Entrepreneurship and the Market Process

Arielle John, Diana W. Thomas, Arielle John, Diana W. Thomas

• Publisher: Palgrave Macmillan
• Year: 2020
• ISBN:
  9783030424084
• Topic: Negocios y empresa
• Subtopic: Negocios en general

What is the significance of entrepreneurship in an economy? Scholars have argued that when the market is viewed as a process of perpetual adjustment to various forces, and not as a set of end-state prices and quantities simply arrived at, the role of the entrepreneur comes to the fore. What then are fruitful ways to conceive of the phenomenon of entrepreneurship? How do entrepreneurs both respond to and shape larger forces in the economy? In what ways can political institutions and government regulation shape the decisions made by entrepreneurs, and their responsiveness to consumers? How does the cultural environment influence the types of opportunities that an entrepreneur will notice and act on? Finally, is entrepreneurial behavior strictly limited to activity we see in the market?

This edited volume—comprised of chapters by scholars and students studying from the disciplines of sociology and economics—examines entrepreneurship theoretically and applied to various cases. It provides an overview of the economic literature on entrepreneurship and puts forth a framework for understanding the market process, as well the policy implications of government intervention and cultural considerations in the market. It will be of use to any scholars, students, practitioners or policymakers interested in entrepreneurship.

© The Author(s) 2021

A. John, D. W. Thomas (eds.)Entrepreneurship and the Market ProcessMercatus Studies in Political and Social Economyhttps://doi.org/10.1007/978-3-030-42408-4_1

Begin Abstract

1. Entrepreneurship and the Market Process

Diana W. Thomas¹ and Arielle John²

(1)

Institute of Economic Inquiry, Creighton University, Omaha, NE, USA

(2)

Mercatus Center, George Mason University, Fairfax, VA, USA

Diana W. Thomas (Corresponding author)

Email: [email protected]

Arielle John

Email: [email protected]

End Abstract

Why Entrepreneurship Is Important

In his 1964 presidential address to the Southern Economic Association membership, James Buchanan famously asked the provocative question “What should economists do?” Buchanan’s question was explicitly motivated by his assessment that the discipline had gotten lost in doing “what economists do” without consideration of what would constitute scientific progress. More specifically, James Buchanan was advocating for an economics that would place the “theory of markets” rather than the “‘theory of resource allocation’ at center stage” (1964, p. 13) and return to Adam Smith’s observation that there is a propensity in human nature to “truck, barter, and exchange one thing for another” (Smith 1776, p. 25).

The orthodoxy Buchanan was constructively critiquing was neoclassical price theory, which examines the patterns of equilibrium prices, costs, and output in different markets with specific emphasis on the allocation of resources in equilibrium. The goal of the price theoretical apparatus is to understand the requirements of general equilibrium, identify the paths toward equilibrium that price and quantity may take, and state the price and quantity combinations that will satisfy equilibrium conditions across different markets. In investigating the effects of government policy, price theory focuses on the changes in equilibrium price and quantity that changes in policy will bring about.

Lacking from orthodox price theory, in Buchanan’s assessment, was a focus on “man’s behavior in the market relationship […] and the manifold variations in the structure that this relationship can take” (Buchanan 1964, p. 214). The alternative approach to studying economic behavior he proposed was explicitly focused on exchange relationships and the various forms they could take in both markets and politics. Buchanan’s extension of this analytical focus to include spheres other than markets, and specifically politics, always assumed that individual behavior and cooperative relationships individuals engaged in depend on the rules of the game or the institutional structure in place to constrain individual behavior.

Buchanan was, of course, not alone in his critique of the path modern economics had taken throughout the beginning of the twentieth century. Israel Kirzner similarly argued that price theory was missing a description of how the actions of individual market participants interact to bring about changes in prices, quantities, and in the manner resources are allocated to competing uses (Kirzner 1973, p. 6). Price theory notoriously stresses that there are but three factors of production—land, labor, capital—to be optimized when making production decisions, but seems to take for granted who exactly is meant to do the optimizing. In Kirzner’s own words, an analytical framework devoid of entrepreneurs “completely lacks the power to explain how prices, quantities and qualities of inputs and outputs are systematically changed during the market process” (1973, p. 42) and so cannot explain how the market equilibrates. Kirzner argued that in order for such considerations to enter the analysis, the analyst would have to shift her focus toward the competitive process and the role of the entrepreneur in perpetuating the competitive process. Crucially, entrepreneurship was the fourth factor of production missing from the neoclassical price theory.

Put differently and using the language of orthodox price theory, rather than focusing on the slope of the production possibilities frontier and its intersection with individual indifference curves, this market process perspective advocated by Buchanan and Kirzner (among others) analyzes how movements of the curve and pivots in its slope come about over time, what the institutional determinants of human action in markets and in politics are, and how exchange relationships change when institutions evolve.

Israel Kirzner specifically contributed to market process theory by introducing a theory of entrepreneurship that accounts for the differential alertness and awareness of entrepreneurs. More specifically, in Kirzner’s model, entrepreneurs bring about the process of equilibration of market relationships by acquiring “more and more accurate and complete mutual knowledge of potential demand and supply attitudes” through entrepreneurial discovery (Kirzner 1997, p. 62). This discovery of information is the essential function entrepreneurs supply in the market process. They are alert to opportunities for arbitrage across space—as is the more traditional understanding of arbitrage—and time, and by acting upon those opportunities bring about changes in existing exchange relationships in the market. In doing so, they can, of course, commit errors, but the insistence upon the integration of an entrepreneurial perspective into the analysis of market relationships ensures a description of systemic adjustments to new and ever-changing information and constraints.

For Kirzner, incomplete and imperfect knowledge are facts of human life that lead to errors in decision-making in the market context all the time. For example, an entrepreneur may believe that her potential customers want to purchase her red shoes for $20 each, when in fact for the quantity she is producing, price should be closer to $30. Therefore, she may erroneously under charge for her shoes. However, alert market participants are able to recognize these sorts of errors with time. According to Kirzner, another person would likely notice the profit opportunity that emerges from the discrepancy between what she is charging and what her customers are willing to pay. That person may buy her shoes at the lower price she is charging and sell them at the higher price somewhere else. Processes like these drive markets toward equilibrium prices and quantities. In Kirzner’s own words, writes, “the entrepreneurial element in the economic behavior of market participants consists … in their alertness to previously unnoticed changes in circumstances which may make it possible to get far more in exchange for whatever they have to offer than was hitherto possible” (1973, pp. 15–16).

While Kirzner develops his theory of entrepreneurship in the context of markets, the individual entrepreneur’s alertness to differential opportunities for profit is essential in driving the process of entrepreneurial discovery not only in markets, but across different institutional settings. All cooperative and collective human endeavors, whether in the context of markets, politics, or society more generally require adjustment to and incorporation of new information into the institutional context in order to allow individuals that operate within this context to cooperate with each other successfully and go about the satisfaction of their individual wants and desires more effectively. The existing literature on entrepreneurship in politics and social organization more generally is multi-faceted and vast, but an entrepreneurial perspective has been applied to culture (Storr 2008; Storr and John 2011; John and Storr 2018), policy change and rent-seeking activities (Simmons et al. 2011; Coyne et al. 2010; DiLorenzo 1988; Holcombe 2002) institutional change in politics (Martin and Thomas 2013), non-profits (Haeffele and Storr 2019), how communities rebuild and revive following natural disasters (Chamlee-Wright and Storr 2010; Storr et al. 2016), and economic development (Chamlee-Wright 2002; Haeffele and Hobson 2019).

Economists of the Austrian school in particular have advanced Kirznerian ideas of entrepreneurship into studies of culture, community recovery, and politics. The driving question provided by Kirzner in many of these treatments is: What types of opportunities will entrepreneurs in various contexts be alert to? For example, Storr and John (2011), use Kirznerian theory to demonstrate how culture can shape entrepreneurial gaze. They posit that “culture will direct an entrepreneur’s gaze as well as her ability to recognize certain opportunities as in fact opportunities” (p. 89). To demonstrate how entrepreneurs with different cultural backgrounds can be alert to different opportunities, the authors provide accounts of different of flavors entrepreneurship in Bahamas and in Trinidad and Tobago, and they connect these different flavors of contemporary entrepreneurship to each island’s economic history. Based on prior experiences under slavery and colonial rule, today’s Bahamian entrepreneurs have a “master pirate” side that is ever ready to hustle, trick, and swindle to make money, but also an “enterprising slave” side, that words diligently and honestly to attract business. In Trinidad and Tobago, where different ethnic groups had dissimilar experiences in the economy pre-and post-independence, some appear to be more alert to opportunities for commercial enterprise, while others tend to look to politics and the bureaucracy for economic advancement.

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