capitalism

Entrepreneurship 149
of economic change, so too there are different conceptions
of the entrepreneurial function.
Joseph Schumpeter’s conception of the entrepreneur
emphasized creative changes and heroic, large-scale innovations.
(His later work, however, adopted a wider definition
that embraced more humble acts of entrepreneurship.)
Schumpeter’s focus was on “new combinations” that are discontinuous
with what has come before (e.g., the commercialization
of the automobile). The Schumpeterian entrepreneur,
by virtue of being an entrepreneur, engages in the creation of
new products, the adoption of new methods of production,
the discovery of new markets for outputs and new sources of
supply of inputs, the development of new marketing methods,
and the creation of new forms of business organization
(e.g., the multinational corporation). Accordingly, entrepreneurship
involves the creation of new production functions,
either new products or new methods for creating existing
products, rather than just an adaptive response to exogenous
changes. With its emphasis on discontinuous innovation,
Schumpeter’s general approach emphasized the disequilibrating
nature of entrepreneurship—that is, entrepreneurship
disturbed previous states of economic coordination.
The conception of entrepreneurship offered by Israel
Kirzner has received increasing attention from economists
in the past few years. His approach built on ideas regarding
competition and market processes earlier put forward by
Hayek and Mises. Kirzner’s analysis conceived of entrepreneurship
in two related ways. On the one hand, his depiction
focused on alertness to profit opportunities as its
essential defining character. In this sense, Kirzner focused
on the entrepreneurial element of human decision making.
It is a propensity of human beings, he argued, to make
spontaneous discoveries of opportunities (including new
ends–means frameworks) that are somehow “staring them
in the face.”
The second way that Kirzner conceived of the entrepreneur
was as someone who takes advantage of opportunities
for arbitrage. In focusing on arbitrage, Kirzner emphasized
the entrepreneur’s economic function and the essential role
that he plays in coordinating market activities. These two
conceptions are clearly interwoven because together they
alert individuals who discover hitherto undiscovered profit
opportunities and engage in arbitrage.
The simplest version of Kirzner’s approach is a singleperiod
model for a single good. The entrepreneur is one
who discovers two prices for the same good in the market;
the price differential represents pure arbitrage profit that is
available to the person who spots it. The entrepreneur
knows exactly what to do and buys the good at the low
price and sells it at a high price. The price discrepancy
arises because buyers who buy at high prices in one part of
the market are unaware of sellers who are selling at lower
prices in other parts of the same market. Ignorance of
opportunities for mutually beneficial exchange gives rise to
a lack of coordination of buyers’ and sellers’ plans. In this
model, entrepreneurship is instantaneous and involves no
uncertainty or risk. (Schumpeter also excluded the bearing
of risk from the entrepreneurial function; in his view, capitalists
bear the risks.)
Kirzner’s static model of interlocal arbitrage can be
extended to a more dynamic setting, which includes
intertemporal arbitrage—that is, speculation over time. In
this case, the entrepreneur sniffs out differentials between
prices today and expected prices tomorrow. For example,
the entrepreneur might buy a good today at a low price in
the expectation of selling at a higher price tomorrow—a
price that would more than compensate for any temporary
holding costs. In this capacity, the entrepreneur functions as
a speculator. Of course, this type of entrepreneurial activity
communicates information to other market players as well
so that over time their ignorance of these particular opportunities
diminishes.
Kirzner’s model can be extended in other ways. Thus
far, we have only been considering markets for a single
(final) good. However, it is possible to imagine similar
kinds of entrepreneurial adjustments being made between
factor (input) markets and product (output) markets. In
these cases, the entrepreneur discovers differences between
prices in input markets and the price of the final good that
those inputs produce. If the final good is a new type of
product that does not yet exist, then the entrepreneur is
engaged in innovation.
Kirzner’s contribution is significant because it provides a
unified analysis of all three forms of entrepreneurship—
arbitrage, speculation, and innovation. The latter two activities
are more sophisticated versions of arbitrage from an
economic point of view. His approach has been criticized,
however, for its relatively static treatment of time, its downplaying
of the radical uncertainty involved in entrepreneurial
decision making, and its consequent inattention to
entrepreneurial errors and losses. In addition, there is no
explicit treatment of firms in his theory of entrepreneurship.
Like Kirzner, Mark Casson emphasized the equilibrating
role of entrepreneurship. His theory of entrepreneurship
seeks to inject market-process ideas into conventional
neoclassical economic theory. Casson defined the entrepreneur
as someone who specializes in taking judgmental
decisions about the coordination (i.e., the allocation) of scarce
resources. According to Casson’s approach, Kirznerian
arbitrage and Schumpeterian innovation are special cases
of a more general notion of entrepreneurial speculation
based on self-confident judgment. The essence of entrepreneurship
is having a superior perception of events and
opportunities. Casson’s entrepreneur is the one who has
superior access to unique information that must be protected
to exploit it fully. Because of the transaction costs
of market-making, the entrepreneur often creates and
manages new firms to undertake production rather than