Entrepreneurship And The Austrian School Business Essay

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The main topic of this paper is to explore the entrepreneurship and the Austrian School approach to the theory of the firm. We will try to understand the theory of the firm in an environment of spontaneous order of market in relationship with the entrepreneurial function of the firm. As the Austrian School's economic theory studies human action, the Austrian theory of the firm will be inseparable from the theory of entrepreneurship:

"Though they developed in isolation, the theory of entrepreneurship and the economic theory of the firm can be usefully integrated. In particular, the concept of entrepreneurship as judgment associated with Knight (1921) and some Austrian school economists aligns naturally with the theory of the firm. Because judgment cannot be purchased on the market, the entrepreneur needs a firm - a set of alienable assets he controls - to carry out his function". [1] 

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The economic agents change their minds continuously and thus generate a dynamic process which Kirzner calls the market process [2] . Also Mises considers the market as a process in a continually changing state determined by individual judgments and their actions:

The market is a process, actuated by the interplay of the actions of the various individuals cooperating under the division of labor. The forces determining the-continually changing-state of the market are the value judgments of these individuals and their actions as directed by these value judgments [3] .

That suggests making a Robbin-type of maximization calculation and efficence impossible. Robbins puts forward the economic agent's task to economize on scarce resources efficiently, but efficiency is no more possible in an Austrian-school- like market-process [4] . Friedrich von Hayek in his writings attempted to conceptualize and understand the mechanisms that drive disequilibrium processes of change. In his introductory work "The Use of Knowledge in Society" (1945), he emphasized the role of information and dispersed knowledge. According to him the question concerned with the economic problem society is perceived as a greater problem: it is not only about allocating resources effectively but operating within a context of dispersed information.

"The reason for this is that the 'data' from which the economic calculus start are never for the whole society given to a single mind which could work out the implications, and can never be so given.

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exist in concentrated or integrated form, but solely as the dispersed bits of the incomplete and frequently contradictory knowledge which all the separate individuals possess." [5] 

Mises solved this task by introducing human action- by admitting the ability of human action to every economic agent. The agents that possess diverse resources and have diverse aims will make plans to achieve the greatest well being. The mutual lack of knowledge of market participants makes it possible to obtain "trade-related profits" through discovery. And the discovery has always the complimentary environment to go on through information that constantly changes becomes impossible to have permanents states of equilibrium; Mises sums up this idea when he states: "On the market agitation never stops." [6] 

Besides the agents' attempt to calculate economic problems they are also alert to opportunities. Once an economic agent recognizes a market opportunity, he acts on it to improve his position. And opportunities are abundant in a situation of disequilibrium. That is where Kirzner's entrepreneur comes from. While von Mises admitted the ability of human action to every economic agent, Kirzner confined it to a certain group of agents which he labeled entrepreneurs.

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In free open market economies, entrepreneurs promote balancing adjustments. Hence, the entrepreneur is introduced as an arbitrageur that equilibrates markets. [7] Process analysis sees entrepreneurs as agents that discover and take advantage of opportunities that make it possible to go from imbalance toward balance or equilibrium.

Hayek states that entrepreneurs play a key role in coordination:

It can hardly mean anything but that, under certain conditions, the knowledge and intentions of different members of society are supposed to come more and more into agreement or, to put the same thing in less general and less exact but more concrete terms, that the expectations of the people and particularly of the entrepreneurs will become more and more correct. [8] 

The term "entrepreneur" has a lot of meanings, and is often subject to different literatures. For example, entrepreneurs are considered as factors of economic growth, important adjusting factors toward market equilibrium, and are described as charismatic leaders, innovators, managers, etc [9] . The figure of the entrepreneur was present in the minds of classical authors during a great part of the 18th and 19th centuries. They dealt with the concept of entrepreneur, and its scope and relevance to economic life; but they emphasized capitalists as those who accumulate, assign, and control capital. [10] 

"the driving force of the market, the element tending toward unceasing innovation and improvement, is provided by the restlessness of the promoter and his eagerness to make profits as large as possible." [11] 

Entrepreneurs benefit from price differentials buying at lower prices and selling at higher prices, however these actions bear itself uncertainties. Mises enlarges the spectrum and defined the origin of the entrepreneurial function of any human being as the act of bearing uncertainty in every action. [12] 

According to Kirzner the essence of entrepreneurship is "alertness". Alertness means insight, knowing where to seek and a greater sensitivity to the environment. Entrepreneurs have the special ability of remaining alert to different and as yet unnoticed alternatives. It is because the entrepreneur is alert that he notices opportunities that others simply don't see:

"Now I choose to label that element of alertness to possibly newly worthwhile goals and to possibly newly available resources -which we have seen is absent from the notion of economizing but very much present in that of human action the entrepreneurial element in human decision-making." [13] 

When an entrepreneur discovers and exploits an opportunity, the entrepreneur redefines the means-end framework and, ceteris paribus, tends to bring the system closer to equilibrium. In other words, his activity increases the coordination of other agents' plans. Not all market adjustments are equilibrating, of course, and disequilibration is also a common feature of the market economy, as Mises (1949) explains. Disequilibrating tendencies in the market system are not simply the result of exogenous changes (like changes in preferences), but also of endogenous changes (emerging from the equilibrating forces themselves). Kirzner recognizes, however, that mistaken interpretations by entrepreneurs lead to losses that act as unbalancing forces. The tendency towards (a new) equilibrium is only reestablished when entrepreneurs discover the opportunities for profit resulting from these mistakes. [14] The entrepreneur brings knowledge that is entirely unknown to anyone in the market, and helps defining a new equilibrium by setting the pattern of an underlying future reality:

"The daring, alert entrepreneur discovers theses earlier errors, buys where prices are too low and sells where prices are too high. In this way low prices are nudged higher, high prices are nudged lower price discrepancies are narrowed in the equilibrative direction. Shortages are filled, surpluses are whittled away; quantity gaps tend to be eliminated in the equilibrative direction". [15] 

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Apart from the never reaching state of complete equilibrium, each market is portrayed by opportunities for entrepreneurial profit. Entrepreneurs are alert to price differences in the marketplace. These differences can be purely geographical or can take place over time. Knowledge is dispersed in the economy and the entrepreneur realizes that he can profit from these situations:

"In a world of ceaselessly changing tastes, resource availabilities and known technological possibilities, this entrepreneurial process cannot guarantee rapid or slow convergence to a state of equilibrium. But it does at each moment guarantee profit incentives tending to nudge the market in what, from the perspective of that moment, must be recognized as the equilibrative direction". [16] 

"Profit opportunities provide incentives for entrepreneurial corrective decisions. These incentives offer rewards to those who can better anticipate precisely those changes in supply and demand conditions which we have seen to be so disconcertingly possible. What our understanding of the entrepreneurial discovery process provides is no conviction that an unerringly equilibrative process is at all times in progress, but rather appreciation for the economic forces which continually encourage such equilibrative movement". [17] 

Inventive entrepreneurs through the responsiveness of alert operate in the market process world of entrepreneurial discovery. In other words this approach postulates a tendency for profit opportunities to be discovered and grasped by entrepreneurs' participants. This approach allows for the introduction of discovery over time and shows that the entrepreneur can imagine the future, even if he only discovers one of the underlying future realities. By imagining the future, the entrepreneur can set the economy onto a new path, and influence the pattern of preferences individuals hold at a certain point in time (Kirzner, 1992). Entrepreneurial activity is a distinctive characteristic of market economies, where the driving force behind the process is represented by the discoveries made by entrepreneurs in a context of dispersed information.

As the Austrian School economic theory studies human action, the entrepreneurship function is treated inseparable from the theory of the firm:

"Does the entrepreneur need a firm? We have argued that the concept of entrepreneurship as judgment provides the clearest link between entrepreneurship, asset ownership, and economic organization. Similarly, the economic theory of the firm can be improved substantially by taking seriously the essential heterogeneity of capital goods and the subsequent need for entrepreneurial experimentation." [18] 

The role of the entrepreneur has integrated involvement in this theory. As to above, the market process can be understood as a discovery procedure that tends to solve the economic problem - equilibrium through entrepreneurial competition, and the firm can be seen as a sequence of entrepreneurial actions over time. The entrepreneurial theory of the firm is essential because of the significant role positioned├é┬áby entrepreneurs in market economies. Entrepreneurship is the core of the dynamics of modern capitalism and the entrepreneur is "the driving force of the whole economic system" (Mises, 1949: 249). A society with competing entrepreneurs is not only capable of coordinating but also of orienting forces to release and save resources, and at the same time of achieving economic growth [19] .

From this perspective, agents make their decisions based on a given set of goals, priorities and resources. In Kirzner's opinion, entrepreneurs' economic behavior is linked to this quest of identifying goals and resources, and pursuing the greatest efficiency on one hand, and subsequent discoveries on the other.