Israel Kirzner is a prominent member of the Austrian School of economics. His major contribution is his work on the meaning and importance of entrepreneurship.

Kirzner’s view is that mainstream neo-classical economics omits the role of the entrepreneur. The standard neoclassical models of markets, whether perfect competition, monopolistic competition, or monopoly, argues Kirzner, are equilibrium models. They omit the crucial role of the entrepreneur, which is to bring markets to equilibrium. In Kirzner’s view, which he and others refer to as a distinct viewpoint of the Austrian school of economics, the main characteristic of the entrepreneur is alertness. The entrepreneur is alert to price differences that others have not noticed and makes a profit by acting on this alertness. So, for example, the entrepreneur notices that goods selling for $10 in one market are fetching $15 in another market. He also notices that the shipping, insurance, and interest costs of buying where it sells for $10 and selling where it sells for $15 are less than $5. So he buys in the cheaper market, sells in the dearer market, and makes a profit. As long as others are not aware of this difference, the entrepreneur continues to make money. But other entrepreneurs are also alert. When they notice the difference in prices, they seek to do what the first entrepreneur did. As they enter the market—buying in the cheaper market and selling in the dearer market—they drive the price of the good that they buy above $10 and drive the price where they are selling below $15. This continues until the price difference covers the shipping, insurance, and interest costs.

In his 1973 book, Competition and Entrepreneurship, Kirzner finds similarities and differences between his view of entrepreneurship and that of Joseph Schumpeter. What they have in common is that the entrepreneur qua entrepreneur contributes “no factor services to production.” Kirzner elaborates, “What the entrepreneur contributes is merely the pure decision to direct these inputs into the process selected rather than into other processes.”

The main difference between Kirzner’s entrepreneur and Schumpeter’s is that Schumpeter’s entrepreneur upsets an existing equilibrium by introducing a new product or a new production technique, while for Kirzner, the entrepreneur “has an equilibrating influence.” Kirzner writes, “For me the important feature of entrepreneurship is not so much the ability to break away from routine as the ability to perceive new opportunities which others have not yet noticed.”

He elaborates:

Entrepreneurship for me is not so much the introduction of new products or new techniques of production as the ability to see where new products have become unsuspectedly valuable to consumers and where new methods of production have, unknown to others, become feasible. For me the function of the entrepreneur consists not of shifting the curves of cost or revenue which face him, but of noticing that they have in fact shifted. (italics in original)[1]

Kirzner’s entrepreneur, then, is essentially an arbitrageur, a point that Kirzner makes in comparing his view of the entrepreneur to that of his mentor Ludwig von Mises. He sees both the Misesian view and his own as “an ‘arbitrage’ theory of profit.” (italics in original) For Kirzner’s entrepreneur, something is sold at different prices in two different markets because of imperfect communication between participants in the two markets. But, Kirzner notes, it is not only arbitrage in the narrow sense of buying a good in one market and selling the identical good in the other market. It is also arbitrage in a wider sense: in the market for factors of production, “it appears as a bundle of inputs, and in the product market it appears as a consumption good.”

Kirzner’s view is that entrepreneurship is an inherent aspect of the competitive process. The term “process” is important because Kirzner sees competition as a process rather than as an end state.  But in the neoclassical model of perfect competition, which came to dominate economics in the 1920s, there was no process. Kirzner writes:

Competition, to the equilibrium price theorist, turned out to refer to a state of affairs into which so many competing participants have already entered that no room exists for additional entry (or other modification of existing market conditions). (italics in original)[2]

Kirzner notes that this end-state view of competition is very far from the view of the non-economist.

By viewing competition as a process, one can get a new perspective on various market phenomena that economists have commented on and analyzed for almost a century. Two that stand out are (1) the role of advertising and selling effort in general and (2) the alleged waste from competition.

Consider advertising and selling effort. The alert entrepreneur must also alert potential buyers to the presence and, ideally, the attractiveness of the items he’s selling. Doing so uses resources, but those resources are not wasted. Kirzner writes that “selling effort (including advertising) that alters the opportunities perceived by consumers constitutes an entirely normal avenue of competitive-entrepreneurial activity.” But such activity, he notes, would be unnecessary in a state of equilibrium because in that state, consumers already know all they need to know. Again, those who focus on an equilibrium, and not on the competitive process that gets us closer to equilibrium, will miss the value of advertising and other selling costs.

One criticism of free markets that has been made for many decades is that they result in wasteful duplication. When one firm already exists, according to this view, entry of another firm is wasteful. Kirzner answers:

The truth is that until the newly competing entrepreneur has tested his hunch about the lowest cost at which he can produce, we simply do not know what organization of industry is “best.” To describe the competitive process as wasteful because it corrects mistakes only after they occur seems similar to ascribing the ailment to the medicine which heals it, or even to blaming the diagnostic procedure for the disease it identifies.[3]

Although economists do not typically engage in moral philosophy, Kirzner has applied his theory of entrepreneurship to make a case for the justice of making profits. He writes:

The finders-keepers rule asserts that an unowned object becomes the justly owned property of the first person who, discovering its availability and its potential value, takes possession of it.[4]

Because the Kirznerian entrepreneur makes a profit by discovering a higher-valued use, argues Kirzner, the entrepreneur, by the finders-keepers rule, has a right to the profit he makes from acting on that discovery.

For more on Kirzner’s life and work, see A Conversation with Israel Kirzner, an Intellectual Portrait at Econlib Videos.

Kirzner was born in London, England. From 1947 to 1948, he attended the University of Cape Town in South Africa. From 1950 to 1951, he attended the University of London. He earned a B.A. at Brooklyn College, an M.B.A. from New York University (NYU), and a Ph.D. in economics from NYU in 1957. He was an assistant professor of economics at NYU from 1957 to 1961, an associate professor from 1961 to 1968, and a full professor from 1968 until he retired in 2001. In 1976, he founded a graduate study program in Austrian economics at NYU.


About the Author

 

David R. Henderson is the editor of The Concise Encyclopedia of Economics. He is also an emeritus professor of economics with the Naval Postgraduate School and a research fellow with the Hoover Institution at Stanford University. He earned his Ph.D. in economics at UCLA.


Selected Works

 

  1. The Economic Point of View. Kansas City: Sheed and Ward.
  2. Competition and Entrepreneurship. Chicago: University of Chicago Press.
  3. Perception, Opportunity, and Profit. Chicago: University of Chicago Press.
  4. Discovery, Capitalism, and Distributive Justice. New York: Basil Blackwell.

Footnotes

 

[1] Kirzner, Israel M., Competition and Entrepreneurship, Chicago: University of Chicago Press, 1973, p. 81.

[2] Kirzner, Competition and Entrepreneurship, p. 28.

[3] Kirzner, Competition and Entrepreneurship, p. 236.

[4] Kirzner, Israel M, Discovery, Capitalism, and Distributive Justice, New York: Basil Blackwell, 1989, p. 98.