Israel Kirzner’s Competition and Entrepreneurship presents a new perspective on why economic science is unable to draw a clear distinction between production costs and selling costs. Kirzner examines the issue of costs from the standpoint of the entrepreneur and arrives at the conclusion that there is indeed no way to clearly separate costs of production from costs of selling.

            Prior economists such as Edward Chamberlin saw the production/selling cost ambiguity as arising in part due to product variability. If increased costs in advertising and marketing a product were to increase consumer demand for the product, it is unclear as to whether the nature of the product itself has thereby been altered. If it has been, then the advertising has resulted in an improved product and can thus be considered a “production” cost.

            But Kirzner goes beyond this argument:

“Although it is indeed true that the offending formulation arose out of a failure to recognize the variability of the product, it should be pointed out that this was based, in turn, upon a failure to perceive the entrepreneurial character of the decision to produce – even the decision to produce a single product” (Kirzner 1973, p.  143).

            The entrepreneur is on the lookout for new profit opportunities, which can only be realized by either lowering his costs or increasing his revenues in a hitherto unrecognized way. If he decides to manufacture a product, the prospect of such a profit will be his motivation for doing so. It only because he sees some possibility of selling the product at a profit that the entrepreneur will undertake its production in the first place:

“No one else has quite perceived this revenue possibility until now, or at any rate no one has hitherto discovered a way to realize it at quite so low an outlay. Clearly, the outlay undertaken in this way by the producer cannot be divorced from the revenue possibility to which it is directed. The outlay is undertaken only to win the anticipated revenue; this revenue is anticipated only because this product, rather than any other, has been produced. Every penny of outlay is believed necessary to successfully market the product and thus capture the revenue that had been envisaged” (Kirzner 1973, p.  143-144).

            Had the entrepreneur not created a physical product, there would (in most cases) be nothing to sell. Thus, the costs incurred in hiring the labor, capital, and natural resources to physically manufacture the product are necessary costs. Had the entrepreneur not spent money on advertising and other kinds of promotion, fewer (if any) consumers would have been aware of his product. Thus, these “selling costs” are also necessary costs. But it is impossible to neatly separate the two kinds of costs, because they are inextricably bound to the same purpose: the revenue to be gained from the product’s sale. Writes Kirzner: “No single penny of the outlay – even those usually considered as strictly production, rather than selling, costs – can be perceived as anything but costs incurred in order to ‘sell’” (Kirzner 1973, p. 144).

            Furthermore, entrepreneurs operate in a world of imperfect information, where even the most physically well-designed product will go to waste if consumers do not know about it. One of the entrepreneur’s crucial tasks is to render consumers aware that opportunities for improving their well-being even exist:

”Our entrepreneurs, it now becomes apparent, must be charged with the responsibility not only of perceiving how an opportunity can be made available to a consumer (for which the consumer would be happy to pay more than it costs the entrepreneur to make the opportunity available), but also of making the consumer perceive that this is in fact available” (Kirzner 1973, p. 148).

            In doing this, the entrepreneur enables consumers to make “Robbinsian” benefit-maximizing calculations with improved information regarding the opportunities which they can take into consideration.

             Hence, economic science cannot make a functional distinction between production costs and selling costs. Any such distinction can only be made on a technical level (i.e., the physical actions required in the manufacturing process are different from those required in advertising) or from the standpoint of personal value judgments – but economics as such cannot separate the two.

Works Cited

Kirzner, Israel M. 1973. Competition and Entrepreneurship. University of Chicago Press.

G. Stolyarov II is a science fiction novelist, independent philosophical essayist, poet, amateur mathematician, composer, contributor to Enter Stage Right, Le Quebecois Libre,  Rebirth of Reason, and the Ludwig von Mises Institute, Senior Writer for The Liberal Institute, weekly columnist for GrasstopsUSA.com, and Editor-in-Chief of The Rational Argumentator, a magazine championing the principles of reason, rights, and progress. Mr. Stolyarov also publishes his articles on Helium.com and Associated Content to assist the spread of rational ideas. His newest science fiction novel is Eden against the Colossus. His latest non-fiction treatise is A Rational Cosmology. His most recent play is Implied Consent. Mr. Stolyarov can be contacted at gennadystolyarovii@yahoo.com.

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