[This is a selection from "Driving the Market Process: 'Alertness' Versus Innovation and 'Creative Destruction'" in the Quarterly Journal of Austrian Economics. The full article is here.]
Joseph Schumpeter’s theory of entrepreneurship significantly differs from that of Israel Kirzner. This is particularly apparent in Schumpeter’s argument that entrepreneurial activity is characteristic of both market and non-market economies and similarly drives their development. His explanation reveals his moorings in conventional neoclassical microeconomic theory, rather than in Austrian School market process theory.
There are several serious flaws in Schumpeter’s theory of entrepreneurship. The Walrasian general equilibrium model on which he bases his theories of development and business cycles profoundly misrepresents the market process for reasons extensively treated elsewhere—particularly in the critiques of Mises and other Austrian School theorists. This is apparently what leads him to apply his entrepreneurial deus ex machina to both market and non-market contexts to the detriment of an understanding of either. In addition, his entrepreneurial deus ex machina as disruptor of general equilibrium lacks reasoned motivation. It is not a pursuer of profit opportunities, it is a Prometheus without a first cause, a mere pragmatic device to get things going. Schumpeter’s approach even runs opposite to the 1870s Marginal Revolution shift from production-driven to consumer-driven market process theory. His consumers are the tail that is wagged by the entrepreneurial dog.
Schumpeter also posits innovations as acts of entrepreneurship without an explanation of the source of the “new possibilities” that are used in innovation. He denies that they are found or created by entrepreneurship; they just come into existence somehow, lie about for awhile, are stumbled upon and get applied. His perfect knowledge assumption for a general equilibrium to exist in a market economy actually removes any rational source for entrepreneurial activity.
Kirzner’s theory of entrepreneurship has obvious and substantial moorings in Austrian School market process theory as it has developed through the work of Menger, Mises, and Hayek. His extensive development of the specifics of the entrepreneurial aspect of human action has added significantly to our understanding of it. In sharp contrast to Schumpeter’s ad hoc deus ex machina, Kirzner’s entrepreneurial concept is founded on consumer sovereignty and enhances our understanding of how the market process aids individuals in their attempts to achieve chosen ends.
Nevertheless, there are discordant elements in Kirzner’s vision. To find the essence of entrepreneurship in “alertness” to profit opportunities is insightful, but there must be more to it than that. It takes an act of will to be alert, and a further act of will to decide to do something about it. The capacity to be alert to opportunities and to strive to profit from them is gutsy and not always present all the time or in all people.
Further, Kirzner’s own comparison of his concept of entrepreneurship with that of Schumpeter is inadequate in that he accedes to Schumpeter’s “ideal type” view of “the entrepreneur,” rather than being—as Kirzner himself recognizes—an aspect of human consciousness present in exchange relations. He does this when he characterizes the difference between their respective views as one between that of the entrepreneur as disrupter of equilibrium versus that of equilibrator, thus leaving out the ignorance, uncertainty, and purposefulness that give rise to the entrepreneurial aspect of all human action only in the market process.
It is also difficult to separate innovation from entrepreneurship, if entrepreneurship is entwined with “boldness, self-confidence, creativity and innovative ability,” as Kirzner says it is. Expanding the definition of “arbitrage” to include innovation seems more like a slight of the hand than an argument. A focused alertness to possible market profit opportunities—of whatever sort—and the will to pursue them seems a necessary part of the concept of entrepreneurship. Kirzner’s later writings appear to concede this.
Lastly, the comparison between the two theories of entrepreneurial action suggest that it may be time to drop the use of the words “equilibrium” and “disequilibrium” from economics. The market process is not about attaining “equilibrium,” whether temporary or terminal. It is about purposive individuals seeking to achieve personal goals through exchange with others in a context of ignorance and uncertainty that requires speculation. Market exchange is just one of the means for the peaceful pursuit of human ends. The language of classical mechanics provides inappropriate metaphors for the explanation of the process of market exchange. The first law of thermodynamics applies only to physical science phenomena, not to catallactics, which is a science of human action in which value is created rather than being equilibrated or merely not lost.
