Abstract
Nicolai Foss and Peter Klein have penned a most remarkable book on the theory of the firm. They offer a rich analysis of the economic organization through the lenses of various approaches including Austrian economics and neo-institutional economics. Their work is a welcome addition to the field of entrepreneurship studies, as it focuses on the role of entrepreneurship within established organizations. While I embrace most of the authors’ conclusions, I disagree with a central piece of their analysis: The rejection of the Kirznerian framework. In establishing judgment as the fundamental explanans of the theory of entrepreneurship, Foss and Klein introduce the bias of seeing entrepreneurship as allocating resources in firms. Moreover, introducing the process of judgment does not offer new insights that cannot be obtained through Kirznerian discovery analysis. Fundamentally, the essence of entrepreneurship is at stake. And it is not a debate about semantics. It is my contention that Israel Kirzner offers a more fundamental theory of entrepreneurship — one that can be applied within and beyond the realm of the firm, and that helps us explain social change, market processes, development, and growth.
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Notes
Foss and Klein (2012). Quotes and page references are from Organizing Entrepreneurial Judgment, unless otherwise stated.
Fundamentally, the authors reject Kirzner’s basic tenets of entrepreneurship theory, i.e., alertness to gains from trade, discovery as a genuine change in the ends-means framework, costlessness of discovery, and propertyless entrepreneurial function.
As many philosophers and economists (including Murray Rothbard) have shown, there is simply no need to mix labor with nature to establish property rights. The notion of first occupant supersedes any theory based on labor. The analogy holds here in my view.
Foss and Klein “call for much more emphasis being placed upon the processes by which entrepreneurial perceptions are translated into action than on the psychological aspects of ‘discovery’” (p. 226), italics in original.
Rothbard first emphasized this view (1974, p. 903).
Mises (1998, Ch. XIV, Sec. 7).
Defining homo agens in terms of genus and differentia may provide a further explanation. A potential definition is as follows: “homo agens is a Robbinsian maximizer (genus) who is capable, through alertness as a pure entrepreneur, of altering his preferences in order to introduce a new ends-means framework of action (differentia).” Charisma is not a defining aspect of the differentia, even though it may help explain it. On the other hand “creator” can be considered as part of the differentia since creation implies a change in the ends-means framework.
Klein (2010, p. 107) states, “Opportunities do not exist objectively, ex ante, but are created, ex nihilo, as entrepreneurs act based on their subjective beliefs.”
As Kirzner explains, the Mengerian vision consists “in the insight that the essential causal determinant shaping economic phenomena is not the physical environment within which economic activity proceeds, but the preference structure of the consumers whose needs inspire that activity” (1995, p. 13).
It is true, as Salerno (1993) contends, that discovery cannot strictly be inferred from action. But discovery can be only one of two explanations of the motives behind the action (the other being that preferences have been known for a long time).
Similarly in this sentence: “the unit of analysis should be the assembly of resources in the present in anticipation of (uncertain) receipts in the future” (p. 102). This assembly of resources only takes place because of the discovery of new gains from trade. It is the consequence of that future new possibility. So the discovery of the opportunity is driving the action by formulating the purpose. It is because the opportunity is perceived to exist (and interpreted) that investments are made.
Note that Roger Garrison describes Kirzner’s position as being in line with that of Mises. As he puts it: “We must take Ludwig von Mises literally when he suggests that the only way we can conceive of markets is to conceive of a tendency toward equilibrium… It is on that expansive band between the two poles that Mises’s concept of human action, the ultimate source of the equilibrating tendency, has applicability” (1982, p. 133–4).
An alternative to the radical subjectivist view of expectations is Weberian and Schutzian ideal typification (Sautet 2015, p. 14).
In spite of Foss and Klein’s view to the contrary, casual empiricism offers countless cases in the business world of “big” Kirznerian discoveries. For instance, firm founders such as Kevin Plank (Under Armor) and Nick Woodman (GoPro) have both reported having started their companies following such big moments of discovery. Plank noticed that his football shorts would dry much faster than his tops and then decided to make tops based on the same fabric as that of the shorts. Woodman realized, as he was using a small camera of his own making to film his exploits as a racecar driver, that people around him had a huge interest in such a camera. In both cases, many other discoveries followed the initial crucial one.
The authors also criticize Kirzner for not offering a “theory of how opportunities come to be identified, who identifies them, and so on; identification itself is a black box” (p. 70). Hence “opportunity discovery is an analytical primitive, meaning that Kirzner does not address its antecedents/determinants” (ibid). One may ask whether judgment is also an analytical primitive, especially since it rests on discovery. Kirzner often emphasizes that his theory of entrepreneurial discovery is not psychological. Alertness is posited and varies across individuals depending on their genetic heritage, prior experience (Arentz et al. 2013; Minniti 2004; Shane 2000), and the like. This seems no different than judgment, which varies according to some factors such as cultural context, etc. (p. 42).
Note that while Kirzner describes entrepreneurship as a responding agency in one part of the book, he also explains in another section (2013, pp. 27-8) that it is precisely the entrepreneurial element in human action (as opposed to the economizing aspect) that is “responsible for our understanding of human action as active, creative, and human rather than as passive, automatic, and mechanical.”
Arguably Foss and Klein expand the meaning of the notion of judgment compared to High’s.
Further discoveries may help shoulder uncertainty aside, but uncertainty is always part of human action.
As the authors put it, “judgment can be decomposed in terms of such activities as searching for potential opportunities, evaluating those, and undertaking and coordinating the many investments and actions that are necessary to realizing an opportunity. This is what we mean by an ‘entrepreneurial division of labor’” (p. 230).
See also the following passage: “judgment is not a resource with a supply curve in the sense that capital and labor are resources. Judgment is the faculty of decision-making about resources. And yet, one can speak of judgment being ‘costly,’ meaning that judgments are not formed instantaneously and that they require complementary (scarce, costly) resources to be made and carried out” (p. 234).
Control over one’s own mind and body necessitates self-ownership, as libertarian political theory puts it, or the absolute respect for human dignity, as Catholic social teachings explain it. In that sense, the only ownership that matters to the entrepreneurial function is not that of assets but that of oneself.
Foss and Klein discuss the notion of “proxy-entrepreneurship” to describe situations in which some make decisions about the use of resources they don’t own (pp. 191–8). While this reminds the reader of the notion of nested entrepreneurship in Kirzner’s Competition and Entrepreneurship, it is the case that proxy-entrepreneurs make entrepreneurial discovery without having direct ownership of the assets under their control.
As Kirzner puts it: “The isolation of a purely entrepreneurial element in production is, of course, an analytical device. Human action in its totality is made up of an entrepreneurial element (to which is attributable the decision maker’s awareness of the ends-means framework within which he is free to operate), and an economizing element (to which we attribute the efficiency, with respect to the perceived ends-means framework, of the decision taken)” (1979, pp. 197–198). Italics in the original.
See for instance Bauer (1986).
See for instance the testimony of Charles Koch who insists, in his book Good Profit (2015, p. 78), on the importance of the (Kirznerian) process of discovery at Koch Industries, which “begins when we observe,” Koch explains, “often vaguely, a gap between what is and what could be. Our intuition tells us something better is just beyond the range of our mind’s eye. To build a culture of discovery, we must encourage, not discourage, the passionate pursuit of hunches (no matter their origin).”
See especially Kirzner (2013, Ch. 2).
Moreover, Foss and Klein explain that in the firm, “the problem facing the principal is not just that he is uninformed about what state of nature has been revealed or of the realization of the agent’s effort (i.e. hidden information), as in the usual agency model…, but rather that the agent’s knowledge is superior to that of the principal with respect to certain entrepreneurial possibilities (i.e., hidden knowledge)” (p. 216). This view of the principal-agent problem echoes my analysis of the “double Hayekian knowledge problem” (DHKP) found in the firm (Sautet 2000, pp. 98 and ff.). The DHKP has implications for the organization of firms in terms of hierarchy and structure, such as the delegation of rights to employees to foster entrepreneurial discovery within the organization and to reveal the “hidden knowledge” (to use Foss and Klein’s term). This is one of the interpretations of the role of the M-Form (Sautet 2000, pp. 108 and ff.).
See Boettke and Sautet’s introduction to Kirzner (2010).
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Acknowledgments
I would like to thank Peter Boettke, Michael Hernandez, and Daniel J. Smith for their comments and suggestions. The usual caveats apply.
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Sautet, F. The battle for the essence of entrepreneurship. Rev Austrian Econ 31, 123–139 (2018). https://doi.org/10.1007/s11138-016-0364-x
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DOI: https://doi.org/10.1007/s11138-016-0364-x
Keywords
- Organizing Entrepreneurial Judgment: A New Approach to the Firm
- Discovery
- Entrepreneurship
- Firm
- Judgment
- Kirzner
- Ownership
- Uncertainty
- Opportunity
- Subjectivism