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What Most Critics of "Markets" Get Wrong about Entrepreneurs

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Tags Free MarketsEntrepreneurshipPhilosophy and Methodology

03/28/2019

Practically all critiques of markets are fundamentally ignorant and never address the actual issue. And they've been ignorant in the same way for about (at least?) a century. The so-called "market socialist" response to Mises' claim that socialism (the common/public ownership of the means of production) is impossible illustrates this.

Real Prices vs. Government "Prices"

Starting with Frederic Taylor's AEA presidential address published in 1929, with same ideas being adopted by Lange and Lerner1 in the 1930s, there was agreement about the allocative and informational functions of market prices. But as they were opponents of private property, the market socialists argued that government should provide the pricing mechanism through establishing list prices and adjust them in the face of shortages and surpluses. So, basically, the government should have a master list of
prices of all goods, including (and especially) the means of production (from land to specialized labor, machines and hammers and screws, etc.), and whenever producers experienced a shortage of something, they'd report this to the central planning office, which would then update the list to set a higher "price." The same thing was to occur if there were too many of something — a surplus — which would then warrant a lower "price."

Of course, this "solution" has major problems in terms of the knowledge problems that Hayek discuss as well as the problem of time, since list prices would only be updated in response to surpluses and shortages — never in response to expected changes in production. Real prices, of course, are determined by entrepreneurs and producers bidding for resources that they expect will bring them future revenue if consumers find the goods valuable.

So real prices are really future prices, whereas the market socialists' list prices are by necessity only past prices. The prices are thus very different, and cannot serve the same function.

But the real issue here is that the actual and real problem is misunderstood.

This is not a matter of management, or allocating resources among already existing lines of production. Such a problem can, at least conceptually, be solved as it is a problem of lacking information and, potentially, processing of such information.

The real issue entrepreneurship, or the attempted production of novel and previously unseen goods and services that almost always require the creation of new means of production, new specializations, and new understanding. Entrepreneurs imagine that a previously never seen good or service would be valued by consumers, and that this novel idea means resources traded at current prices are under-priced. They are really, from the point of view of the entrepreneur, worth more than the prices indicate. The entrepreneur thus sets out to acquire resources at present prices in pursuit of future new profits.

Entrepreneurs Expand an Ever-Changing Market

As many entrepreneurs do this, and since they do this while competing with entrepreneurs who have imagined the future differently, their work constitutes a division of intellectual labor. But, more importantly, as innovative entrepreneurs outbid other entrepreneurs, they establish a new direction for the market process overall and a new scope of market production — a new basis for pricing.

A market economy, with private ownership of the means of production, increases its extent. It is never stable.

The market's new scope cannot be reflected in the central planning board's list prices because those are retrospective. But also because entrepreneurs have either no incentive to take the risks of pursuing the production of new goods (because profits aren't theirs to keep) or, alternatively, have no downside to moderate risk-taking (because the loss is not theirs). And, as a result, the overall production structure is no longer directed toward satisfying consumers' actual wants; this is the very definition of waste, as production is not undertaken to facilitate value but for the purpose of minimizing cost. And you can only minimize cost in already existing production — not in previously untried production, which first need to prove its value. (I write about this here.) 

The real issue, which is the shifting of the market's boundaries in pursuit of new value creation, is never, as far as I know, part of the critique of markets. Critics always focus on whether production is undertaken rationally and efficiently. Which always misses the more fundamental point of what may be possible. This is where markets excel, because of the division of intellectual labor in pursuit of profit and avoidance of loss with the consumer as final arbiter of value.

Maybe this is the reason critics avoid such a discussion because they have no solution to it.

Or they simply don't understand it.

Originally published as a Twitter thread. Follow Per Bylund on Twitter. 
  • 1. Link from the editor.

Per Bylund is assistant professor of entrepreneurship & Records-Johnston Professor of Free Enterprise in the School of Entrepreneurship at Oklahoma State University. Website: PerBylund.com.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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