Unlike most orthodox Neoclassical economic theories – with their assumptions of perfect information held by all market participants – Israel Kirzner’s view of entrepreneurship and the competitive process seeks to describe a more realistic scenario, in which human knowledge is limited and many profit opportunities can be entirely overlooked by virtually all actors in the marketplace. Into this framework, it is possible to fit the idea of the entrepreneur and to explain his role in a manner that can apply to the real market as we observe it.

            If information is imperfect, then it is not the case that the sole task of market participants is to be what Kirzner calls “Robbinsian” economizers – who make rational calculations about the optimal economic decision based on readily available and certainly known data. Quite the contrary,

Because the participants in this market are less than omniscient, there are likely to exist, at any given time, a multitude of opportunities that have not yet been taken advantage of. Sellers may have sold for prices lower than the prices which were in fact obtainable… Buyers may have bought for prices higher than the lowest prices needed to secure what they are buying… (Kirzner 1973, p. 41).

Yet it is also the case that a tendency exists for such discrepancies to become corrected or at least ameliorated over time. What makes such equilibrating movement possible? This is the role of the market entrepreneur – a role that does not involve mechanical calculation per se, but rather a quality that Kirzner terms “alertness”: “To discover these unexploited opportunities requires alertness. Calculation will not help, and economizing and optimizing will not of themselves yield this knowledge” (Kirzner 1973, p. 41).

            An entrepreneur exercises his alertness when he notices before anybody else that resources are in some manner sub-optimally priced. If this is information that he can act on, then he stands to make a profit by doing so:

What our decision-maker without means needs to arrive at the best decision is simply to know where these unexploited opportunities exist. All he needs is to discover where buyers have been paying too much and where sellers have been receiving too little and to bridge the gap by offering to buy for a little more and to sell for a little less. (Kirzner 1973, p. 41).

In the process, the entrepreneur will earn the difference between the buying price and the selling price. As he continues to do this (and as other market participants begin to catch on and to follow his lead), the arbitrage opportunity will disappear and it will no longer be possible to make profits in this way. However, the result will also be a more optimal allocation of resources to more highly valued uses than previously – at least given the same set of consumer tastes and preferences.

            Practically everybody in real markets engages in entrepreneurship to an extent. Kirzner notes that “the resource owner selling his resources in the factor market may be viewed, in the setting of imperfect information, as exercising a measure of entrepreneurship…”  (Kirzner 1973, pp. 39-40), as can the consumer who does not know with certainty all of the data that could contribute to his purchasing decisions if known.

            Kirzner then proceeds to abstract the entrepreneurial component away from other market functions – such as resource ownership, production, and consumption. For Kirzner, “[w]hat the introduction of the pure entrepreneur means… is that for our analysis we create a decision-maker who starts out without any means whatsoever” (Kirzner 1973, p. 40). The pure entrepreneur, according to Kirzner, need not start out with any initial endowment in order to notice a profitable opportunity and to take advantage of it, in the process benefiting himself materially.

Reservations Regarding Pure Entrepreneurship

            Yet it seems that, in actual markets, a lack of any initial material endowment would tend to limit an entrepreneur’s ability to take advantage of profit opportunities given a particular level of alertness. For instance, let us say that there is a widget pricing discrepancy in markets X and Y. A widget sells for $100 in Market X, while an identical widget sells for $120 in Market Y. Furthermore, we assume that it takes one year of time to transport widgets from one market to another but no direct monetary expenditure.

            There are two would-be entrepreneurs – A and B – each of whom independently notices this opportunity. A has an initial endowment of $100, sufficient to purchase a widget. B has no such endowment, but he is able to borrow money at the best interest rates available.

            A – who is not a pure entrepreneur, because he starts owning capital – can take advantage of this opportunity. He can buy a widget in Market X, sell it in Market Y, and make a profit of $20.

            B – although he can get the best rates on a loan – lives in a society with an extremely high rate of time preference and a high proportion of individuals who default on their loans – such that the lowest interest rate is 21% per year. So, if B were to borrow $100 and use it to purchase a widget in Market X and sell it one year later in Market Y, he would get $120 from the sale – but he would then simultaneously owe $121, leading to a loss of $1, as opposed to a profit of $20 had B owned the $100 to start with. If B knows this in advance, he will not undertake what would otherwise have been a profitable opportunity.

            An objection to this case might be that, given the 21% interest rate, the widget re-sale is not the most advantageous opportunity for either A or B, because A could simply lend his money out at 21% and receive $121 a year later instead of the $120 he would get from selling the widget in Market Y. However, let us assume that much of the interest is a risk premium paid to the lender – due to the considerable likelihood that the borrower will default on the loan. A is extremely risk-averse in his preferences – much more so than the typical lender in his society. Thus, he does not wish to lend out his $100 because for him even the possibility of losing everything outweighs the likelihood of making a $21 gain. But A is readily willing to seize a guaranteed profit, such as the one possible from a widget re-sale.

            So in this scenario, the widget re-sale becomes the most advantageous opportunity for A, but only because A is not a Kirznerian pure entrepreneur, while B – the man who would have been the pure entrepreneur – cannot take advantage of an opportunity he notices simply because of the high cost of borrowing the initial capital.

            This situation suggests that while it may be possible in many cases for entrepreneurship to exist without any initial endowment on the entrepreneur’s part, in some cases the entrepreneur must own property in addition to exhibiting alertness in order to make use of what the latter faculty has noticed. Whether or not pure entrepreneurial action, given a certain level of alertness, is possible might also depend on the cost of borrowing capital in a given economy. I invite any discussion and clarification of this scenario – as well as any arguments for why it can be reconciled with Kirzner’s model, if that is possible.

Works Cited

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

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