Wenzel on Kirzner
Robert Wenzel offers a spirited defense of Israel Kirzner’s concept of entrepreneurial alertness in a response to Danny Sanchez. I admire Wenzel’s enthusiasm and his appreciation for Mises, but I think his defense misses the mark. Indeed, there is a growing awareness among scholars working in the Austrian tradition that the essence of entrepreneurship is not alertness, but uncertainty-bearing, what Frank Knight and Mises both called judgment. I’m hardly an impartial observer in this debate, so I’ll offer only a few brief remarks here.
First, the critical construct in Kirzner’s approach to entrepreneurship is not alertness (or discovery), but opportunities. What is it, in other words, that the entrepreneur is alert to? A skilled baseball hitter is particularly alert to the speed and position of the ball; a watchful mother is alert to the cry of her child; the successful hunter is alert to the movements of the deer; and so on. The problem with Kirzner’s metaphor is not the idea that certain people are especially quick to notice things, but the idea that profits exist out there, objectively, waiting to be noticed. In a world of uncertainty, there are no profit opportunities to be alert to.
Of course, Kirzner recognizes that his metaphor is just that, a metaphor. My argument is that the metaphor is unhelpful and misleading. It takes our attention away from the uncertainty inherent in all human action, particularly regarding commercial behavior that involves the ownership and deployment of heterogeneous capital resources. Wenzel counters with examples of real-world entrepreneurs who don’t think about uncertainty. “[T]hey aren’t rolling case or class dice. They aren’t taking much risk. They are seeing Kirznerian opportunities.” But this is simply a category mistake. The issue isn’t what these entrepreneurs think they are doing, but what they are actually doing. Real-world entrepreneurs tend to be highly confident — overconfident, according to most of the research literature — in their judgments about the future. When they act, they have a particular image of the future in mind, and they are often sure their actions will bring about this particular future. But this is a statement about the entrepreneur’s psychology, not the economic function of the entrepreneur. The entrepreneur may believe he is seizing an objectively existing profit opportunity, but he isn’t. There are no such things to be seized.
Second, Wenzel misreads Mises on entrepreneurship and resource ownership (partly by quoting Mises out of context). This is understandable, because Mises’s own treatment of the distinction between entrepreneur and capitalist is uncharacteristically muddled. Mises virtually always associates entrepreneurship with judgment under uncertainty, but he has a lone reference to “pure entrepreneurship,” where he discusses the “imaginary construct of functional distribution” mentioned by Wenzel. I’ve written about this before, so I’ll just quote myself:
Mises clearly associates entrepreneurship with uncertainty-bearing: “The term entrepreneur as used by [economic] theory means: acting man exclusively seen from the aspect of the uncertainty inherent in every action” (Mises, 1949, p.254). Of course, all human action involves uncertainty, as Mises emphasizes by quoting the English proverb: “There’s many a slip ’twixt cup and lip” (Mises, 1949, p.254). Hence, capital owners, landowners, and even laborers (who own their own minds and bodies) act as entrepreneurs under conditions of uncertainty. Mises goes on, in the passage noted above, to describe a “pure entrepreneur” who is neither capitalist, landowner, or laborer, but his discussion is confusing, describing a hypothetical agent who borrows funds from capitalists, invests them, reaps any subsequent profit, and passes losses on to the lenders. But, as he notes: “Such an entrepreneur would, in fact, be an employee of the capitalists who speculates on their account and takes a 100 percent share in the net profits without being concerned about the losses” (Mises, 1949, p.254). But clearly such an agent is an employee of the capitalists, paid with a contingency fee. The uncertainty-bearer – the entrepreneur, according to Mises’s own definition – in this example is the capitalist, not the employee. Mises agrees, writing just two sentences later: “To the extent that the losses incurred cannot be borne out of the entrepreneur’s own funds, they fall upon the lending capitalists, whatever the terms of the contract may be. A capitalist is always also virtually an entrepreneur and speculator. He always runs the chance of losing his funds” (Mises, 1949, p.254). What, then, is a “pure entrepreneur”? The concept makes little sense in Mises’s own formulation.
My 2008 article “Opportunity Discovery, Entrepreneurial Action, and Economic Organization” offers a more detailed critique of the opportunity construct, particularly as used in contemporary entrepreneurship research. I think the entrepreneurship research literature is starting to move away from Kirzner. For example, the best paper award at this year’s Academy of Management conference (Entrepreneurship Division) went to Professor Per Davidsson for a paper arguing that that the entrepreneurship field should drop the concept of “opportunity” altogether.