http://mercatus.org/events/40-years-after-nobel-f-hayek-and-political-economy-progressive-research-programUnfortunately, the video and audio do not begin until 8.33, so one must skip ahead.
Kirzner is introduced by Peter Boettke as the “leading” modern member of the Austrian school, but Kirzner’s contributions to economics are overrated, and, as we will see below, limited in their applicability to real world market systems.
So what are his contributions? They lie mostly in the theory of entrepreneurship (for a selection of his work, see Kirzner 1973, 1976, 1992, 1997, 2000, 2009).
Kirzner’s work focusses on entrepreneurial action, as distinct from the purely utility maximising behaviour in neoclassical theory (Vaughn 1994: 141). Many entrepreneurs make errors and mistakes, and so increase disequilibrium, but at the same time create opportunities for profit. The entrepreneurs who are most successful are “alert” and their “alertness” is a crucial quality that causes a tendency to equilibrium within a market system (Vaughn 1994: 141).
In Kirzner’s theory, the most important “opportunities for profit” are discrepancies between sale prices of goods in different markets that can be exploited: the successful entrepreneur buys cheaply and sells as high as he can, through his “alertness” (Vaughn 1994: 142). Discrepancies between costs of production and sale prices can also be exploited. Thus the “alert” entrepreneur is in essence a successful arbitrageur or, in the words of Lewin, a successful “all-purpose arbitrageur” (Lewin 1999: 25).
Lewin provides a good summary of the role of Kirzner’s “alert” entrepreneur whose action tends to move the market towards equilibrium:
“Suffice it to say that the entrepreneur is ‘an all-purpose arbitrageur’ (my term) who is alert to profit opportunities that exist as a result of price differences at a point of time, price differences between two points in time (after accounting for interest and holding costs), or price and cost differences (that is the price of a finished product and the cost of all the resources, including interest, necessary to produce it). By exploiting these generalized price discrepancies the entrepreneur tends to remove them … . The tendency to equilibrium is supplied by entrepreneurial action.” (Lewin 1999: 25).So the “alert” entrepreneur’s action tends to move the market towards supply and demand equilibrium via price flexibility: his purchases for inputs will tend to raise prices in factor markets, and his production will tend to lower the price of his output goods (through increased supply).
As an aside, I will just note how Kirzner’s view of entrepreneurship is in fact at variance with that of Schumpeter: for Kirzner the “alert” and successful entrepreneur is equilibrating, while for Schumpeter the successful, innovating entrepreneur creates disequilibrium or “creative destruction” (Vaughn 1994: 143; Kirzner 1973: 72–74, 81, 92).
To the extent that some markets have well-behaved demand curves with flexprices and entrepreneurs do behaviour in the way Kirzner’s theory supposes, there is some merit to the theory.
Unfortunately, most markets are not like this, but have relatively inflexible mark-up prices/cost-based prices.
It strikes me that Kirzner’s work on entrepreneurship, profit seeking, and why firms invest badly ignores real world price rigidities and a realistic theory of the average mark-up pricing firm.
The average firm is making investment decisions not because it sees “arbitrage opportunities” between the highly flexible prices of inputs and outputs, but because it thinks its product or product line will sell at the cost-based price/mark-up price it sets on top of its average unit costs.
In reality, the average firm will take a given set of costs, produce its output and then calculate a total average unit cost at a given target or estimated sales volume. Then the firm adds a mark-up for profit and creates a market price, at which it sells its output. As long as it more or less reaches its target or estimated sales volume and can increase sales, it will make a profit and survive.
The average firm is therefore not engaged in behaviour that tends to equilibrate supply and demand in markets by price flexibility, nor can the average firm really be described as an “alert” arbitrageur in the way Kirzner’s requires.
Mainstream economics at least has the good sense to recognise how extensive real world price rigidity is – and modify economic theory in light of these facts. The Austrians by contrast seem to be struck in a 19th century view of prices and their theory suffers badly for it, as we can see in the case of Kirzner.
“Price, Average Total Cost, Average Variable Cost and Marginal Cost,” November 28, 2013.
“Mark-up Pricing in 21 Nations and the Eurozone: the Empirical Evidence.”
“Israel Kirzner on the History of Austrian Economics, Part 1,” August 9, 2012.
“Israel Kirzner on the History of Austrian Economics, Part 2,” August 14, 2012.
“Kirzner on Hayek on Prices,” May 22, 2013.
“Kirzner on the Law of Supply and Demand in Austrian Economics,” January 24, 2014.
Kirzner, Israel M. 1973. Competition and Entrepreneurship. University of Chicago Press, Chicago and London.
Kirzner, Israel M. 1976. “Equilibrium versus Market Process,” in E. G. Dolan (ed.), The Foundations of Modern Austrian Economics. Sheed & Ward, Kansas City. 115–125.
Kirzner, Israel M. 1992. The Meaning of Market Process: Essays in the Development of Modern Austrian Economics. Routledge, London and New York.
Kirzner, Israel M. 1997. “Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach,” Journal of Economic Literature 35.1: 60–85.
Kirzner, Israel M. 2000. The Driving Force of the Market: Essays in Austrian Economics. Routledge, London and New York.
Kirzner, Israel M. 2009. “The Alert and Creative Entrepreneur,” Small Business Economics 32.2: 145 –152.
Lewin, Peter. 1999. Capital in Disequilibrium: The Role of Capital in a Changing World. Routledge, London.
Sautet, Frederic. 2010. “The Competitive Market is a Process of Entrepreneurial Discovery,” in Peter J. Boettke, (ed.). Handbook on Contemporary Austrian Economics. Edward Elgar, Cheltenham and Northampton, Mass. 87–108.
Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition. Cambridge University Press, Cambridge and New York.