Abstract
Ludwig von Mises, Friedrich Hayek, and Murray Rothbard were the main architects of the distinctly Austrian theory of production as it exists today. All three conceived the entrepreneurial function in the actual market economy as presupposing the ownership of property, specifically capital. Yet, many, if not most, contemporary Austrian economists conceive the entrepreneur as a pure decision-maker possessing superior “alertness” but owning no resources. This pure entrepreneur earns profits by “discovering” and seizing objectively existing but previously unperceived opportunities to arbitrage price discrepancies between a bundle of complementary inputs and the output it yields. That this is the essence of “the” Austrian theory of the entrepreneur and profit is accepted as a matter of course by those among the broader economics profession who are sympathetic to the Austrian approach. It is the goal of this paper to demonstrate that there is in the Austrian tradition traceable back to Carl Menger, a very definite and prominent strand of thought that conceives property ownership as central to the tasks that the entrepreneur characteristically performs in the real-world market economy.
The managerial function . . . can never evolve into a substitute for entrepreneurship. The fallacy to the contrary is due to the error confusing the category of entrepreneurship as it is defined in the imaginary construction of functional distribution with conditions in a living and operating market economy. The function of the entrepreneur cannot be separated from the direction of the employment of factors of production for the accomplishment of definite tasks. The entrepreneur controls the factors of production; it is this control that brings him either entrepreneurial profit or loss. (Mises 1998, p. 302)
Mr. Keynes obviously arrives at this view by an artificial separation of the function of the entrepreneurs as owners of capital and their function as entrepreneurs in the narrow sense. But these two functions cannot be absolutely separated even in theory, because the essential function of the entrepreneurs, that of assuming risks, necessarily implies the ownership of capital. Moreover, any new chance to make entrepreneurs’ profits is identical with a change in the opportunities to invest capital, and will always be reflected in the earnings (and value) of capital invested. (Hayek 1931, p. 277; emphasis in original)
It is clear, therefore, that the process of equalization of rate of return throughout the economy, one that results in a uniform rate of interest, is the very same process that brings about the abolition of profits and losses in the ERE. . . . [I]f the . . . entrepreneur owns no assets, then how in the world does he earn profits? Profits, after all, are simply the other side of the coin of an increase in the value of one’s capital; losses are the reflection of a loss in capital assets. (Rothbard 2004, pp. 513–14; 1997, 2:247; emphasis in original)
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Notes
George Selgin (1990, p. 5) declared that his own contribution “was composed in response to a seemingly indeterminable debate” wherein “Ludwig von Mises’s own epistemological views were being inadequately appreciated on both sides”.
Kirzner (1985, pp. 44–45) did attempt to address Hazlitt’s, Rothbard’s and High’s strictures against his notion of the entrepreneur, but did so in a manner that suggested he understood their main point to revolve around the fact that the pure entrepreneur did not incur the incidence of uncertainty and losses. In fact, as High (1982, p. 166) had perceptively noted, the more fundamental point involves ownership: “If entrepreneurship is completely separate from ownership, is it meaningful to speak of entrepreneurial loss? Can losses fall on the entrepreneur or must they fall on the resource owner.”
However it should be noted that in the case of factor owners and consumers, these entrepreneurial gains and losses are directly and purely psychic and never monetary. Take for example a laborer who accepts a lower paying position when a higher paying one with equal nonpecuniary characteristics is imminently available or a consumer who stocks up on a durable good a few days in advance of a sale in which the price of the good is deeply discounted. Neither one has suffered a loss of previously invested money capital. Rather their losses consist in forgoing the increased psychic gain that would have accrued to them had they sold labor services at the higher wage rate or purchased goods at the lower price. While these losses may certainly be (partly) expressed in terms of monetary opportunity costs they do not result in an actual diminution of money capital.
It should be noted that Böhm-Bawerk (1959, 2, pp. 255–56) did not completely neglect entrepreneurial profits or subsume them under the ownership function; rather he explained them as the product of the “infinite number” of “frictional obstacles” that impedes the instantaneous adjustment of the production structure to the ceaseless changes buffeting the economy. The resulting economic maladjustments “are the inexhaustible source from which flows the constant stream of entrepreneurs’ profits—and of entrepreneurs’ losses as well”.
Clark was the first to rigorously formulate the analytical device of functional distribution as well as the notion of the “static state” and the method of isolating and then analyzing economic change using “the laws of rest.” Mises took over these Clarkian imaginary constructs and gave them a central roll in praxeological economic theory as “imaginary constructions,” e.g., the “evenly rotating economy” and the “final state of rest” (Salerno 2006).
Indeed, Mises (1998, pp. 304, 804–05) attributed “the emergence of an omnipotent managerial class” and the associated bureaucratization of existing business firms to interventionist policies, especially confiscatory taxation of profits that prevents the accumulation of capital by new capitalist-entrepreneurs. Clark (1918, pp, 88–89) similarly argued that “even in the largest corporations,” managers should be owners of some portion of the capital and recipients of some part of the profits. The reduction of the power of stockholding capitalists and entrepreneurs due to their displacement by “salaried men” in “controlling positions” caused by the growth of corporations, ceteris paribus, “tends to reduce profits”.
Rothbard also seems to have been influenced by a neglected and provocative essay on the theory of profit by Roy F. Harrod (1952).
Mises, indeed, hinted that the ownership function would not endure in the ERE. Referring to the contradictions involved in pushing the ERE construction to its logical conclusion, Mises (1998, p. 249) stated: “[I]t is impossible to eliminate the entrepreneur from the picture of a market economy. The various complementary factors of production cannot come together spontaneously. They need to be combined by the purposive efforts of men aiming at certain ends and motivated by the urge to improve their state of satisfaction.” But surely, as Rothbard has shown, these “purposive efforts” directed toward organizing productive factors would be forthcoming in the ERE because they are a necessary complement to capitalist investment and earn a separable rent that improves the state of satisfaction of the capitalist-owner.
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Salerno, J.T. The Entrepreneur: Real and Imagined. Quart J Austrian Econ 11, 188–207 (2008). https://doi.org/10.1007/s12113-008-9043-5
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DOI: https://doi.org/10.1007/s12113-008-9043-5