Uncertainty is on the rise again. At least in terms of social science research, where uncertainty is getting renewed attention. This is about time, since uncertainty is an ever-present problem that we must deal with in everyday life and that has important implications for any economy. So how can we possibly understand the economy without it? Yet, economists have for many decades downplayed its role or entirely overlooked it.
Today, entrepreneurship scholars are the ones most eagerly embracing the concept and attempting to figure it out. Unfortunately, they have largely chosen to address it as a rather abstract philosophical problem of “what can be known” instead of as a circumstance that entrepreneurs must bear. This is highly problematic, not only because entrepreneurship scholars make pretty terrible philosophers. It is problematic also because uncertainty in the abstract tells us pretty much nothing about the implications of uncertainty for entrepreneurship and the market economy.
Economists are not nearly as interested in uncertainty. There are some contemporary attempts to understand uncertainty, such as Bhidé’s recently published Uncertainty and Enterprise: Venturing Beyond the Known, but other than these rare exceptions one will typically need to go back to the middle or first half of the 20th century to find economists who dealt with uncertainty. For example, Alchian noted in the Journal of Political Economy in 1950 that, “Where foresight is uncertain, ‘profit maximization’ is meaningless as a guide to specifiable action.” Yes, “meaningless” is in italics in the original article. Imagine if Alchian had been taken seriously—we would have missed out on a lot of the economic nonsense produced in the past 3/4 century.
Austrians have of course always taken uncertainty seriously. But I have come to realize that much of the Austrian literature makes the same mistakes as both mainstream economists and entrepreneurship scholars. Austrian economists’ discussions and theorizing are certainly better in most, if not all, respects, but uncertainty still tends to be acknowledged without discussing specific structural economic implications. This is problematic because it is not enough to note that uncertainty makes it difficult or impossible to exercise perfect foresight or to reliably plan an economy, or that some undefined quality like “alertness” or “judgment” is necessary to deal with the unknown. Those are rather empty claims unless they are followed up with how economic theory and our conception of the market process are impacted by uncertainty.
But this is not the case if one reads Mises from the perspective that the promoter-entrepreneur is the true driving force of the market. Such a reading of Mises, especially his mature theorizing in Human Action, appears to me both much more accurate and also much more radical than the works by most other Austrians. With this reading, uncertainty of value stands out as the main issue that any economy must suffer and seek to overcome. It is an issue that requires economic calculation. Without integral entrepreneurs betting their private property on specific productions with uncertain value, decided by consumers after the fact, there is no “division of intellectual labor,” as Mises put it, and the best possible future cannot be pursued and created. It cannot even be drafted, which means progress is only accomplished by chance—it is a possible outcome but not the direction of economic activity.
Reading Mises from an entrepreneurship perspective also solves the problems that social scientists today grapple with because it limits the concept of uncertainty to where it is relevant to economic action and, thus, the economic system. Uncertainty as the unpredictability of “the future” in abstract is neither interesting nor helpful. For it to be useful requires greater specificity and it needs to be related directly to the causalites of the economy. Mises does so in stating that, “The ultimate source from which entrepreneurial profit and loss are derived is the uncertainty of the future constellation of demand and supply.” Note the last several words, they are key.
Mises’s view of the economy is a never-ending process directed toward creating value for consumers in their future circumstances. This value cannot be known before the fact, which is why all economizing production must be speculative, which in turn means any such undertaking can generate a loss. Only after the fact can we know whether and to what extent the goods that were produced were in fact the “right ones” (they earned profits) or not (they generated losses). But to figure this out requires that someone bets on the production of specific goods based only on what the producer imagines that consumers will want. Only by allowing for a plethora of such imaginations to compete freely both for scarce factors of production and for the money of consumers can the overall market process be directed toward greater value creation.
It is the process of competitive uncertainty-bearing entrepreneurship, the continuous homing in on what consumers will value in unknowable but imaginable futures, that facilitates rational decision-making and therefore, in a very fundamental sense, economy. Were it not for this constant uncertainty-bearing by entrepreneurs—their speculative investing toward the best ways of satisfying future consumers—there would be no way of economizing on the social level. This is done through the prices that entrepreneurs generate in their constant bidding for factors based on their expected value contributions. Or, as Mises puts it, “Eliminate economic calculation and you have no means of making a rational choice between the various alternatives.”
Mises’s economics is much more radical than simply referencing prices as a means to measure and thus make rational economic decisions. If read from an entrepreneurship perspective, as I choose to do (and think is the appropriate way to do it), Mises recognizes that the market economy as a whole progresses and brings us higher standard of living only because it encompasses decentralized decision-making under uncertainty—entrepreneurial speculations in pursuit of profit—with consumers the final arbiters of what value entrepreneurs have created. It is a beautiful argument, not to mention a radical economic conception, that is not often properly recognized, even by many Austrians.
