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Austrian Theories of Intervention and Entrepreneurship

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Tags Calculation and KnowledgeEntrepreneurshipInterventionism

At last week’s AERC, I was privileged to take part in a session celebrating Joe Salerno’s contributions to economics, as well as his role as a mentor to many young Austrians. The session, which was organized by Per Bylund and David Howden, concluded with the presentation of a new volume of essays in Salerno’s honor, to which I was proud to contribute a chapter (available free here).

For those new to Austrian economics, there are few modern scholars whose work I would recommend more enthusiastically than Salerno’s. Over the course of his career, he has not only documented the history and pre-history of the school, but also greatly expanded on the insights of Mises and other Austrians. He is, in my opinion, the leading Misesian economist alive today.

Indicators of his influence can be found in any chapter from this new book. All the contributions are worth reading, but I’ll stick to mine, and let the other authors discuss their own work. My chapter deals with the relation between government intervention and entrepreneurship, especially Austrians’ distinct views about how public policy threatens entrepreneurial behavior.

Most economists agree that government intervention undermines entrepreneurship. For instance, it’s obvious that taxes on profits reduce the incentive to serve consumers, or that trade restrictions have often destroyed profitable ventures in developing economies. It’s also conventional to note that regulation protects some businesses—usually the largest ones—at the expense of their smaller competitors.

This view of public policy is mostly uncontroversial. But Austrians have tried to push these basic insights about regulation further by thinking about more than just the poor incentives created by intervention (which are nevertheless quite important).

Austrians have suggested at least two specific ways policy might affect entrepreneurial behavior at a fundamental level: the first is the theory of entrepreneurial incentives proposed by Israel Kirzner, and the second is the theory of entrepreneurial calculation developed initially by Mises, and later by economists like Salerno.

In the first part of my chapter (and more extensively here), I suggest that Kirzner’s view, while highly original, is difficult to apply in practice. One thing that’s always troubled me about his theory is that it appears to rely on a paradoxical (his term) view of profit opportunities. Specifically, Kirzner emphasizes that entrepreneurs can’t search for opportunities, but must discover them serendipitously. According to him, the existence of a pure profit opportunity is itself a sufficient incentive to attract the entrepreneur’s attention, because entrepreneurs tend to systematically notice what it’s in their interest to notice. This leads Kirzner to conclude that opportunities cause their own discovery, an idea that’s been criticized by scholars inside and outside the Austrian school.

Importantly, Kirzner uses the opportunity discovery view to discuss economic policy as well as pure theory. In his view, government intervention eliminates profitable opportunities, and therefore also eliminates the systematic tendency toward discovery (and thus, toward increasing consumer welfare). But this raises an important question: if we can’t establish that in a free market there is a systematic tendency toward opportunity discovery, how can we infer that real-world intervention hampers this tendency? In my chapter, I suggest that we can’t reach this conclusion without making some major adjustments to the theory behind it.

However, another option exists that in my opinion provides a more thorough account of the damaging effects of regulation on entrepreneurs. The theory of entrepreneurial calculation not only explains progress in the free market, but also how progress is arrested by intervention. Economic calculation is the ability of entrepreneurs to use money prices to appraise the factors of production and thereby incorporate them into their production plans. It is the rational process underlying the market’s ability to allocate resources effectively and to systematically increase welfare, and its absence is the leading cause of the economic disasters of socialism.

One advantage of this approach is that it’s easy to see the effects of intervention on calculation, and therefore also on economic performance. Obvious regulations like taxes cause entrepreneurs to adjust their valuations of certain lines of production, and often to abandon them or choose new ones. Or regulation can distort entrepreneurs’ understanding of market conditions, as in the case of the business cycle. Or calculation can be eliminated altogether and replaced by other forms of decision-making like “political entrepreneurship.”

In short, there are many ways to apply calculation theory to problems in economic policy. Calculation is a fundamental concept in Austrian economics, and is at the center of a vibrant research agenda to which Joe Salerno has contributed enormously.

Matt McCaffrey, former Mises Research Fellow, is assistant professor of enterprise at the University of Manchester.

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