Competition and Entrepreneurship

Competition and Entrepreneurship

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Pages: 224
First ed.: 1973
Author: Israel Kirzner

Israel Kirzner is an Anglo-American economist who follows the Austrian School of economics, better known for introducing the entrepreneur into the model of economic competition. Unlike Schumpeter, who viewed the entrepreneur as someone disrupting market equilibrium achieved by nonentrepreneurial interactions between consumers and procedures, Kirzner sees the entrepreneur as the equilibrating force in market activities.

Kirzner's hero is the entrepreneur. The willingness to make profits requires them to "know where to look for knowledge," meaning they need to be alert to potential activities, improvements, and consumer demands to profit from them. This entrepreneurial knowledge, termed alertness by Kirzner, does not necessarily coincide with substantive market information.

Differently from the titanic representation that Schumpeter gives of entrepreneurs, Kirzner depicts a humbler figure which is potentially within everyone’s reach. The entrepreneur does not need to be the inventor of something completely new; they do not need to shift the paradigm. They just need to notice that the paradigm has shifted. They work at the margins, improving, connecting demand and supply, providing little services that lower transaction costs. 

“I view the entrepreneur not as a source of innovative ideas ex nihilo, but as being alert to the opportunities that exist already and are waiting to be noticed. In economic development, too, the entrepreneur is to be seen as responding to opportunities rather than creating them; as capturing profit opportunities rather than generating them.”

Kirzner teaches us to consider how competition develops in its entire process. It is meaningless to label big companies such as Amazon "monopolies" just because you see them as the sole sources of a particular good or service. Since competition is a long-term and constant process, we need to look at how Amazon gained its competitive advantage. We should not assess a market situation only after a sector has been monopolized.

If you do that, you'll quickly realize that:

When one takes a longer-run view of the monopoly situation, one sees that it was won by competition, and that it represents, as such (and as far as it goes), a step forward in the entrepreneurial process of the market.

Alternatively, if we do not see competition in one sector, it may simply mean that only one entrepreneur has been aware enough of the profitability situation in that sector. That may be a more or less temporary situation.

A situation is concerning when there are barriers to entry in a particular business. In that case, competition is impaired, and one can talk about a monopoly.

As Hayek noted in his famous article, "Competition as a discovery procedure" (1968), competition is not to be understood as an outcome – as a static situation that the market has achieved. The same critique is reinforced by Kirzner: competition is not a situation but an active process where entrepreneurs identify and correct uncoordinated plans. The entrepreneurial activity and the figure of the entrepreneur exist only because individuals are relatively ignorant about each other's plans. If producers and consumers had all the information about each other, there would be just one price for every product and just one supplier.

“The exploitation of profit opportunities consists in identifying and correcting uncoordinated groups of plans. And, of course, as the process of correction proceeds the profit opportunities themselves dwindle away.”

Entrepreneurs exploit ignorance (which is typically not accounted for in mainstream competitive models) and coordinate better producers and consumers. By so doing, they eliminate imperfection of knowledge among them. 

“Each step in the process improves the coordination of existing information and eliminates some of the discordant decisions made earlier.”