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Department of Economics
The Genius of Mises and The Brilliance of Kirzner
Peter Boettke
and
Frederic Sautet
George Mason University
Department of Economics
Paper No. 11-05
Electronic copy available at: http://ssrn.com/abstract=1753343 Electronic copy available at: http://ssrn.com/abstract=1735649
1
1he Gen|us of M|ses and 1he 8r||||ance of k|rzner

Petei Boettke, Bepaitment of Economics, ueoige Nason 0niveisity
Fieueiic Sautet, Neicatus Centei at ueoige Nason 0niveisity


What Nises taught us in his wiitings, in his lectuies, in his
seminais, anu in peihaps eveiything he saiu, was that
economics is ciucially impoitant. Economics is not an
intellectual game. Economics is ueauly seiious. The veiy futuie
of mankinuof civilizationuepenus, in Nises' view, upon
wiuespieau unueistanuing of, anu iespect foi, the piinciples of
economics.
Isiael Kiiznei (2uu6)
Introduct|on
The neoclassical mouel of the puie maiket economy is a fiictionless woilu
wheie the uecentializeu uecisions of agents aie cooiuinateu seamlessly thiough the
piice mechanism. The neoclassical mouel of maiket failuie anu thus goveinment
inteiventionism, on the othei hanu, ueals with the complications of the ieal woilu
(i.e. the fiictions in the woilu), anu uemonstiates how the piice system cannot
peifectly opeiate. In this view, goveinment can impiove upon the failuies of the
maiket.
By contiast, the woiks of economists such as Aimen Alchian, }ames
Buchanan, Ronalu Coase, Bouglas Noith, veinon Smith anu Elinoi 0stiom fully
embiace the fiictions that exist in the ieal woilu, anu attempt to show how maiket
foices woik to aujust behavioi anu change piactices in oiuei to amelioiate the
impeifections in the woilu anu piomote the cooiuination of plans. The piice system
is impoitant piecisely because we aie impeifect actois in an impeifect woilu of
fiictions, unceitainty, anu human ignoiance.
Electronic copy available at: http://ssrn.com/abstract=1753343 Electronic copy available at: http://ssrn.com/abstract=1735649
2
Luuwig von Nises anu Isiael Kiiznei aie two of the most piominent scholais
who have attempteu to gain a iichei unueistanuing of how the invisible hanu
opeiates in cooiuinating the vast aiiay of economic exchanges that occui on a uaily
basis in the actual impeifect woilu. The "invisible hanu" woiks piecisely because of
the impeifections in this vision of maiket theoiy, anu uoes not iequiie any of the
assumptions associateu with the foimal theoiy of geneial competitive equilibiium
neithei laige numbeis, piice taking, homogenous goous, noi peifect knowleuge.
As Luuwig von Nises (1978: S6) wiote, "|wjhat uistinguishes the Austiian School
anu will lenu it immoital fame is piecisely the fact that it cieateu a theoiy of
economic action anu not of economic equilibiium oi non-action". Austiian
economists, most notably Nises, Bayek anu Kiiznei, have sought to uemonstiate
how human behavioi guiueu by piices, as well as monetaiy piofits anu losses, anu
unuei a system of piivate piopeity woulu aujust anu cope with the woilu's
impeifections. This methouology focuses on the institutional stiuctuie that cieates a
unique incentive-baseu fiamewoik that in tuin influences the behavioi of actois.
This behavioi incluues the uissemination of infoimation which then uiiectly
influences the uecisions anu actions of agents in cooiuinating theii activities anu
hence in impioving the oveiall efficiency of the economic system. It took some gieat
minus to uevelop this analysis, anu amongst them stanu Nises, Bayek anu Kiiznei.
Foi puiposes of this occasion we focus oui attention on the unique contiibutions of
Nises anu Kiiznei.
M|ses and the Market
Isiael Kiiznei often comments on the ieaction he hau upon heaiing Nises
explaining that the maiket is a piocess uuiing his couise of giauuate stuuies at New
Yoik 0niveisity. Kiiznei uesciibes the expeiience as intellectually jaiiing. Inueeu,
he unueistoou what it meant to say "the maiket was a place", but what coulu it
possibly mean to say, "the maiket is a piocess". Nises meant that the maiket is not
only a space wheie people may haggle ovei piices; it is also a piocess, by which
knowleuge is geneiateu, infoimation comes to be known, anu piices aie ueteimineu
thioughout society. The Nisesian emphasis ovei the notion of maiket as a piocess is
S
what sepaiates tiauitional maiket theoiy fiom the Austiian view. The maiket is
cential in the Austiian appioach because it is a piocess.
Inueeu, in the letteis between Nengei anu Walias one can alieauy tiace the
uiffeiences between an appioach to the theoiy of piice that focuses on piice
ueteimination in a system of simultaneous equations on the one hanu, anu piice
foimation thiough a piocess of ongoing baigaining anu exchange, on the othei. But
the leauing iepiesentatives of the iespective schools thought this was meiely a
uiffeience in emphasis iathei than a uiffeience in substance. Bans Nayei (19S2)
iuentifieu in moie uepth the significant uiffeiences between what he calleu a
"functionalist theoiy" anu a "causal-genetic theoiy" of piice. The conscious
application of the notion of maiket piocess analysis was juxtaposeu with geneial
equilibiium theoiy. While the othei leauing iepiesentatives of the Austiian school
in vienna at the time such as Nachlup, Nayei, anu Noigenstein cleaily unueistoou
the impoitance of maiket piocess in economic analysis, it was Nises, Bayek, anu
latei Kiiznei who put foith a matuie ienueiing of the Austiian maiket piocess
analysis.
To unueistanu the oiigin of maiket piocess analysis, one must go back to
Nises's Tbe Tbeory of Honey onJ CreJit (1912) in which he employeu "peiiou
analysis" oi the "step-by-step" methouology anu sought, way aheau of his time, to
integiate micio anu macioeconomic theoiy in ueveloping an analysis of money anu
the wiuespieau consequences of monetaiy mismanagement by political authoiities.
Nises's theoiy of the business cycle was intimately linkeu to the way he came to
unueistanu the maiket piocess. Nises, along with Bayek, woikeu on questions of
business foiecasting anu what came to be known as the ''Austiian theoiy of the
tiaue cycle.'' Ciitical aspects of that theoiy weie: (1) a pictuie of the capital
stiuctuie in an economy as consisting of heteiogeneous capital goou combinations
that hau to be maintaineu oi ieshuffleu in moie piouuctive anu auvantageous
combinations; (2) a vision of the piouuction piocess as taking place ovei time, thus
geneiating a neeu foi a mechanism foi the inteitempoial cooiuination of piouuction
plans to meet consumei uemanus; anu (S) the notion that incieases in the money
supply woik thiough the economy not in an instantaneous aujustment of piices, but
4
thiough ielative piice aujustments. Nises's woik both uefenueu the quantity theoiy
of money against monetaiy cianks that sought to eliminate poveity by piinting
moie money, anu ciiticizeu the quantity theoiy as inteipieteu in mechanical
inteipietations which postulateu instantaneous aujustments of the piice system to
changes in the quantity of money anu theiefoie unueiestimateu the negative
consequences of the manipulation of money anu cieuit by political authoiities in an
economy.
The link to the maiket piocess, while not explicit, was always piesent in this
analysis. Entiepieneuis iely on piice signals to guiue them in theii piouuction
piojects so that they aie allocating scaice capital iesouices in the most valuable
uiiection anu employing the least costly technologies. The capital stiuctuie uoes not
automatically ieplenish itself, but insteau iequiies the caieful calculations of
economic actois to ueteimine which piouuction plans aie the most piofitable ones
to puisue. If piice signals aie confusing, then uecisions conceining the maintenance
anu allocation of capital will be mistaken fiom the point of view of economic value
maximization. The monetaiy theoiy of the tiaue cycle uevelopeu by Nises anu
Bayek in the 192us contiasteu a vision of the entiepieneui-baseu economy with the
moie mechanistic unueistanuing of a monetaiy economy associateu with
economists in the 0S anu the 0K, anu the chaotic vision of economic life associateu
with the ciitics of capitalism.
Contempoianeously with the woik on monetaiy theoiy anu the tiaue cycle,
Nises was embioileu in a uebate ovei the economic feasibility of socialism. Nises'
analysis of socialism is, like his monetaiy theoiy, baseu on the subjective theoiy of
value as applieu in the context of a capital-using economy. In fact, Nises went as fai
as to claim: ''To unueistanu the pioblem of economic calculation it was necessaiy to
iecognize the tiue natuie of the exchange ielations expiesseu in the piices of the
maiket. The existence of this impoitant pioblem coulu be ievealeu only by the
methous of the mouein subjective theoiy of value'' (|1922j 19S1, p. 186). At the
coie of Nises's compiehensive ciitique of socialism lies his unueistanuing of the
maiket piocess. What makes socialism impossible is not only the peiveise
incentives of collective owneiship anu the cumbeisomeness of buieauciacy; it is
S
moie impoitantly the inability to simulate entiepieneuiial innovation outsiue the
context of a maiket economy anu the luie of piofit anu the penalties of loss.
Inueeu, the ciitical point Nises iaiseu against the most coheient foim of
socialism was that collective owneiship in the means of piouuction woulu ienuei
iational economic calculation impossible. Without piivate piopeity in the means of
piouuction, theie woulu be no maiket foi the means of piouuction. Without a
maiket foi the means of piouuction, theie woulu be no maiket piices foi the means
of piouuction. In the absence of maiket piices (ieflecting the ielative scaicities of
capital goous), economic planneis woulu not be able iationally to calculate the most
economically efficient investment path. Without the ability to engage in iational
economic calculation, piouuction coulu not be iationally oiganizeu. No inuiviuual oi
gioup of inuiviuuals coulu uisciiminate between the numeious possibilities of
methous of piouuction to ueteimine which ones aie the most cost effective without
iecouise to calculations baseu on monetaiy piices. Nonetaiy piices anu piofit anu
loss accounting aie inuispensable guiues in the business of economic
auministiation. In theii absence, the human minu woulu be at a loss to ueciue
between uiffeient piocesses of piouuction. Socialism in its attempt to oveicome the
anaichy of piouuction substitutes insteau planneu chaos. As Nises puts it:

To suppose that a socialist community coulu substitute calculations in kinu
foi calculations in teims of money is an illusion. In a community that uoes
not piactice exchange, calculation in kinu can nevei covei moie than
consumption goous. They bieak uown completely wheie goous of highei
oiuei aie conceineu. 0nce society abanuons fiee piicing of piouuction goous
iational piouuction becomes impossible. Eveiy step that leaus away fiom
piivate owneiship of the means of piouuction anu the use of money is a step
away fiom iational economic activity. (|1922j 19S1, p. 1u2)

Nises' ciitique of socialism was gieeteu with iesistance by such figuies as
Kail Polanyi, Fieu Tayloi, 0skai Lange, anu Abba Leinei. The theoietical uiscussion
among piofessional economists took place within the histoiical context of the 192us
anu especially 19Sus, when westein capitalist economies weie embioileu in the
uieat Bepiession while the socialist Soviet system of centializeu economic planning
6
was unueistoou to have tiansfoimeu a peasant countiy into an inuustiial economy
in one geneiation. Supposeuly capitalism was pioveu by the events of the 19Sus to
be not only unjust, but also unstable anu inefficient. Socialist cential planning, on
the othei hanu, pioviueu the Soviet 0nion with the mateiial base to fight the fascist
thieat that aiose in ueimany in the 19Sus anu 194us.
All thiough the uebate on the feasibility of socialism, Nises slowly uevelopeu
a moie matuie unueistanuing of the entiepieneuiial maiket piocess. In Sociolism
(1922), he aigueu that the piice system as a whole seives a thiee-folu function,
which by uefinition socialism woulu have to uo without. In a maiket economy, the
cuiient aiiay of piices signals to uecision makeis the ielative scaicities of the goous
anu seivices in question. If the piice is ielatively high, it can be infeiieu that the
commouity in question is ielatively scaice anu thus must be economizeu in its use,
wheieas if the piice is ielatively low, it can be infeiieu that the commouity in
question is ielatively abunuant anu thus can be utilizeu moie. The cuiient aiiay of
piices aiu uecision makeis in making uecisions by pioviuing ex ante knowleuge of
the situation. Bowevei, the piice system also pioviues ex post knowleuge to
economic actois in the foim of the constellation of piices that emeige in the next
peiiou anu the piofit anu loss statements of businesses. If an actoi can buy low anu
sell high, the maiket communicates that the pievious uecision was in the iight
uiiection, wheieas if it is ievealeu that, baseu on that eailiei knowleuge, you bought
high anu now must sell low, an eiioi in juugment is ievealeu that neeus to be
auuiesseu. The veiy uisciepancy between the ex ante expectations set by the aiiay
of piices at the moment of uecision, anu the ex post iealizations of piofit anu loss
sets in motion the uiscoveiy of bettei ways to aiiange economic activities. These
uiscoveiies aie maue eithei by the oiiginal paities to the tiansactions oi by new
paities who entei the fiay anu biu iesouices away fiom the eailiei actois. It is
thiough the piice system anu the constant aujustments of ielative piices that
economic cooiuination anu continual leaining occuis. The stiong claims about the
maiket system's ability to self-coiiect aie pieuicateu on the veiacity of the piice
system to achieve cooiuination anu leaining.
7
With the iise of socialist planning in the woilu anu the suppoit it ieceiveu
fiom Westein intellectuals, Nises ueciueu to continue the fight against what he
consiueieu unoithouox anu "bau" economics anu staiteu wiiting what woulu
become his magnum opus, fiist publisheu in 194u in ueiman anu latei publisheu in
English tianslation with significant mouifications in 1949. In Eumon Action: A
Treotise on Fconomics (1949 |1966j) Nises skillfully applieu anu uevelopeu the
step-by-step methouology to the economics of time, unceitainty, economic
calculations, the maiket economy, the piocess of piice foimation, inteiest, cieuit
expansion, the tiaue cycle as well as many othei topics. In this way, Nises expanueu
on the woik of his viennese teacheis anu colleagues in incoipoiating the uynamic
element of the economic piocess into the analytical fiamewoik of mouein
economics. In Eumon Action, Nises uevelops fuithei the iuea of the maiket as a
piocess anu shows how maiket piices aie geneially "false", oi non-equilibiium
piices, yet aie infoimationally anu motivationally useful in guiuing anu cooiuinating
economic activity thiough time. In this context, Nises (1966, pp. SS7-8) stateu that,
"the essential fact is that it is the competition of piofit-seeking entiepieneuis that
uoes not toleiate the pieseivation of false piices of the factois of piouuction. The
activities of the entiepieneuis aie the element that woulu biing about the
uniealizable state of the evenly iotating economy if no fuithei changes weie to
occui."
0nlike what Walias hau assumeu, piices uo not ieflect all the knowleuge
available. Because piices uon't ieflect all available knowleuge, uisciepancies exist
which cieate pockets of piofit that entiepieneuis may uiscovei. In othei woius, the
communication system is not peifect; piices uo not convey all the knowleuge that
Walias woulu like them to convey. Bowevei, it is piecisely in this "impeifection"
that lays the engine of the economic system. The impeifection of piices is what
cieates the ability of the system to communicate infoimation conceining its own
faulty communication piopeities.
0ltimately, the notion of maiket as a piocess in Nises's woik iests on the
iuea of inteiconnecteuness among human activities (i.e., "connexity" as Nises puts
it). The connexity of the maiket can only be explaineu if one views the maiket as a
8
piocess. The mechanism that cieates the connexity of human activities is
entiepieneuiial monetaiy calculations. Its consequence is social coopeiation unuei
the uivision of laboi upon which economic giowth anu uevelopment uepenus. This
mechanism iests on the existence of piivate piopeity, fieeuom of contiact, anu a
meuium of exchange. As money is piesent in all exchanges anu thus links togethei
the uecisions of eveiyone by viitue of being a meuium of exchange, entiepieneuis
aie able to uiscovei oppoitunities that may iequiie, foi theii exploitation, a laige
uivision of laboi anu knowleuge. The simultaneous exploitation of numeious
entiepieneuiial uiscoveiies cieates a concatenation of affaiis among the vaiious
economic actois because entiepieneuis biu iesouices away fiom theii alteinative
uses. This biuuing piocess (baseu on entiepieneuiial monetaiy calculation) cieates
inteiconnecteuness among human activities. Piices aie not isolateu elements in the
maiketplace; they iesult fiom the complex ielationships that pievail at any moment
in society, anu upon which the mateiial, scientific anu technological auvances of
westein civilization iests.
k|rzner and entrepreneur|a| d|scovery
Isiael Kiiznei has uesciibeu his giauuate euucation in economics at New
Yoik 0niveisity as one of piofounu confusion anu intellectual enlightenment. 0ne
night a week he leaineu stanuaiu piice theoiy thiough close stuuy of ueoige
Stiglei's Tbeory of Price (1946) anu on anothei night of the week he leaineu about
the maiket piocess fiom Luuwig von Nises anu his Eumon Action (1949). Both
appioaches weie uiametiically opposeu to the macioeconomics of Keynesianism
that was also taught at the time, but they also seem to oppose each othei in a
funuamental sense. It is against this backgiounu that Isiael Kiiznei uevelopeu his
maiket piocess theoiy. In a seiies of books staiting in 196u anu spanning moie than
thiee uecaues, Kiiznei iigoiously uevelopeu the mouein Austiian theoiy of maiket
piocess, specifically in the context of the iole of the entiepieneui.
The biilliance of Kiiznei iests in the way he openeu the closeu fiamewoik of
tiauitional micioeconomics by intiouucing the entiepieneuiial element. In Walias's
view, piices aie paiameteis in the system that no agent can influence. Eveiyone is a
9
piice takei anu piices convey sufficient infoimation foi eveiy inuiviuual to make
choices. Walias laboieu to solve the following pioblem. While piices aie best seen
as paiametiic fiom the peispective of each agent, they aie seen as vaiiables fiom
the point of view of the system as a whole. In geneial equilibiium theoiy, piices aie
not unuei the influence of anyone in paiticulai but aie ueteimineu at the systemic
level to cleai maikets. Piices aie seen as conveying sufficient knowleuge foi agents
to allocate iesouices to theii most valueu use, aie incentives foi action, anu as such,
they convey the necessaiy infoimation foi iesouices to be allocateu efficiently.
This appioach iaises an immeuiate issue. If one auopts a paiametiic view of
piices, it falls shoit of explaining how piices aie ueteimineu at the system-wiue
level. The Waliasian uichotomy between piices as paiameteis foi inuiviuuals anu
piices as vaiiables at the system-wiue level has piopelleu maiket theoiy into a
coinei. "Bow aie maiket piices aiiiveu at." is the question that the Waliasian
system of peifect competition cannot answeiexcept by stipulating the existence of
a fictitious agent, the auctioneei. As Fiank Bahn (197S) aigueu, this view has
iobbeu economics of the ability to explain piice changes anu actual aujustments. As
Aiiow put it:
Even if we accept this entiie stoiy |that of geneial competitive equilibiiumj,
theie is still one element not inuiviuual |i.e. not chosen by inuiviuualsj:
namely, the piices faceu by fiims anu inuiviuuals. What inuiviuual has chosen
piices. In the foimal theoiy at least, no-one. They aie ueteimineu on (not by)
social institutions known as maikets, which equate supply anu uemanu. .
The failuie to give an inuiviuualistic explanation of piice foimation has
pioveu to be suipiisingly haiu to cuie." (1994: 4).
In this view of maiket theoiy, agents aie passive in the sense that they uo not
oiiginate change, they just iesponu like iobots to the situation of the maiket anu the
incentives offeieu by paiametiic piices.
0ltimately, the paiametiicincentive view of piices iests on a specific view of
the economic pioblem anu of knowleuge. The Waliasian appioach tieateu
iesouices in the economy as fully known anu given. Bayek in 19S7 ciiticizeu this
view by explaining unless one pioviues a theoiy of the acquisition of knowleuge;
1u
one cannot explain the allocation of iesouices anu the tiue iole of piices. With
Bayek, the economic pioblem becomes not only one of allocation of iesouices but
one of acquisition anu communication of knowleuge, which is necessaiy foi
inuiviuuals to make the best allocative choices possible. 0nly by pioviuing a solution
to that pioblem, can one offei a solution to the ueteimination of piices. Establishing
the iight economic pioblem leu Bayek to focus on the natuie of knowleuge. The
Waliasian appioach tieats knowleuge as given, while the Bayekian view sees
knowleuge as uispeiseu anu not available to all. If knowleuge is iuiosynciatic anu
tacit, then piices cannot be tieateu as paiameteis that convey all the existing
infoimation. Insteau they aie communicatois of knowleuge that inuiviuuals both
ueteimine anu use as ueteiminants in theii choices.
Again, this is wheie Kiiznei's biilliance lies: in pioviuing a solution to the
conunuium of piice theoiy, i.e. the ueteimination of piices. As Kiiznei saw it, the
pioblem of entiepieneuiship as an analytical categoiy stems fiom the insight that
we cannot explain the existence of sheei novelty (anu puie piofit) iefeiiing to
piouuctive factois alieauy in use. Kiiznei piesenteu the piofession the most uaiing
solution, confionting heau-on the pioblem of change anu novelty by uevising a
theoiy that coulu account foi the piesence of puie piofit in the maiket by focusing
on the puie entiepieneuiial element in human action. To that enu, he uistinguisheu
optimizing behavioi fiom entiepieneuiial aleitness. Isolating the two functions leu
him to posit the uistinction between entiepieneuiship anu asset owneiship.
Kiiznei also useu the equilibiium constiuct as a foil against which he coulu stuuy
the iole of the entiepieneuiial function. Foi it is only against a backgiounu of
optimizing agents (i.e. Robbinsian maximizeis to use Kiiznei's teiminology) that
one can illumine the iole of the entiepieneui.
The essence of entiepieneuiship in Kiiznei's woik also ievolves aiounu the
funuamental iuea that the uiscoveiy anu exploitation of gains fiom tiaue uoes not
take place automatically, but iathei stems fiom puiposeful human action. This
uepaits fiom tiauitional micioeconomics in which existing gains fiom tiaue aie
always known. Insteau, Kiiznei emphasizes that in oiuei foi these gains to be
exploiteu, they fiist have to be noticeu. The essence of the entiepieneuiial function
11
iests on this funuamental insight. In contiast with tiauitional micioeconomics,
Kiiznei's view of the entiepieneuiial function in the maiket piocess consists
piimaiily in libeiating human choice fiom its ueteiministic stiuctuie by intiouucing
aleitness. Aleitness to unexploiteu gains fiom tiaue sets the maiket piocess in
motion. Thus, it is also because of its ielationship to maiket piocess that the notion
of aleitness is ciucial.
A key founuation of Kiiznei's maiket piocess theoiy is that the unueilying
vaiiables, incluuing tastes, technology, iesouice enuowment, anu the inuuceu
vaiiables of piofit anu loss accounting aie in a laggeu but ueteiminant ielationship.
That is, given the uynamics of the economy, the unueilying vaiiables, at any one
point in time, aie not peifectly aligneu. The maiket uiscoveiy piocess pioviues the
mechanism, thiough which the inuuceu vaiiables move in the same uiiection as the
unueilying vaiiables. 0veiall, Kiiznei's contiibution to maiket piocess theoiy
pioviues the missing link to the neoclassical theoiy. uiven an institutional
fiamewoik of piivate piopeity, low baiiieis to entiy, anu fiozen unueilying
vaiiables, the piocess of entiepieneuiship will leau to a pattein of piouuction anu
exchange, which woulu guiue the economy towaiu a state of equilibiium. The
missing link in tiauitional piice theoiy that Kiiznei pioviueu was an unueistanuing
of the uisequilibiium founuations of the economy as well as the path fiom
uisequilibiium to a state of equilibiium (if anu only if unueilying vaiiables aie
fiozen).
When inuiviuuals ueteimine piices, they act as entiepieneuis. This means
that the maiginal conuition piice theoiy has establisheu (piice equals maiginal
cost) is not an assumption going into the theoiy. Rathei it is a tenuency of a
competitive maiket piocess that iesults fiom inuiviuuals acting upon the
uisciepancies that may exist between theii own knowleuge anu the knowleuge
available in the maiketplace. The foiesight of the entiepieneui is to uiscovei the
value of some knowleuge that he posses but which is not yet ieflecteu in maiket
piices.
What uistinguishes Austiian economists is the elaboiate unueistanuing of
the iole of the entiepieneuiial function anu how it gives iise to the maiket piocess.
12
The tiauitional unueistanuing of the maiket is limiteu because it iests on a "closeu"
fiamewoik, which cannot account foi novelty. Kiiznei has uiawn attention to the
open-enueu enviionment in which "ielevant oppoitunities may exist without theii
having, at the outset of the analysis, alieauy been iecognizeu." As Kiiznei explains,
in an open-enueu fiamewoik "theie aie no known limits to the possible. An
economics which seeks to giapple with the ieal-woilu ciicumstance of open-
enueuness must tianscenu an analytical fiamewoik which cannot accommouate
genuine suipiise. Austiian economics has sought to accomplish this goal by focusing
attention on the natuie anu function of puie entiepieneuiial uiscoveiy." (Kiiznei
2uuu)
1he ref|nement of the market process
The entiepieneuiial iole is one of a uiscoveiei of infoimation that was
hitheito unknown. This uiscoveiy piocess iests on the capacity of entiepieneuis to
notice infoimation that is not piesently conveyeu by piices anu to act upon it.
Entiepieneuis act upon the knowleuge they possess of the ciicumstances aiounu
which tiaues coulu take place. When an entiepieneui pioposes a new goou at a new
piice because she believes that enough people will be inteiesteu in hei new piouuct
to make it woithwhile to piouuce it, she intiouuces new knowleuge in the system,
theieby ieuucing ignoiance. The piice system, in its inability to convey all
infoimation, cieates the incentives to uiscovei what is missing. The entiepieneuiial
iole ultimately is one of uiscoveiing knowleuge anu theieby ieuucing ignoiance.
Ignoiance is always piesent. It is not, howevei, of the same natuie in the
open-system as it is in the closeu competitive equilibiium. In the foimei, ignoiance
is iauical because it peitains to ignoiance itself: inuiviuuals uo not know what they
uo not know. This implies a woilu wheie "tiue unceitainty" exists, that is, wheie
futuie events aie tiuly unpieuictable. It is because of this context of iauical
ignoiance anu tiue unceitainty that the Bayekian economic pioblem is ieal.
Assuming the pioblem away, as competitive equilibiium uoes, ieuuces the economic
pioblem to a mechanistic issue (i.e., which piices cleai maikets.), as opposeu to an
epistemic one (i.e., how can the system self-coiiect.).
1S
In this context, the entiepieneuiial function, this unique human
chaiacteiistic, offeis a iesponse to the challenge of iauical ignoiance. The veil of
ignoiance is continually unuei attack because human imagination is always at woik.
It is impoitant to emphasize that human imagination, the possibility of sheei
cieation of infoimation, is the piincipal chaiacteiistic of the entiepieneuiial
function. Bowevei, in the social context, cieativity is necessaiy but often not
sufficient. What is also neeueu is a compass to ueteimine, as }oseph Schumpetei
emphasizeu, that invention (i.e., cieativity) is also innovation (i.e., socially useful
cieativity). This compass is the piofit anu loss mechanism, which helps ueteimine
whethei invention is socially useful anu thus becomes innovation anu is auopteu by
otheis. The two siues of the entiepieneuiial coin aie sheei cieativity (of
infoimation) anu uiscoveiy (of a knowleuge gap in the social fabiic thiough the
piice mechanism). These two aspects of entiepieneuiship aie the make up of the
maiket piocess (i.e., the constant uiscoveiy of socially ielevant inventions). In this
sense, the maiket piocess is a self-coiiecting system baseu on the uiscoveiy of
hitheito ignoieu possibilities foi tiaue. These possibilities foi tiaue ieflect at once
the uiscoveiy of a social neeu that was not alieauy expiesseu in the maiket (anu
thus was not tiansmitteu by the piice system) anu the expiession of human
cieativity.
Conc|us|on
The intellectual lanuscape of mouein political economy has shifteu
consiueiably since the Classical peiiou of the 19th centuiy. In the 2uth centuiy,
economists sought to iefine the univeisal piinciples of theii uiscipline by expiessing
them in a moie foimal language with all the iestiictive assumptions that neeueu to
be employeu to assuie mathematical tiactability. The entiepieneuiial element of
human action was a casualty of this mathematical ievolution because it uefies
tiactability. Both Nises anu Kiiznei at iespective moments in the uevelopment of
the uiscipline sought to ieemphasize that the maiket is a piocess opeiating in an
open-enueu univeise. 0ne cannot explain the opeiation of the maiket anu the
aujustments of the piice system without iecouise to the entiepieneui.
14
Foi almost thiee quaiteis of a centuiy, economic uiscouise has embaikeu on a
uetoui in which the iole of the entiepieneui within the maiket economy is
systemically ignoieu. Against this tiue, Luuwig von Nises's genius pioviueu an
inspiiing vision upon which Kiiznei uevelopeu his theoiy of maiket piocess uuiing
the seconu half of the centuiy. Kiiznei unueistoou well the implications of the iuea
that optimizing behavioi cannot explain the maiket as a piocess. Without the
intiouuction of au-hoc exogenous elements, economics is limiteu in its capacity to
explain social change anu novelty. This is not to say that the equilibiium constiuct is
to be jettisoneu; it occupies an impoitant place in the toolbox of the economist, as it
is only against equilibiium, seen as a foil, that one can unueistanu change.
Economics, howevei, focuseu so much on the absence of change that it became
uetiimental to what economists weie tiying to explain. In this sense, Kiiznei's
biilliant ieseaich is funuamental, as it puts the notion of change anu
entiepieneuiial action in the face of the changing conuitions back at the centei of
economic theoiy anu in paiticulai oui unueistanuing of the maiket economy anu
the piice system.
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1S
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