Gains
From Trade Between Austrian Economics and Entrepreneurial Studies: An
Introduction to the Volume
JEL: B53, M13
Austrian economics and
entrepreneurial studies have both expanded greatly in the last twenty or thirty
years. Unfortunately, they have
developed more or less independently of each other. Austrian economics has enjoyed a revival since 1973 or 1974. In 1973 Israel Kirzner published his classic
book, Competition and Entrepreneurship, which outlined an
entrepreneurial theory of the market process.
In 1974 F. A. Hayek was awarded the Nobel Memorial Prize in
Economics. The same year saw the famous
South Royalton conference, which is the traditional origin of the “Austrian
revival.” The intellectual history of
entrepreneurial studies reaches back at least as far as Richard Cantillon
(1755). As an intellectual movement,
however, entrepreneurial studies began about the same time as the Austrian
revival. The beginnings of the entrepreneurship
movement might be dated to sometime before 1978 when Babson College established
its Center for Entrepreneurial Studies, the first such center in the US. In all this time, however, there has been
limited exchange between Austrian economics and entrepreneurial studies. It is high time we expand trade across the
border between Austrian economics and entrepreneurial studies.
Intellectual
exchange between these two groups has been frustrated by at least two
factors. Austrians have been
discouraged from reading entrepreneurial works because of the frequent
repetition of a famous remark of Ludwig von Mises. Entrepreneurship, Mises said, “defies any rules and
systematization. It can be neither taught nor learned” (Mises 1949, 584). This remark has been repeated often in Austrian seminars, usually
with the purpose of dismissing the notion that Austrians might gain from
exchange with scholars of entrepreneurship.
Such resistance is surprising in a group so uniformly enthusiastic about
free trade. Mises’ remark seems to deny
that a theory of entrepreneurship is possible.
But Mises’ student Israel Kirzner created just such a theory on the very
foundations Mises had laid down (Kirzner 1973). It is true, of course, that no one can teach an entrepreneur the
specific innovation that he creates.
What, indeed, would that mean?
But one can teach business students the tools and skills required to
transform a new idea into a practical business plan. We can also teach them to be not afraid. We can teach them, that is, that new ideas
can become business plans and that they are perfectly free to found new
enterprises and think new things.
Mises’ remark should no longer discourage Austrians from reading in
entrepreneurial studies.
Scholars of entrepreneurship have sometimes been discouraged from
reading much Austrian economics by the apparent limits of Kirzner’s
theory. Kirzner seems to neglect the
entrepreneurial process, to view profit opportunities as external to the
entrepreneur, and to restrict entrepreneurship to simultaneous arbitrage. Minniti and I (2003) have argued that these limits
to Kirzner’s theory “are more apparent than real.” When Kirzner’s theory is placed in the context of a broader
Austrian theory of market process, it is revealed to be more dynamic than it
initially appears. More recent
developments within the Austrian tradition also tend to break down the
impression that the Austrian theory is static or otherwise less than useful in
entrepreneurial studies. David Harper,
for example, has developed an “Austrian” theory of the entrepreneurial process
(Harper 1996, 1998). Butos and I have
outlined a theory of entrepreneurial learning in which Kirznerian entrepreneurs
are Hayekian learners (Butos and Koppl 1999, Koppl 2002). Choi Scholars of entrepreneurship should no
longer ignore or dismiss Austrian theory.
It is
hard to predict what gains will come from trade between Austrian economics and
entrepreneurial studies. There is some
reason to think, however, that Austrian economics has a comparative advantage
in theoretical unity, while entrepreneurial studies has a comparative advantage
in empirical richness.
In her
contribution to this volume, Maria Minniti notes the different meanings of
“entrepreneurship.” “In principle,” she
notes, “this diversity of meaning is not necessarily a problem. In practice,
however, the result has been that we are getting more pieces of the puzzle, but
no picture is emerging.” She uses
“Kirzner’s theory as the starting point and unifying theme” of her survey. The Austrian school has an overarching
theoretical framework that might be used to organize much of the literature in
entrepreneurial studies.
Austrian
economists have probably devoted too little effort to empirical work in the
past. This trend has changed radically
in the last few years as Demmert & Klein 2003, Koppl 2002, and Keeler 2001
illustrate. Nevertheless, Austrian
economics is still not very well endowed with empirical findings. Scholars of entrepreneurship, by contrast,
have been very energetic in confronting theory with the facts of history. Entrepreneurial studies is rich with
empirical studies of how entrepreneurs think, what they do, how
entrepreneurship is geographically distributed, whether entrepreneurship is
correlated with growth, and so on. In
this volume the contribution of Audretsch & Thurik reviews much of the
empirical literature on entrepreneurship and growth. With their co-authors, they have made many valuable contributions
to this literature. Baumol’s
contribution includes a summary treatment of his historical analysis (in Baumol
1990 and 2002) of the institutions encouraging either productive or
unproductive entrepreneurship. Austrian
economists considering entrepreneurship as a research topic should immerse
themselves in such empirical results and, in most cases, make their own
contributions to the empirical literature.
I believe Austrian economics has much to add to the conversation. If so, it is likely that an Austrian
perspective can lead to the discovery of new and interesting facts about
entrepreneurship. Looking at the world
from a different angle, we are likely to see what others miss.
Continued
exchange between Austrian economics and entrepreneurial studies is likely to
lead to changes in the distribution of comparative advantage. It is my personal hope that continued
exchange will help the budding Austrian tradition of empirical work to develop
further. Entrepreneurial studies may
gain from the “epistemic-cognitive turn” (Boettke 2002) of the Austrian
school. The field of entrepreneurial
studies has produced many theoretical insights and models. If scholars of entrepreneurship import
significant portions of Austrian theory, it is only a matter of time before
they will have improved theories ready for export to Austrian economics. In the meantime, we can make a few more
guesses about where the initial gains from trade may lie.
I have already suggested
that Austrian economics has the potential to make a significant contribution to
the literature on entrepreneurship and economic growth. In this volume, Boettke and Coyne emphasize
the Austrian view that entrepreneurship is an aspect of all human action. They infer (rightly, I believe) that
institutions decide whether the human disposition to entrepreneurship produces
economic growth. In particular, “the
two core institutions, necessary for achieving the goal of encouraging
entrepreneurship, are private property and the rule of law.” The legal structure is a vital factor
deciding whether entrepreneurial calculations will be farsighted and “rational”
in Max Weber’s sense. As their paper
illustrates, Austrian economists emphasize the role of culture in determining
how the “same” institutional structure may function very differently in
different places.
Scholars interested
entrepreneurship and growth should probably consult Audretsch, Baumol, and
Burke (2001) who discuss the migration of Austrian ideas to the mainstream
literature in industrial organization.
Their review provides a good example of the gains from exchange between
Austrian and non-Austrian traditions.
They note a fundamental difference between the arguments for laissez
faire coming from the Chicago and Austrian schools. They “both advocate a laissez faire
approach to regulation, but for very different reasons; the former [Chicago] on
the presumption that the supply of entrepreneurs is infinite in the long-run
while the latter [Austrian] concerns itself with the incentives needed to
expand the limited supply of entrepreneurial resources” (620). The model in Yates (2000) illustrates their
point nicely. In his model of the
entrepreneurial market process, “the market adjustment process is consistent
with static Walrasian equilibrium” when “entrepreneurs do not make
mistakes.” If, however, “entrepreneurs
do make mistakes, then the market adjustment process is generally consistent
with another kind of equilibrium” in which a uniform price emerges, but not all
units are sold. In his model, the
welfare implications of a tax “cannot be studied in isolation from the features
of the disequilibrium adjustment process that directs the market from one
equilibrium to the other.” He thinks
this result “suggests that further study of disequilibrium and, in particular,
market process theory, will illuminate interesting insights into other welfare
issues” (p. 81).
Austrian economists constantly
investigate the role of knowledge in society.
“It is characteristic of the Austrian approach,” Richardson notes in his
contribution, “to keep the epistemology, as well as the logic, of decision
taking in the foreground.” His notion
of the “structure of their awareness” is an essential insight into who
perceives what profit opportunities.
Differences in the structures of firm awareness contribute to the
emergence of enduring capabilities that are hard to replicate. They are an important source of the
differentiation and continuity that allow competition to function reasonably
well.
Butos develops a theme
briefly touched on at the end of Richardson’s essay, namely, the growth of
knowledge. He examines the role of
Kirznerian entrepreneurs in generating knowledge. Butos argues that entrepreneurs do not merely use dispersed
knowledge, they produce knowledge.
Building in part on McQuade (see Butos and McQuade 2002 and McQuade and
Butos 2003), Butos argues “market
process involves a transformation of knowledge at the individual level
into a new form of quasi-knowledge” existing at the level of markets, not
individuals. (It is quasi-knowledge
rather than knowledge because “the market order is non-teleological and
non-conscious.”) Butos describes markets
as “knowledge-generating entities.”
Entrepreneurs are
learners. Entrepreneurship is change in
knowledge and knowledge is a foundational concept in Austrian economics. Thus, it seems reasonable to hope that a serious
look at problems in entrepreneurial studies though the lens of an Austrian view
of knowledge will lead to new results.
For example, casual empiricism suggests that immigrants often become
entrepreneurs. Immigrants would seem to
have less knowledge of local culture than natives, and one might expect this
knowledge deficit to thwart entrepreneurship.
But if immigrants are often entrepreneurs, then the knowledge deficit
would seem to have benefits. What view
of knowledge might clarify the issues and suggest testable theories of immigrant
entrepreneurship? One good candidate is
the connectionist perspective of Peter Earl’s contribution to this volume. Familiarity consists partly in the strength
of connection between certain ideas.
These strong connections may carry the mind away from crosscutting
connections, some of which may represent entrepreneurial opportunities. A more naive observer may make such
connections more easily than cultural insiders.
Austrian perspectives on
knowledge also shed light on an important aspect of entrepreneurship, namely,
leadership. In his contribution to this
volume as in other writings, Ulrich Witt address the issue of cognitive
leadership within the firm.
Entrepreneurs typically act through firms. They are the founders and leaders of business enterprises. An essential leadership function within the
firm is to induce employees to adopt the entrepreneur’s basic business
conception and the corresponding workplace values. (He notes that Langlois and I offer a “different,
though related, interpretation” of the same issues in Koppl and Langlois 2001.) Ioannides notes that failure to achieve cognitive leadership may
cause the entrepreneur’s organization to “dissolve” into a spontaneous
order. The firm may carry on, but it
will no longer function effectively to pursue the founder’s business
vision. The complementary analyses of
Witt and Ioannides may be useful to scholars working on problems of family
business. In this context, the founder
must exercise cognitive leadership within the firm, within the family, and
across generations.
Randy Holcombe argues that
the innovating entrepreneur cannot help himself from acting as a teacher to
other potential entrepreneurs, including his potential competitors. They are made more alert to opportunities by
his example and may recognize errors or insufficiencies in his business model
or the possibility of applying it elsewhere.
McDonald’s gives rise to Burger King and Taco Bell. Holcombe’s paper develops his earlier
argument that entrepreneurship breeds entrepreneurship. This argument has arisen independently in
the entrepreneurship literature in the work of Minniti (Minniti 1999, Minniti
& Bygrave 2000, 2001), who uses non-linear stochastic processes to model
certain dynamics of entrepreneurial choice.
The striking overlap here suggests the likely benefits of further
exchange across the border between Austrian economics and entrepreneurial
studies.
Joseph
Schumpeter is a figure of continuing interest to both Austrian economics and
entrepreneurial studies. My co-editors
and I were thus very happy to have this opportunity to publish his 1928 essay
“Entrepreneur” as translated by Markus Becker and Thorbjørn Knudsen. They made one valuable contribution to
scholarship in the translation and a second valuable contribution with their
introduction. We are pleased to have
brief comments on Schumpeter’s essay from Nicholas Balabkins, Young Back Choi,
Geoffrey Hodgson, and Richard Swedberg.
A more extensive commentary comes from Richard Langlois who may be
viewed, perhaps, as analyzing Das Joseph Schumpeter Problem. Langlois finds that the real Problem is not
any tension between a supposed early and late Schumpeter, which is often
claimed in the Anglo-American literature on technological change. The real Problem is Schumpeter’s
simultaneous adherence to two different views of knowledge, one “rationalist,”
the other “empiricist.”
Langlois’ interpretation
returns us to a theme raised in many contributions to this volume, namely,
knowledge. As Israel Kirzner has taught
us, entrepreneurs innovate and, therefore, entrepreneurship entails change in
knowledge. It is reasonable to expect
that Austrian and Austrian-inspired contributions to entrepreneurial studies
will tend to involve the epistemology of decision taking. They will tend to involve, that is, a
dynamic Austrian view of knowledge and its growth in market economies. Contributions to Austrian economics from
scholars of entrepreneurship are likely to modify those same Austrian views of
knowledge and to enrich them with grounded empirical studies of how
entrepreneurship operates in the world.
This volume shows by example, I think, that continued interaction
between Austrian economics and entrepreneurial studies will enrich our
understanding of markets in exciting, if unpredictable ways.
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