The Capitalist and the Entrepreneur

1 Economic Calculation and the Limits of Organization

2 Entrepreneurship and Corporate Governance

Fuqua’s strategy is to allocate resources into business segments having prospects of the highest return on investment and to extract resources from areas where the future return on investment does not meet our ongoing requirements.... The same principle of expanding areas of high return and shrinking areas of low return is constantly extended to product lines and markets within individual Fuqua operations. Only with a diversified business structure is the application of this modern fundamental business investment policy practical.

Another highly diversified firm, Bangor Punta Corporation, explains that the role of its corporate headquarters is “to act as a central bank supplying operating units with working capital and capital funds” (1966 Annual Report).

3 Do Entrepreneurs Make Predictable Mistakes?

In a dynamic market context, longevity of interfirm alliances is not necessarily an indicator of successful collaboration. A succession of short-term alliances by a firm, for example, may suggest that the firm has a superior ability to learn from its partners, or that it may have superior ability to quickly reconfigure its chain of firm-addressable resources in response to changing competitive and market conditions.

Mosakowski (1997) also offers an experimentation theory of diversification (without looking at subsequent divestitures).

4 The Entrepreneurial Organization of Heterogeneous Capital

5 Opportunity Discovery and Entrepreneurial Action

[E]ntrepreneurs obtain remuneration for their activity in a very different manner than do laborers or lenders of capital. The latter provide factors of production which they sell to the entrepreneur at prices which they naturally try to make as high as possible. The entrepreneur proceeds quite otherwise; instead of selling something to the enterprise, he identifies himself with the enterprise. Some people doubtless will say that he provides the function of enterprise and receives as remuneration a sum which varies according to the results. But this is a tortured way of presenting the thing, inspired by an unhealthy desire to establish arbitrarily asymmetry with the other factors. In reality, the entrepreneur and the firm are one and the same. His function is to negotiate, or to pay people for negotiating under his responsibility and in the name of the firm, with two groups: on the one hand, with those who provide the factors of production, in which case his problem is to pay the lowest prices possible; on the other hand, with the buyers of the finished products, from which it is desirable to obtain as large a total revenue as possible. To say all this in a few words, the entrepreneur, although undeniably providing a factor of production, perhaps the most important one in a capitalist system, is not himself to be defined in those terms.

Marchal expresses, in strong terms, the view described in chapter 4 that entrepreneurship is embodied in asset ownership (i.e., in the creation and operation of the firm). The entrepreneur is not merely an idea man, but rather an owner, who exercises judgment over the capital assets he owns and manages. This contrasts with Kirzner’s analytical device of the “pure entrepreneur” who owns no capital. (I thank John Matthews for the reference to Marchal.)

6 Risk, Uncertainty, and Economic Organization

7 Price Theory and Austrian Economics

I had... become somewhat stale as an economist and felt much out of sympathy with the direction in which economics was developing. Though I had still regarded the work I had done during the 1940s on scientific method, the history of ideas, and political theory as temporary excursions into another field, I found it difficult to return to systematic teaching of economic theory and felt it rather as a release that I was not forced to do so by my teaching duties. (1994, p. 126)

Throughout his career at the London School of Economics from 1932 to 1949, Hayek’s main teaching obligation had been the required graduate course in economic theory. Of course, he did produce his first important work in classical liberal political economy, The Road to Serfdom, in 1944.

To characterize a concrete situation “observed” in reality as one of “equilibrium” is to commit the fallacy of misplaced concreteness. At best, the observer may mean to assert that in his opinion the observed and duly identified situation corresponds to a model in his mind in which a set of selected variables determine a certain outcome, and that he finds no inherent cause of change—that is, that he believes only an outside disturbance, not in evidence at the moment, could produce a change in these variables. This, of course, is a personal judgment, meaningful only if the variables are fully enumerated and the assumptions about their interrelations are clearly stated.

Two adjustment processes are present in Marshall: the adjustment toward market-day equilibrium and the adjustment toward normal equilibrium. In my view... the former should be interpreted as proceeding instantaneously, whereas the latter (to be called intertemporal adjustment) arises across several trading rounds....

The stationary equilibrium concept of equilibrium is in accord with the common-sense understanding of equilibrium—i.e., it is a point of rest. It is implied that this point does not need to be effectively reached; it suffices that reacting forces are triggered whenever it is not reached. Equilibrium is thus viewed as an attractor.... Note also that in this line of thought, assessing the existence of equilibrium or disequilibrium amounts to making a statement about reality.

Why is all this important? Well as Franklin Fischer pointed out in his very important book The Disequilibrium Foundations of Equilibrium Economics (1983) that unless we have good reasons to believe in the systemic tendency toward equilibrium we have no justification at all in upholding the welfare properties of equilibrium economics. In other words, without the sort of explanation that Kirzner provides the entire enterprise of neoclassical equilibrium is little more than a leap of faith.

If one rejects the neoclassical equilibrium concept as a welfare benchmark, though, this justification is unnecessary.

8 Commentary

Interestingly, Hayek himself sought to de-homogenize his work from that of free-market thinkers with whom he disagreed methodologically. In an interview in the 1980s he described Milton Friedman as a “logical positivist,” who “believe[s] economic phenomena can be explained as macrophenomena, that you can ascertain cause and effects from aggregates and averages [Friedman] is on most things, general market problems, sound. I want him on my side. You know, one of the things I often have publicly said is that one of the things I most regret is not having returned to a criticism of Keynes’s treatise, but it is as much true of not having criticized Milton’s [Essays in] Positive Economics, which in a way is quite as dangerous a book.” Quoted in Hayek (1994), pp. 144–45.