I. INTRODUCTION

I am deeply honoured to give this Inaugural John Bonython Lecture. I shall say things this evening that tend to strongly defend the social significance of the contributions made by entrepreneurs and the entrepreneurial endeavour. However, I shall point out that this significance and the value of these contributions in no way depends on the benevolence, public spiritedness, scholarship, wit, gentlemanly charm or high moral characters of entrepreneurs. Even if all entrepreneurs were crass, selfish and uncouth, we would have to recognise the valuable role they play in society. From this perspective, then, the tribute that is being paid by The Centre for Independent Studies in offering this lecture in honour of so distinguished a figure as John Bonython—gentleman, scholar and public-minded citizen—comes with very special grace.

I had the pleasure this morning of spending some time with John Bonython at his home and a remark that he made has stuck in my memory. I believe it is highly relevant to my lecture this evening. We were examining the fascinating collection of works on Cornish history and genealogy that John Bonython inherited from his grandfather, and we noticed some ink corrections made in one of the books by Sir Langdon on one of the genealogical tables referring to the 16th century Bonythons in Cornwall. John remarked, "The Bonythons have quite a habit of correcting mistakes." I shall return to this remark a little later this evening. But first let me turn to my topic—the role of the entrepreneur in the economic system

II. HOW WE SEE THE ENTREPRENEUR

The widespread view, certainly in my own country and I believe in Australia too, is that entrepreneurs are extraordinarily bright and greedy individuals whose activities are rather disreputable. And because they are so disreputable, these activities are likely to result in many unfortunate social consequences. Sometimes it is grudgingly conceded that the sheer vitality and energy of entrepreneurs somehow pushes capitalist societies to higher and higher levels of well-being. Nonetheless, it is usually maintained that all of this must inevitably be accompanied by exploitation and injustice, by the production of shoddy, unsafe products, by monopoly gouging of the consumer, or by violation of consumer preferences through advertising. Moreover, the most tangible evidence of entrepreneurial success, namely the earning of pure profit, is seen as evidence of the unjustified character of entrepreneurial behaviour because, after all, profits are not paid in return for any productive service. Since profits consist of revenues over and above what has to be paid to produce the product, they seemingly cannot be explained as a necessary payment. Inevitably, then, the suspicion is that profit must have been achieved through something approaching fraud or cheating, exploitation or robbery.

An analogy that has sometimes been used perhaps best expresses the popular view: the entrepreneurial lust for profit is compared to the windpower that propels a sailboat. It has the power to move the boat, but cannot be relied upon to move it in the right direction. The wind can just as well propel the sailboat onto rocks as bring it into safe harbour. In other words, profit is a powerful motive that drives individuals to activity. It motivates them, it gets things going, but there is no guarantee whatsoever that the pursuit of profit will not lead to a great deal of waste, injustice and unhappiness..

I have a rather different view of the entrepreneur and the entrepreneurial motive in pursuing pure profit. To repeat, I do not claim that entrepreneurs are moral heroes. I claim instead that the remarkable set of institutions that make up the entrepreneurial market system is able to harness important human characteristics, important human attributes, to the benefit of society. To establish this position it will be necessary for us to consider separately and carefully two items. First we shall consider what is entrepreneurship and the nature of entrepreneurial activity, and second we shall consider what we mean as economists by the ‘public interest’.

III. WHAT IS ENTREPRENEURSHIP?

Who are entrepreneurs and what do they do? We know that entrepreneurs start companies and introduce new product lines, they discover new techniques of production, they strike out for new markets, they seek for new sources of finance, they develop new forms of internal organisation, and on and on. But what is the analytical essence of these diverse activities? How can we capture the theoretical core of entrepreneurship that manifests itself in so many diverse, specific tasks? This had turned out to be an elusive question.

In the history of economic thought, in the history of the attempts economists have made to understand entrepreneurship, a variety of suggestions have been proposed concerning the ‘essence’ of entrepreneurship. Some economists have seen entrepreneurship as consisting essentially in the bearing of pure, sheer uncertainty. Others have seen it as consisting in it innovative character. Others have seen the entrepreneur as the middle man linking markets. Others have seen the entrepreneur as providing leadership; others as a source of information. All of these views are represented in the literature by important contributions.

Alertness
In my own work over the years I have found it useful and helpful to focus on entrepreneurial alertness to available but as yet unnoticed opportunities. What the entrepreneur does is identify opportunities for gain that others have overlooked. These opportunities can take the form of all specific activities that we have mentioned. But the essence of all of them is that the entrepreneur recognises something that others have failed to recognise: that there is an opportunity waiting to be grabbed. It is the alertness of the entrepreneur that leads him to recognise what others and even the entrepreneur himself may earlier have failed to notice.

Observe that the entrepreneur does not possess specific knowledge that others do not possess. What the entrepreneur possesses rather is a sense for discovering what is around the corner. If you like, it is a sense of knowing where to find knowledge. A rather subtle and elusive role; but, I submit, an extraordinarily important one.

Economising and Entrepreneurial Discovery
The implication of this is that entrepreneurial activity is sharply distinguished from what economists call ‘economising’ activity. Economising activity, in the usual sense in which the term is employed by economists, refers to the careful allocation by human beings of their scarce resources in order to achieve optimal results: the maximisation of some desired objective. To economise is to adjust to a particular perceived situation in order to avoid waste and ensure efficiency. But this efficiency is strictly relative to a given perceived situation. Economising does not embrace the discovery of hitherto unperceived opportunities.

Economists often appear to view all human activity as consisting only of acts of economising, and there is no doubt that economising activity is of great importance. But the world of human action is far too rich and dynamic to be confined wholly within the bounds of the static economising model. The world of action must be recognised as including also the dimension of entrepreneurial alertness and discovery. This recognition dramatically changes the face of things. Thus, for example, economists who have focussed on economising have often asserted, as a simple and universal economic truth, that there is no such thing as a ‘free lunch’. A lunch consumed means that some resources have been diverted away from some other potential use. There are no lunches that do not cost resources in this way. But in the entrepreneurial context, in which there are more resources available than had ever been believed, there can be a free lunch. That is what the entrepreneur discovers: totally new opportunities, opportunities that had previously been overlooked. Lunches so discovered have not diverted resources away from other contemplated projects. And indeed the process of entrepreneurial discovery is the revelation of an unending series of free lunches waiting, so to speak, to be noticed and taken advantage of.

I think you will understand now, perhaps, why I found John Bonython’s remark earlier today to be so relevant. Like the Bonythons, the entrepreneur is always discovering where errors have been made, and is always alert to ways of correcting those mistakes.

IV. THE PUBLIC INTEREST

Let me turn now to consider what economists should understand and mean by the term ‘the public interest.’ After all, we are interested in exploring how the entrepreneurial role can serve the public interest. What is that public interest?

Mainstream economics
Here again we must be wary of the standard approach that mainstream economics has tended to follow in identifying the public interest. From a standard economic point of view, the public interest has been seen as the achievement by society of an efficient allocation of social resources. It is as if society were a gigantic economising entity with scarce resources, a given budget, and competing goals. Society would then need an allocation pattern for its resources that would achieve its peak level of goal satisfaction, avoiding any kind of social waste. That is, society would want to avoid any state of affairs, any pattern of resource allocation that might satisfy one set of goals at the expense of some other more important set of goals.

This notion of the public interest that I’ve associated with standard economics tends to treat society in exactly the same way as standard economics treats individual human acts: as economising activity that is successful when it achieves its efficiency objective. From this perspective, to say that the market economy fulfils the public interest means that the market is successful in achieving an efficient allocation of resources. It is here that I believe the Austrian tradition to which Hugh Morgan referred earlier can provide illumination and a most helpful alternative perspective.

The Austrian School and Dispersed Knowledge
We need to go back to the work of F.A. Hayek. Over 40 years ago Hayek pointed out that treating society as if it were an economising entity overlooks a fundamental problem that society confronts before we can even begin to discuss economising at a social level. The problem is that one of the prerequisites for talking about economising at a social level is a complete, centralised bank of knowledge about the objectives of society. But in society, this knowledge is clearly and obviously absent. Instead, as Hayek pointed out, the knowledge we have is scattered and dispersed.

Each of us, as members of society, knows certain things. We know about what we ourselves need and what our families need, we know a little about what our neighbours may need. We also know a little bit about the availability of resources in our immediate neighbourhood. We don’t know a great deal but we do each know a little bit; and the little bits we know as individuals make up a sort of jigsaw puzzle of separate pieces of scattered information. Before we can even begin to think of solving the social economising problem we have to confront the problem of ensuring that these scattered bits of information are brought to bear on economic decisions so that in fact the knowledge is not wasted. How can we ensure that there will be coordination between these innumerable members of society, all knowing their own things, so that their knowledge can be deployed in the interest of society?

The answer to this question is the great contribution of both Mises and Hayek. The market comes to be perceived as a social instrument that is able to bring into the picture and harness all of these scattered bits of information, thus initiating a process of mutual learning that permits coordination to be achieved. It is important to recognise the drastic change in understanding what this Austrian view entails. We are no longer dealing with the narrow problem of coping with scarcity, but with the much more subtle problem of overcoming the gaps in knowledge that exist throughout society and of transcending the little scarcity problems that confront each one of us.

You may notice the analogy here between this economic task and the task of the entrepreneur that we mentioned earlier. From this perspective the notion of the public interest becomes far more subtle than the one I have identified with the older, standard economic view. The public interest surely depends, from this newer economic point of view, on the ability of society’s institutions to transcend these narrow scarcity problems and to mobilise the scattered and initially uncoordinated bits of information. Let us see where the entrepreneur fits into this.

V. THE ROLE OF THE ENTREPRENEUR

We have stated that the entrepreneur engages in perceiving opportunities. What kinds of opportunities does the entrepreneur discover? As far as markets are concerned the entrepreneurial endeavour can be expressed very simply: the entrepreneur perceives the opportunity to buy at a lower price and sell at a higher price, and the difference is pure profit. It is as simple as that. This simple framework can be translated into hundreds of forms and concrete cases. At the level of simple arbitrage, it is buying and selling in different markets at the same time. In judicious speculation, where resources are purchased for their anticipated appreciation over time, such resources are brought in one market today and sold in another market tomorrow, or 10, or 50 years hence. Finally, this bridging of markets is manifest in the creative activities of entrepreneurs who are able to assemble a group of everyday resources and somehow transform them into new products that others have not dreamed of and that consumers value highly. That too involves bridging markets, where the resources are bought in one market and the new product is to be sold in another market.

Markets and Opportunities
The bridging of these markets involves the discovery of opportunities created by errors. These markets would not be separated and the opportunities for profit would not exist if others had not made mistakes that need to be corrected – if others had not overlooked that which the entrepreneur now sees. The price would not, without such error, be lower in one market than it is in the second market, because those who buy at the high price would not do so if they were aware that they could buy at the low price. So that the very phenomenon of pure profit is evidence of earlier error – error that reflects that dispersed knowledge of which Hayek wrote.

But these errors invite their correction. The incentive for the correction of these errors is provided by the error itself because, as we have seen, the error manifests itself in the form of pure profit. That pure profit is the magnet that attracts the attention of the alert entrepreneur – who, I repeat, need not be a moral hero. He needs merely to be able to ‘smell’ where the profits are, because that sense is his alertness to existing error and his pursuit of those incentives is the way he corrects these errors. When the entrepreneur acts to capture profit he bids up the price where it has been low and bids down the price where it has been high, eliminating the price differential. This phenomenon repeats itself in innumerable guises and all types of entrepreneurial endeavour.

In carrying out this role, what is the entrepreneur in fact achieving? He is achieving exactly the kind of coordination and mobilisation of scattered information that we were discussing earlier under the topic of public interest. When price differentials are present between markets it means that the knowledge of the individuals in one market is not being brought to bear upon the knowledge of the individuals in the other market, so that buyers and sellers are not meeting each other because they are not aware of each other. The entrepreneur bridges that gap, He notices those scattered bits of information and, by responding to the translation of those errors into profit, he corrects the initial error. His activity tends to solve the problem of dispersed knowledge. In this way the role of the entrepreneur is wholly congruent with the promotion of what we described earlier as the public interest, in the appropriate economic sense of that term.

Requirements of the Entrepreneur
What is required for the entrepreneur to be able to perform the role that we have identified with the public interest? What institutional framework is required, what encouragement does the entrepreneur need? The answer is that he needs no special encouragement; he needs only the assurance that an opportunity perceived will be permitted to be pursued. This is simply freedom of entrepreneurial entry—the absence of obstacles to discovery. Of course, such obstacles tend to be erected by the pressures of those who stand to lose by the entrepreneurial competition of the entrant. In other words, what we require for the entrepreneurial process to be put to work is absence of privilege and freedom of entrepreneurial entry. These are simply two sides of the same coin.

Does Society Benefit?
Let us return to our initial observation concerning the widespread disparagement of entrepreneurial activity. That disparagement, we noticed, is based in large part on the assumption that pure profit is unjustified. Pure profit does not seem explicable or justifiable in terms of effort or the cost of necessary resources. After all, it is pure ‘gravy’, over and above all amounts necessary to bring about the production of what is produced. It is natural, then, that critics of the entrepreneurial system see profit as prima facie evidence of less than honest dealing in some form or another.

In a narrow sense it is quite true that profits are not necessary for the production of a product. Suppose the entrepreneur buys resources for a sum of money. He creates out of those resources a new type and quality of product, a new form of marketing for that product that inspires consumers to buy at a price that leaves the entrepreneur with a handsome profit. Clearly that product could have been produced even if its price was not greater than the price of the resources. But would it have been produced? That kind of judgement with hindsight presumes that we already know what products are needed. The essence of entrepreneurship is, let us remember, that it happens before it has been discovered what consumers need or what can be produced – the product is still around the corner, so to speak.

What inspires the alertness of the entrepreneur is surely the prospect of being able to benefit by the profits that may be embodied in the production of the product. It is hardly accurate to say that those profits were not needed. They were indeed needed to spur the discovery procedure of the entrepreneurial process. In fact, what has happened is that the entrepreneur, in transforming resources into something worth so much more, has created something out of nothing. The usual criteria of economic justice relate to given economic goods. Therefore they do not apply to the case of entrepreneurial profit, which represents a wholly new economic entity that has been created, found or discovered. So far from the ‘unearned’ character of profit being evidence of exploitation or fraud, this character of pure profit points to its invaluable role in inspiring pure discovery and in generating the solution to the social economic problem embedded in dispersed knowledge.

VI. CONCLUSION

What then is the role of the entrepreneur in the economic system? I think we can sum up our argument by drawing attention to two entrepreneurial functions. The entrepreneur is the agent that spurs society to take advantage of existing scattered and dispersed knowledge. This permits society to enjoy a tendency towards the fullest exploitation of existing resources in terms of today’s technological knowledge. It permits society to avoid waste and to successfully negotiate the economising problems by bridging and overcoming the dispersed character of knowledge. At the same time, the entrepreneurial role also makes a second, related contribution. The entrepreneur and entrepreneurial activity not only spur society to continually become aware of better ways of utilising existing resources; it is entrepreneurial alertness that generates and harnesses new technological knowledge, and discovers entirely new bodies of resources that had hitherto been overlooked.

The entrepreneurial role is of paramount social significance in ensuring the fullest utilisation of existing resources in terms of existing knowledge. It is no less significant in fueling economic growth and development into a limitless future because the entrepreneur, after all, exists to transcend the limits of what has gone before. I submit that a society that prizes these achievements and appreciates them should surely learn to value the crucially important role the entrepreneur plays in the public interest.

About the author:
Israel M. Kirzner was Professor of Economics at New York University. He studied Economics under Ludwig von Mises in the 1950s and became an ardent proponent of 'Austrian economics', which emphasises the role of individuals and their knowledge and decisions in the evolution of economic systems.