Tag Archives: entrepreneur

It is possible that economics could once again become useful

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The entrepreneur is the missing ingredient in economics about which I have written. What cannot be linked is the paper I did on “The Absence of the Entrepreneur in the Economic Theories of the English-Speaking World”. What there is a link for is Origin and Evolution of the Term “Entrepreneur” in English, unpublished alas but available online.

But when it comes to the study of entrepreneurship, the names that matter are William Baumol and Israel Kirzner. Baumol has unfortunately gone to his reward, but Kirzner, bless him, at 88 has now been formally recognised by the American History of Economics Association. The citation below virtually leaves out his work on the entrepreneur but still does focus on his Austrian perspective. But even in awarding him the Distinguished Fellow Award, they also added, “our recommendation is, of course, based on his scholarly contributions and not on his political views”. Heaven forfend that that anyone should think that his political beliefs should matter, but you may be sure that they did. Nevertheless, here we are. There is also finally recognition that mainstream economics has no penetration in allowing us to understand how an economy works. A straw in the wind, but a good sign all the same.

The 2018 HES Distinguished Fellow Award was presented to Israel Kirzner at the recent HES conference at Loyola University, Chicago. Several strong candidates were proposed by the membership this year. The nominating committee, formed by Robert Leonard, Jeff Biddle and Mauro Boianovsky (chair), unanimously agreed that the most deserving of these candidates was Israel Kirzner and recommended to the HES Executive Committee that he should be the recipient of the HES Distinguished Fellow Award in 2018. The nominating letter was submitted by Peter Boettke, together with supporting letters by Bruce Caldwell, Karen Vaughn and Mario Rizzo. Our recommendation resulted from our consideration of several aspects of Kirzner’s work and career.

Born in 1930, Kirzner is well known as a leading scholar in the Austrian economic tradition. His work forcefully illustrates how the history of economics can be used as an important heuristic tool to cast light on current economic research. In that sense, Kirzner shares with members (e.g. Stigler, Robbins, Dobb, Viner, Galbraith, Schumpeter, Hayek, Patinkin and Sraffa) of what Craufurd Goodwin used to call the “Golden Age” of the history of economic thought (HET) a commitment to understanding economic problems through the use of HET as an analytical device instead of a separate sub-discipline. As put by Bruce Caldwell, “precisely because he works within the Austrian tradition, Kirzner often draws on history to make comparisons between the view he endorses and those he criticizes, and often the criticisms are methodological”. This shows especially in his main books The Economic Point of View (1960), Essay on Capital (1966) and Competition and Entrepreneurship (1973).

The highlights of Kirzner’s specific contributions to the history of economics are his 1994 edition of Classics in Austrian Economics (which includes a number of essential translations) and several essays on Von Mises and particularly Carl Menger. As pointed out by Karen Vaughn, Kirzner has been instrumental not only in explaining Menger’s ideas as the founder of Austrian economics, but also in encouraging a revival of interest in his writings. Moreover, as observed by Mario Rizzo, Kirzner is not just a historian of Austrian economics – for instance, in his works on the theories of profit and capital, Kirzner discusses carefully contributions by J.B. Clark, F.B. Hawley, F. Knight, I. Fisher, J. Schumpeter and others.

Kirzner has produced a body of work deeply imbued with a historical-philosophical sensibility. Although our recommendation is, of course, based on his scholarly contributions and not on his political views, it should be noted that Kirzner has shown that it is possible to combine political beliefs and scholarly scruple, and that this has been a source of inspiration for his followers, in whom we see that same attitude perpetuated.

My book launch

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There will be few moments in my life as exquisite as Wednesday when Peter Costello* came up to the University to launch the second edition of my Free Market Economics: an Introduction for the General Reader. It was a rare moment when the political side of my life, the academic side and my recognition of the importance of classical economic theory were brought together all at once, and was a moment I could share with my friends and family.

I may sometimes give the impression that the book is mostly about Keynesian economics and macro which is not the case at all. That is why I started it out, but the oddest thing for me was to find that as I wrote each chapter, that I harboured views that are far outside the standard textbook treatment. This starts even before we get to supply and demand, but I promise you this, by the time you finish with supply and demand you will know you are in a different economic world. Of course, there are demand-side market forces that limit the price that can be charged for a product, and forces on the supply side that put some kind of lower limit on the price. But the notion that there is a single equilibrium price for a product where two lines cross on a two-dimensional plane is unsupportable by even the most casual empiricism. As I point out to my classes, the price of a cup of coffee, starting from the $1 at the 7-11, to prices four and five times higher that are charged, all within a mile of the front door of our building, ought to make you appreciate that there is something else. I do teach the traditional S and D analysis, but my students also are made to understand that prices are not set by these two curves, but by entrepreneurs who are making decisions about their optimal pricing strategy, given all of the forces of the market that surround them. And most importantly, I do not let them forget that the information in a demand curve can never be known by anyone, ever. It is strictly for teaching purposes. Entrepreneurs in the real world have to work these things out for themselves in real time.

But if I have a villain on the microeconomic side, it is the MR=MC analysis and diagram. If economics had gone out of its way to find some means to cloud minds about what goes on in markets, I don’t think they could have come up with anything worse.

mc equals mr

I teach Keynesian economics, of course, but I won’t teach that. You can find it discussed in my book, but it’s in an appendix. Over the years of teaching this diagram and the explanations that surround it, I found that after going through markets and then supply and demand, you would come to this and stop a class cold. Eventually some could draw the diagram and some might have seen the point, but there would not have been many. I do, of course, teach marginal analysis, but not like this. If you would like to see how I do it, as just part of the way this book is different from any economics book you know, Quadrant Online put up a few pages of the book under the heading Margin of Success.

As I said at the end of my presentation, there are three features of the book that I stress over and again: the role of the entrepreneur, value added and the crucial importance of uncertainty. Each is part of what must truly be understood by marginal analysis: entrepreneurial decision making in the face of the unknown future. And the point I make about the entrepreneur, as I said on the night, is that we now talk about market forces and the invisible hand, but the reality is that there is only one force that matters in a market economy, and that is the entrepreneur. And I don’t mean entrepreneur as in someone who innovates and causes change. I mean entrepreneur as in the captain of a ship in the midst of a storm a thousand miles from land.

_____

* For non-Australians, Peter Costello is the nearest equivalent we have to Ronald Reagan. He ran the economy for eleven of the best years economically this country ever had. Not only was the Asian Financial Crisis a non-event when every one of our major regional trading partners was in recession, but we ended up with 5-6% at the same time. And not only budget surpluses year after year, Australia was, until Labor took over, the only country in the world that had ZERO DEBT! The momentum given to the economy by Costello meant that we travelled through the GFC with hardly a ripple. Our problems have come since due to the debts and deficits Labor piled up. We will never see zero debt again in anyone’s lifetime, and will be lucky even to see our budget balanced any time this side of 2025.

The consequences of having no English word for entrepreneur

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I have just finished a paper that will be published next year in a book that no one will read and so this will disappear. And to tell the truth, I cannot even tell how much this is even true, although it looks true enough to me. This is the conclusion to the paper, which seems to me to say all of this. But the point of the paper is that, because English did not originally have a word for “entrepreneur” our economic theories have been not just mis-shapen, but have led to such major distortions in our understanding of how economies work we ended up fostering the economic illiteracies of Marxism. Read the conclusion for yourself and see what you think.

Jean-Baptiste Say is properly recognised as the first economist to separate out the often entwined threads of the entrepreneur on the one hand and the owners of capital on the other. He did have, as John Stuart Mill noted, the advantage of having a separate word in French for this function, which allowed him a degree of conceptual clarity that was not available to those who wrote in English. But as noted, it was not until the fourth edition of his Treatise that even Say was able to see this distinction clearly, and even then placed his discussion within a footnote rather that make it a feature part of his text.

This distinction, as crucial as it is for clear thinking on economic issues, remained buried since the role of the capitalist at the time almost fully overlapped the role of the entrepreneur and therefore the term “capitalist” was used as an exact substitute. Marx in all his own works on economics, focused on the capitalist. There is not a single use by Marx of the term “entrepreneur” in the whole of the translated text of Volume 1 of Capital. But it is not due to any deficiencies on the part of the translator. The term “entrepreneur” does show up in Capital, but only once, in a footnote, and only because of a translation of a passage written originally by Molinari in French. This is the footnote:

“Even the mild, free-trade, vulgar economist, Molinari, says: “Dans les colonies l’esclavage a été aboli sans que le travail forcé se trouvait remplacé par une quantité équivalente de travail libre, on a vu s’opérer la contre-partie du fait qui se réalise tous les jours sous nos yeux. On a vu les simples travailleurs exploiter à leur tour les entrepreneurs d’industrie, exiger d’eux des salaires hors de toute proportion avec la part légitime qui leur revenait dans le produit. Les planteurs, ne pouvant obtenir de leurs sucres un prix suffisant pour couvrir la hausse de salaire, ont été obligés de fournir l’excédant, d’abord sur leurs profits, ensuite sur leurs capitaux mêmes. Une foule de planteurs ont été ruinés de la sorte, d’autres ont fermé leurs ateliers pour échapper à une ruine imminente…. Sans doute, il vaut mieux voir périr des accumulations de capitaux que des générations d’hommes [how generous of Mr. Molinaril]: mais ne vaudrait-il pas mieux que ni les uns ni les autres périssent?” (Molinari l. c. pp. 51, 52.) Mr. Molinari, Mr. Molinari! What then becomes of the ten commandments, of Moses and the prophets, of the law of supply and demand, if in Europe the “entrepreneur” can cut down the labourer’s legitimate part, and in the West Indies, the labourer can cut down the entrepreneur’s? And what, if you please, is this “legitimate part,” which on your own showing the capitalist in Europe daily neglects to pay? Over yonder, in the colonies where the labourers are so “simple” as to “exploit” the capitalist, Mr. Molinari feels a strong itching to set the law of supply and demand, that works elsewhere automatically, on the right road by means of the police.” (Marx [1867] 1906: 844)

In the wake of this tradition, even where the factors of production are discussed, they are usually summarised as land, labour and capital. It is only a rare exception in which there is any mention, let alone discussion, of the fourth possible factor which is the entrepreneur. Yet without the entrepreneur, the other three factors would lack direction and purpose.

There is, that is to say, the return on real capital, which is the return for ownership of various humanly produced tools and structures that are used in productive activity. There is then the return that comes from employing and directing each and every input as part of the production process in just such a way that a positive return over costs is earned. It is this second function that is the role of the entrepreneur. And it is this that is almost totally ignored in the economics of the English-speaking world, and as a result of the major influence of English-language economics on the world, with immense loss to our global understanding of the actual processes of a market economy, and indeed, of any economy beyond the primitive.

The absence of the entrepreneur in economic theory

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It was a choice either to come to France and to the meeting on J.-B. Say or go to Hong Kong and to the Mt Pelerin Society meeting. With some racing across France and then an all-night flight I might have made it for the last three days, one of which was an excursion to Macau, where I have already been. So here I went, not without some regrets, but this conference has been so exceptional and I will feed off the things I learned for a long time to come.

My own presentation was on the absence of the entrepreneur in the economics of the English speaking world, a problem few notice and about which there is generally little comment or even the slightest general recognition that it matters.

• the dominance over the past century of the economics of the English speaking countries

• the absence of discussion of the entrepreneur in the economic literature written in English

• the meaning of “entrepreneur” comes from the French entreprendre which means to undertake with the word for entrepreneur in English having literally been “undertaker” which has its other more common meaning as someone who buries people for a living – a morbid connection

• interestingly as a sidelight, the German word to undertake is unternehmen and therefore the German for entrepreneur is Unternehmer but in this case with none of the morbid connectivity of English

• John Stuart Mill in 1848 was discussing the need for an English equivalent of entrepreneur and lamented that no such term existed

• Schumpeter’s notion of an entrepreneur embeds innovation

• the Kirzner version of an entrepreneur is someone who exploits opportunities others have overlooked

• the meaning that is missing with such overtones is the plain notion of an entrepreneur as a factor of production that exists along with land, labour and capital – someone who runs a business and brings the other factors together in a productive profit making enterprise

• all such entrepreneurs are almost certainly creative in their own way, some more than others, but it is the notion of the organiser of a business that is needed

• economic theory has, however determined that it must follow physics in depending on external non-human forces, such as demand or utility with human decision making almost invisible

• the use of MC=MR as the profit-maximising position is paradigmatic in that no actual human decision making is visible other than to follow the dots to the highest possible profit

• although this is the essence of the theory of the firm, what is omitted is the possibility of novelty and innovation not to mention time

• an innovative entrepreneur is inconsistent with economics-as-physics since it opens up the possibility of discontinuity

• discontinuity via innovation makes mathematically-based economics a limited approach to understanding the dynamics of economic change since the future cannot be expected to be like the past.

The one point that was underscored for me at this conference is the importance of defining capitalism as an economic system in which economic decisions are made by entrepreneurs who are defined as a self-selected group who run businesses to earn their living. They are not chosen by governments or funded by governments but live or fail based on their own capabilities in providing buyers with the things they want. If you want to distinguish a true market-based economy from amongst the many fakes that now exist, just find out who owns their businesses and how such individuals ended up running such firms.

The evolving nature of the history of economic thought

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An email to a colleague in Europe who is going off to the Congress on J.-B. Say and the entrepreneur at the end of August.

I am very pleased to hear from you and to find you are heading off to this Congress. It seems exceptionally interesting and the focus on the entrepreneur has been for too long ignored within economic theory and policy. There was some interest expressed to me about my going there as well but it has unfortunately come to nothing. It would have been a quite long journey and as I also have a conference in Hong Kong just after may have been too much of an excursion. But whatever might have been the original interest in my attendance, nothing has come of it so I am off to Hong Kong which will be a bit easier than the 20,000 mile round trip going to France would have required. Still, I would have liked to have gone but that’s life.

The seriously interesting part for me, but probably of little interest to anyone looking at what Say was writing in 1803, is that I have written what amounts to Say’s Treatise for the 21st century. I will attach a blog post I did on the book, but it is about nothing less than the crucial role of the entrepreneur combined with an understanding of Say’s Law as expressed by Say, Ricardo, James Mill and John Stuart Mill. I am the living embodiment of those values but probably 150 years behind the times, but in my view, also about 15-20 years before my time. The fact of this conference is a sign of the subterranean changes going on. But it is hard for anyone who has grown up on aggregate demand and math ec to understand what’s required if you remove AD from within macro and start treating the future as genuinely uncertain. What happens then is you end up with the classical theory of the cycle which no one any longer understands. You should be able to read the back cover of the text in the blog post attached which explains all this in more detail.

I should also mention one other reason I was pleased to hear from you. Had you not written, I would not have known that my post to the SHOE website had actually been posted since it drew not a single response and google mail doesn’t post returned emails that one has sent out oneself. My campaign to save HET from the historians and philosophers of science seems to fall on deaf ears, but the more I engage in this debate, the most astonished I am at how misconceived their ideas are. Sure certain aspects of HET are HaPoS but that is not anywhere near HET’s core significance. I really do believe that HET has been overrun by philosophers and sociologists who have almost no interest in economic issues other than as a peripheral matter upon which they can contemplate everything else under the sun aside from the way an economy works. I think that because HET in Australia retains its original essence almost entirely, that the shifts that are going on elsewhere were almost invisible to us when they came to try to remove HET from economics which is why we all rose up as one. Now with conferences such as this in Boulogne-sur-Mer, where the central interest is mainly in understanding how economies function but using past economists as a vehicle, there may be a shift back coming into play. My intervention to preserve HET, however much it seems to have been resented by some of our American and European colleagues, was just in time. Had HET gone to HaPoS, it would have died within the decade within departments of economics. It would have become as relevant to economics as the history of physics is to physicists.

Finally, I am going to copy into this email my young colleague from Auchy so he can know what’s going on. I hope you enjoy the conference which I hope will be a great success and please do keep me informed.

Kind regards

The entrepreneur and modern economic theory

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The entrepreneur has been written out of economic theory. Let me explain:

      • the dominance over the past century of the economics of the English speaking countries
      • the absence of discussion of the entrepreneur in the economic literature written in English
      • the meaning of “entrepreneur” comes from the French entreprendre which means to undertake and therefore entrepreneur in English is literally translated as “undertaker” which has its other more common meaning as someone who buries people for a living – a morbid connection
      • interestingly as a sidelight, the German word to undertake is unternehmen and therefore the German for entrepreneur is Unternehmer but in this case with none of the morbid connectivity of English
      • Mill in 1848 was discussing the need for an English equivalent of entrepreneur and lamented that no such term existed
      • Schumpeter’s notion of an entrepreneur embeds innovation
      • the Rothbardian version of an entrepreneur is someone who exploits opportunities others have overlooked
      • the meaning that is missing with such overtones is the plain notion of an entrepreneur as a factor of production that exists along with land, labour and capital – someone who runs a business and brings the other factors together in a productive profit making enterprise
      • all such entrepreneurs are almost certainly creative in their own way, some more than others, but it is the notion of the organiser of a business that is needed
      • economic theory has, however determined that it must follow physics in depending on external non-human forces, such as demand or utility with human decision making almost invisible
      • the use of MC=MR as the profit-maximising position is almost paradigmatic in that no actual human decision making is visible other than to follow the dots to the highest possible profit
      • although this is the essence of the theory of the firm, what is omitted is the possibility of novelty and innovation
      • an innovative entrepreneur is inconsistent with economics as physics since it opens up the possibility of discontinuity
    • discontinuity via innovation makes mathematically-based economics a limited approach to understanding the dynamics of economic change since the future cannot be expected to be like the past.