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The ethics of pure entrepreneurship: An Austrian economics perspective

Abstract

This paper focuses on the justice of income distribution in a system of private property rights. Milton Friedman argued that the “ethical principle that would directly justify the distribution of income in a free society is ‘to each according to what he and the instruments he owns produces’” (1962: 161–2). In this paper we (a) show that the winning of pure entrepreneurial profit cannot be justified on the basis of Friedman’s ethical principle, and (b) argue that a fuller understanding of the meaning of “pure entrepreneurial profit” reveals that Friedman’s universal ethic is of little relevance to capitalism, properly understood as a free enterprise system. To pass ethical judgment on pure entrepreneurial profit, it is necessary to supplement Friedman’s ethical principle with additional ethical insights. This paper does not argue directly in favor of any one such possible additional insight; it will simply demonstrate how one such additional insight might, if it passes final ethical screening, serve as the ethical defense of pure capitalism, which, we argue, Friedman’s ethical principle is unable to do.

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Notes

  1. A reader familiar with the writings of Frank Knight may wonder why we have not cited Knight’s view that the pure entrepreneur is the only producer of the product of industry. (Knight writes that under the enterprise system it is the entrepreneurs who are “in the strict sense the producers, while the great mass of the population merely furnish them with productive services” [Knight 1921: 271]). However, Knight’s observation (while it may possibly be linked to some of the insights to be emphasized later in this paper) has nothing to do with the ethical core of the Milton Friedman criterion for justice (in which incomes should reflect relative resource contributions to the productive process). In fact there is every reason to believe that Knight saw pure profit as fundamentally undeserved. He did not emphasize this, in his critiques of capitalism, apparently only because of his conviction that in the reality of the capitalist system, profits are, in general, outweighed by entrepreneurial losses. (On all this see Kirzner 1989: 58f, 138.)

  2. Note that without this discovery, the luncheonette would not have been opened at this location; its meals would not have been produced for this location. It is at this point that one might possibly see some affinity with Frank Knight’s (rather puzzling) observation, cited earlier in this paper to the effect that the entrepreneur is the only producer of the product. See further above, footnote 1.

References

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Correspondence to Israel M. Kirzner.

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Kirzner, I.M. The ethics of pure entrepreneurship: An Austrian economics perspective. Rev Austrian Econ 32, 89–99 (2019). https://doi.org/10.1007/s11138-017-0412-1

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  • DOI: https://doi.org/10.1007/s11138-017-0412-1

Keywords

  • Entrepreneurship
  • Justice
  • Milton Friedman
  • Property rights
  • Pure entrepreneurial profit

JEL classification

  • B53
  • L26