Abstract
What is now called the judgment-based approach to entrepreneurship (JBA) has a rich pedigree in Austrian economics and continues to grow rapidly in that tradition as well as in various research fields in business and management. The JBA has also attracted some criticisms. Frédéric Sautet’s recent review essay is an example. Sautet’s main concern is that the JBA rejects Israel Kirzner’s alertness/discovery approach which, in Sautet’s view, provides a more compelling basis for theorizing. Unfortunately, we do not find Sautet’s criticisms of the JBA convincing. They frequently ignore our arguments about entrepreneurial judgment and its manifestation in the business firm, fail to address our criticisms of the alertness/discovery approach, and are rooted in a flawed understanding of the history of economic thought.
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Notes
We pass over sections of Sautet’s essay such as “Firms and Capital Goods” that are not critical of us.
If true, this would undermine Kirzner’s claim to originality, a claim Sautet urgently wishes to defend.
Schumpeter also had no theory of economic calculation and explicitly rejected the idea that entrepreneurs deal with uncertainty, both crucial aspects of Mises’s theory (McCaffrey, 2009). Schumpeter also does not use the stationary state as a foil for explaining entrepreneurship, as Sautet claims (Sautet, 2018, p. 126): it was a necessary starting point for his theory, which was based on a version of Walrasian general equilibrium, another concept Mises unqualifiedly rejected. Schumpeter’s entrepreneur attempts to escape this equilibrium, which for him can only be done through credit creation (McCaffrey, 2013; Rothbard, 1987).
Furthermore, the later editions of Theory of Economic Development still strongly emphasize entrepreneurs’ need for bank credit, which is surely not universally available.
See Schumpeter (2003, p. 417) for a clarification about the empirical progress of this transition.
In attributing this construct to the work of Lionel Robbins, Kirzner has not appreciated Robbins’ views, which are more nuanced and less mechanical than Kirzner implies (Salerno, 2009).
Boettke (2005) similarly describes the Kirznerian system as an add-on to neoclassical microeconomics: “as Franklin Fischer pointed out in his very important book The Disequilibrium Foundations of Equilibrium Economics (1983) that unless we have good reasons to believe in the systemic tendency toward equilibrium we have no justification at all in upholding the welfare properties of equilibrium economics. In other words, without the sort of explanation that Kirzner provides the entire enterprise of neoclassical equilibrium is little more than a leap of faith.” But why must we accept the enterprise of neoclassical equilibrium economics?
The fact that Kirzner does not appear even in the footnotes to mainstream price theory is as good an indication as any that his contribution has not been recognized. Klein and Bylund (2014) show that Kirzner’s works have very few citations in economics journals, though they have been cited often in entrepreneurship research.
In Sautet’s view, “Kirzner’s economic theory rests on the notion of purpose in action” (Sautet, 2018, p. 127; emphasis added). Note that for Mises this is a confused claim: for him, action is purposeful behavior.
Sautet approaches such an expansive definition. For example: “By discovering vines that can be used as nets, Crusoe, in the deepest sense, created the nets” (Sautet, 2018, p. 131). Or: “discovery is precisely how purpose comes to exist” (Sautet, 2018, p. 128). The second example not only contradicts Sautet’s concession to Salerno quoted above, but also makes discovery so broad that it applies to virtually anything: exactly what Sautet accuses the JBA of doing (see below).
This claim is made as part of Sautet’s attempt to associate the JBA with Ludwig Lachmann’s radical subjectivism; see below.
Sautet attempts to associate Mises with Kirzner’s equilibration theory, citing a remark from Roger Garrison in support (Sautet, 2018, p. 129n14). In that paper, Garrison argues that, “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” (Garrison, 1982, p. 133). Yet the quote Garrison cites is taken from Mises’s discussion of the “plain state of rest”: a momentary, actually existing equilibrium that Kirzner explicitly argues is not useful as a description of equilibrium or market-clearing (Mises, 1949, p. 245; Kirzner, 1999; Klein, 2008).
High’s article plays no role in Foss and Klein (2012), and is mentioned only once, in a footnote.
Sautet makes a basic error by claiming that, according to Mises, the pure entrepreneur earns neither profits nor losses: Mises explicitly says that the pure entrepreneur earns profits but not losses (Sautet, 2018, p. 135; Mises, 1949, p. 254). Sautet is perhaps confusing the pure entrepreneur with the conditions of the Evenly Rotating Economy, in which profit and loss do not exist.
Mises’s essay “Profit and Loss” is his clearest exposition of the meaning of entrepreneurship, and avoids the ambiguity found in some passages of Human Action. This essay is rarely cited by Kirznerians, however.
Fetter (1915, pp. 321-322n1) clarified the confusion surrounding the use of the word “residual” to describe entrepreneurial profit.
In oral conversation Kirzner has described uncertainty as a “veil” and insisted that alertness must be able to “pierce the veil” for entrepreneurship to facilitate coordination. Whether or not this is a useful metaphor, it is not an explanation for how and why alertness is able to do this.
Before making this criticism Sautet mentions the idea of residual control, so he must be aware of it (Sautet, 2018, p. 132).
Without a distinction like this, there is essentially no difference between entrepreneurs and non-entrepreneurs in Kirzner’s theory: entrepreneurs and managers (as well as laborers and anyone else) are all alert discoverers. As a result, entrepreneurship loses meaning, and is certainly not a basis for distinguishing different types of income.
Mises also uses this idea to distinguish between nominal and real entrepreneurs under “socialism of the German pattern” (Mises, 1949, pp. 713–714).
Note the necessity of physical resources in the example: apparently Sautet’s theory is “materialist” too!
As part of this argument, Sautet repeats his earlier claims about materialism and labor-mixing.
Note too that most of the core sources Sautet cites were published in the 1980s and early 1990s.
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The title refers to Rothbard’s “Breaking Out of the Walrasian Box: The Cases of Schumpeter and Hansen” (1987).
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McCaffrey, M., Foss, N.J., Klein, P.G. et al. Breaking out of the Kirznerian box: A reply to Sautet. Rev Austrian Econ 36, 1–21 (2023). https://doi.org/10.1007/s11138-021-00552-x
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DOI: https://doi.org/10.1007/s11138-021-00552-x