In the Inaugural John Bonython lecture, Israel Kirzner strongly defends the entrepreneur’s role in keeping our economy healthy and vigorous.
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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 no way depends on the benevolence, public spiritedness, philanthropy, or even simply 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-spirited citizen — moves with very special grace.
I had the pleasure this morning of spending some time with John Bonython; this gave me a remark that he made last 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 were quite a habit of correcting mistakes.” I shall return to that 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 despicable. And because they are so despicable, 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 societies to achieve 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, in most simple definitions of entrepreneurial success, namely the earning of pure profit, it is seen as evidence of the unjustified character of entrepreneurial behaviour because, after all, profits are not tied to returns 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 wolf-power that propels a sleigh. I take it to mean that although the wolf certainly pushes the sleigh along, it means the right direction. The wind can just as well propel the sailboat across its broad expanse as a gale. 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 lead to a great deal of waste, injustice and misguidance.
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, for the benefit of society. To establish this point will be to become the focus of the discussion that follows. First we shall consider what an entrepreneur is and the nature of entrepreneurial activity; and second we shall consider what role an entrepreneur is economically 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 so on. But what is the analytical essence of these diverse activities? How can we capture the essential core of entrepreneurship that manifests itself in so many diverse aspects?
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 risk, under uncertainty. Others have seen it as consisting in 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 the 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 he sees opportunity where others have not.
Observe that the entrepreneur does not possess specific knowledge that others do not possess. What the entrepreneur possesses rather is a more active awareness of the current situation. It is, as I said, not knowledge that he possesses, but an awareness of something that may be important.
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 satisfaction. 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 unexpected 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 economising. The discovery of action must also be recognised as including the discovery of entrepreneurial opportunities and discovery.
To emphasise this point, economists who have focused on economising have often assumed that all relevant knowledge about resources, technologies, and preferences is given to all participants in the market process. There are no blanks that must be filled in, no gaps that must be discovered by human actors. But once we recognise that the world is full of such gaps, then entrepreneurial alertness becomes crucial. The entrepreneur discovers these opportunities that have been overlooked.
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 the public interest?
The term “public interest” is often thought of as referring to a kind of overall social welfare which society should attempt to maximise. The difficulty with this view is that it suggests that the public interest can be defined independently of the preferences and actions of the individuals who make up society. In reality, society is nothing but the individuals who compose it. To speak of the public interest apart from the interests of individuals is therefore misleading.
In the Austrian tradition of economics the public interest is understood in a different way. The public interest is served when the actions of individuals are coordinated through the market process so that mutually beneficial exchanges can occur. The market system makes it possible for individuals, each pursuing his or her own plans and objectives, to interact in ways that bring about a pattern of social cooperation.
Entrepreneurial activity plays a crucial role in this process. The entrepreneur discovers opportunities for gain that arise because of previously unnoticed possibilities for exchange. By recognising these opportunities and acting upon them, entrepreneurs help to coordinate the plans of different individuals. In doing so they contribute to the efficient use of resources and to the satisfaction of consumer wants.
Thus, even though the entrepreneur may be motivated by the pursuit of profit, the actions of entrepreneurs can nevertheless promote the public interest. Profit opportunities arise precisely where there are unexploited possibilities for mutually beneficial exchange. When entrepreneurs move to exploit these opportunities, they help to eliminate errors and bring about a better coordination of economic activity.
In this sense the entrepreneurial function serves the public interest by helping the market process to work more effectively. The entrepreneur is not required to be motivated by altruism or public spirit. The very pursuit of profit, within the institutional framework of a market economy, leads entrepreneurs to perform actions that benefit society as a whole.
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 as entrepreneurs perceiving the opportunity to buy at lower prices and sell at higher prices, and the differences in prices signal the presence of simple arbitrage. 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 bought into one market and sold in another market tomorrow, or 10, or 50 years hence. Finally, this bridging of markets in immediate time — the corrective 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 products are 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 led to the correction of others had not overlooked that which the entrepreneur now sees. The price would not be high enough to be profitable if someone else had not overlooked the fact that the lower price would be acceptable to the consumer. The errors that create these opportunities for profit are the result of the fact that knowledge is dispersed among individuals. The entrepreneur’s role is precisely to notice these discrepancies and to act upon them.
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 so that entrepreneurs may be encouraged? The answer is that what is needed is 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 the provision and defence of 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 of the cost of necessary resources. After all, it is pure profit — 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 the existence of profits as evidence of exploitation.
In a narrow sense it is quite true that profits are not the price for the production of a product. Suppose that entrepreneurs buy resources for the purpose of producing a product, and that the costs of those resources are lower than the price that consumers are willing to pay for the finished product. The fact that profits appear indicates that resources had previously been misallocated — that resources capable of producing something that consumers value highly were being used for less valuable purposes. Profit is therefore the signal that alerts entrepreneurs to these opportunities and encourages them to move resources into more valuable uses. In this way the entrepreneurial process corrects errors and improves the allocation of resources in society.
