Kirzner, Mises, the Entrepreneur, and the Market Process

Daniel Kuehn has a string of interesting posts on Israel Kirzner and they have pulled me from my slumber.1 I want to defend Kirzner, but at the same time I agree with Daniel that maybe Austrians have ignored “mainstream” contributions to market process economics. While I can’t claim to be superbly well read on Kirzner, I do feel comfortable making the claim that maybe Kirzner’s (main) contribution was much more narrow than many Austrians suspect the entrepreneur’s role in the market process, rather than the market process in general.

First things first, I suspect one of the following happened: (a) Daniel misunderstood Kirzner; (b) Kirzner did not communicate his argument well. (I’ve already commented on this on Daniel’s blog, but hopefully he won’t mind if I repeat myself here.) Daniel claims that Kirzner made an elementary mistake is confusing value for prices. If that’s true, I agree with Daniel. But, then I think that Kirzner articulated his point poorly.

If I interpreted Competition and Entrepreneurship correctly, Kirzner cares about prices not values. Specifically, and following Mises, he argues that the entrepreneur’s role is to notice disequilibria between factor and final good markets. To illustrate this line of reasoning in terms of equilibrium, suppose that the final goods market is producing at qc(uantity) < qc*, and let’s assume that this implies that the the price for factors of production is pf < pf*, such that if the entrepreneur buys at pf he’ll be able to sell at a price that corresponds to qc*, but at a cost that corresponds to qc. Kirzner is explaining pure profits, not surplus value.

It is, I think, more-or-less the same point that Frank Knight makes in “Profit and Entrepreneurial Functions,”

In the theory of competition, all adjustments “tend” to be made correctly, through the correction of errors on the basis of experience, and pure profit accordingly tends to be temporary. While it exists, in a positive form, it may obviously be regarded as a phenomenon of monopoly, and some distinction, which can never be clear, must be made between temporary profit and permanent monopoly revenue.

— p. 128.

(Kirzner, however, would disagree with the notion that profits are a monopoly phenomenon.)

What of the claim that the “mainstream” ignores the market process? I can’t agree with this argument, because I think there is a large “mainstream” literature out there that talks exactly about the market process, although perhaps not in a way that Austrians can readily identify. In fact, I think that there are several theories out there which go beyond Kirzner and, actually, explore many areas that Kirzner maybe didn’t recognize.

Consider the debate between Ludwig Lachmann and Kirzner. Both agreed that there are equilibrium and disequilibrium “forces” at work; they disagreed on what the net outcome has to be. Kirzner believed that markets ultimately equilibrate, while Lachmann held the much more ambiguous position that we can’t know for certain, at least in an a priori sense. Doesn’t the literature on job market search frictions and monopsonistically competitive labor markets prove Lachmann right? Things like employee loyalty to their firm, or imperfect knowledge of labor markets, other forms of transaction costs (e.g. transportation costs), suggest that maybe there comes a point where markets won’t equilibrate further (given a set of institutions). Finally, don’t these results contribute to our understanding of the market process?

Speaking of institutions, doesn’t Akerlof’s “Market for Lemons” paper, when properly interpreted, give us quite a bit of insight on the market process and institutional change? Coming back to the Lachmann-Kirzner debate, Akerlof’s insight actually seems to back Kirzner if markets don’t equilibrate [the way we want them to] under one set of institutions, we’ll develop new institutions to get them there. Moreover, to posit that agents will introduce new rules (e.g. reputation, guarantees, et cetera) seems to implicitly assume that there are agents willing to capitalize on new profit opportunities.

Likewise, I interpret New Trade Theory as belonging to the study of the market process. Paul Krugman, and others, provided insight on how markets respond to changes in population size and, more fundamentally, how markets can form at all, if we assume that there are no comparative advantages at t0. This is a dynamic theory at heart, so it must say something about the market process (something that many Austrians have been quick to dismiss). Perhaps New Trade Theory has a more narrow focus than, say, Mises’ discussion of profit and loss, but that doesn’t mean that it doesn’t offer any process theory insight at all.

Sure, maybe these theories are framed in terms of equilibrium not unlike Kirzner’s theory, mind you , but they’re suggestive of the fact that maybe the “mainstream” thinks more about the market process than Austrians give them credit for. So, in this regard, I completely agree with Daniel. In fact, I could go as far as to claim that, rather than Austrian contributions being underestimated by the “mainstream,” perhaps the Austrians have underestimated “mainstream” contributions. Or, maybe there’s a little bit of both going on.

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1. This site has been loading very slowly. The servers I contract through aren’t working out, but hopefully I’ll be able to move the site to new servers soon.

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