The Role of the Entrepreneur in the Market Process

Richard Ebeling, in an essay about Israel Kirzner, gives this excellent summary of Kirzner's theory of entrepreneurship:

"Kirzner has emphasized that the market is a process of entrepreneurial alertness. The satisfaction of consumer demand may be the purpose behind production, but there must be some who, in the social system of division of labor, have the specialized role of anticipating what it is that consumers will desire in the future and then hiring, directing, and coordinating the use of the means of production towards that end.

What guides entrepreneurs in this task is the anticipation of profits — revenues in excess of the expenses to bring goods to market — and the avoidance of losses. But one of the insights that Kirzner has highlighted is that while entrepreneurship is crucial to the workings of the market, it cannot be bought and sold like other goods or resources for a certain price. The reason is that the essence of entrepreneurial activity is “alertness,” an attention to scanning the market horizon for opportunities and innovations that can result in making better goods, or new goods, or bringing less-expensively manufactured goods to the market place.

But to be “alert” is to notice something that others have neither seen nor thought of before. Alertness means thinking and seeing “outside the box” of the known set of opportunities and routine ways of doing things. It is the process of discovering new knowledge and possibilities that no one has either previously imagined or noticed.

In Israel Kirzner’s view, one of the most important reasons for open, competitive markets is for individuals to have the profit incentives and the chance to benefit from alertness. The free-market institutional order creates the conditions under which people will be more likely to have the motivation to be alert, even though we can never know ahead of time what their creative discoveries will generate and unearth.

But why should the discovery and earning of such profits be considered “good” from the wider social point of view? Part of Kirzner’s answer is a development of Hayek’s insight that corresponding to the division of labor in society is an inevitable division of knowledge. Each of us possesses only a small fraction of all the knowledge and information in the world, and yet somehow all of our interdependent activities must be coordinated for each of us to benefit from the specializations and expertise of our fellow men.

Hayek emphasized that the coordination of the actions of millions of specialized producers and consumers around the global market is brought about through the price system. Any change in someone’s willingness or ability to supply or demand any product anywhere in the market is registered through a change in the price of the good, service, or resource in question.

Furthermore, such changes are occurring all the time in a world of unceasing change. The resulting changes in market prices due to shifts in supply and demand conditions are constantly creating new profit or loss situations.

A central task of the entrepreneur, Kirzner has argued, is to be alert to these shifts in market conditions and indeed to anticipate them as best he can.

His role in the market economy is to bring about modifications and transformations in what goods are produced, where they are produced, and with which methods of production, so that production activities are continuously tending to reflect the actual patterns of consumer demand.

Through his alertness to profits to be gained and losses to be avoided, the entrepreneur ensures the adjustments to change that are required for a process of continual coordination of market activities, upon which both the existing and an improving standard of living are dependent."

related - an audio version of Kirzner's superb short book Early Austrian Economists can be downloaded here: audible.com