David Emanuel Andersson

Competition and Entrepreneurship Revisited April 13, 2009

This semester I’m leading a seminar course on institutional, economic, and social change. One of the topics that we’re covering is entrepreneurship. Last week the theme was Schumpeter’s Theory of Economic Development and this week it’s Kirzner’s turn.

Our seminar format is for one of the students to give a two-hour interactive “lecture” on the relevant book, followed by a discussion led by one of the other students. The lecturing student also has to write a 20-page term paper that consists of a summary and a critique, if possible with references to related papers in the literature. For example, the term paper on Schumpeter (by Vincent Bata) referred to papers by Geoffrey Hodgson, Ulrich Witt, Murray Rothbard, and Michio Morishima.

Tomorrow it’s Nolan Boulanger’s turn, who will be presenting Kirzner’s theory of entrepreneurship. Reading his term paper gave me a feeling of déjà vu, in that Nolan’s reaction to Kirzner is very similar to my first reaction, that is, a very positive assessment. Since I have been criticizing certain aspects of Kirzner’s theory lately – especially his asset neutrality assumption and the lack of genuine Knightian uncertainty in the theory - it was good to be reminded of how much more interesting the theory is than sterile depictions of equilibrium states. And indeed, I still think that had mainstream economists integrated Kirznerian theory as the out-of-equilibrium part of mainstream theory, then the resulting fusion would have represented a major improvement, with Kirzner as the key theorist rather than Walras.

So my partial disillusionment with Kirzner should not blot out his achievement. And, yes, I think Kirzner is more deserving of the big Swedish prize than most laureates to date, and especially compared with the 2008 one (the ones I have personally benefited from reading are Hayek, Coase, Buchanan, North, V. Smith, Schelling, and Sen; Kirzner belongs in that same category).

So my disagreements with Kirzner’s conceptualization of the entrepreneur are diametrically opposed to mainstream criticisms of Austrian economics; I’m no Sherwin Rosen. The problem as I see it is that Kirzner only goes part of  the way in rejecting artificial general equilibrium constructs and rational expectation assumptions. True, he does not start out with a “circular flow” and he does not assume that entrepreneurship is the prerogative of a small innovative minority. That is indeed one of the strengths of the theory. But the impossibility of unchanging knowledge in a dynamic economy is something that Kirzner simply assumes away. Now, if unchanging knowledge is an impossibility, then the assumption of unchanging technology, preferences, and resources during the process of innovative or speculative entrepreneurial equilibration turns the theory into a rather artificial construct; not as artificial as Walrasian equilibrium theory, but still counterfactual in relation to real-world market processes.

In many ways Kirzner reminds me of some new institutional economists: a big improvement on mainstream theory, but still curiously attached to some of its rather unhelpful assumptions. Oliver Williamson is a good example of an NIE economist in a “Kirznerian” position vis-a-vis the mainstream. So while Austrian and new institutional economics in my opinion amount to the two most productive and fascinating research programs in economics, many of the associated economists still cling to a greater chunk  of their shared neoclassical heritage than seems to make sense to me when I attempt to play the role of “impartial external observer.”

I’m however not implying that I mostly prefer self-described heterodox economists. A smaller chunk of neoclassicism does not equal a non-existing chunk. We still need to think about changes at the margin. It is still useful to assume profit-seeking producers and utility-seeking consumers. Imperfect rationality is still a more useful tool than complete irrationality. And so forth. It’s a balancing act at which very few economists have been entirely successful. Hayek and North spring to mind, but only after they had reached normal retirement age. Definitely Loasby, but unfortunately he has been better at discussing the work of others than at developing anything as substantial as Kirzner’s theory. Lachmann is also an obvious candidate, but unfortunately he didn’t write as much as one could have hoped for — and he had the problem of clinging to the methodological individualism prescription at least as desperately as the others have clung to the equilibrium construct. It’s no doubt difficult to find — and keep — an approproiate balance between Occam’s razor, conceptual clarity, and open-ended complexity.