as Shane does (following Kirzner), as opportunity discovery, then it can only be successful. Here’s what I actually wrote on pp. 179-80 (with the sentence quoted by Shane in bold):
For Knight, in other words, opportunities do not exist, just waiting to be discovered (and hence, by definition, exploited). Rather, entrepreneurs invest resources based on their expectations of future consumer demands and market conditions, investments that may or may not yield positive returns. Here the focus is not on opportunities, but on investment and uncertainty. Expectations about the future are inherently subjective and, under conditions of uncertainty rather than risk, constitute judgments that are not themselves modelable. Put differently, subjectivism implies that opportunities do not exist in an objective sense. Hence, a research program based on formalizing and studying empirically the cognitive or psychological processes leading individuals to discover opportunities captures only a limited aspect of the entrepreneurial process. Opportunities for entrepreneurial gain are, thus, inherently subjective—they do not exist until profits are realized. Entrepreneurship research may be able to realize higher marginal returns by focusing on entrepreneurial action, rather than its presumed antecedents.
Only by taking that sentence completely out of context could Shane make me appear to be defining entrepreneurship as necessarily successful!
To summarize, Shane’s 2012 response to critics is a disappointment. He is mostly ignoring the critics, rather than grappling with the substantive issues at hand. I hold to my (subjective) belief that entrepreneurship research has been hampered by the concept of opportunities, and that progress will come from adopting the Knightian emphasis on judgment and action under uncertainty.
Addendum: See also the dictionary.