The Place of Austrian Economics in Management Research, Education, and Consulting

0:00So the slide that Peter had up there of the three big questions that are supposed to provoke us to what to talk about here, I'm trying to answer the first one of kind of what's going on currently in the management, specifically in the entrepreneurship literature that relates to Austrian economics. and entrepreneurship I think is probably the area most congenial to Austrian economics and it's currently very common to use Austrian economics in entrepreneurship especially of course Kirzner and Hayek so I'm going to go through that a little bit I have Waldo or Wally on here depending where you're from because the problem with the entrepreneurship literature is an ongoing problem of trying to identify what in the world is the entrepreneur so trying to find

1:18The Entrepreneurship Division of the Academy of Management Kirzner's idea of discovery, Hayek, knowledge, or role of information would be Hayek as well. So, in trying to give you a current, present perspective of the entrepreneurship literature, hopefully you can see Austrian economics is fairly important. It's more used than any other economic theory in the literature. So, part of the problem with economics, this was is in leading economics textbooks the words entrepreneur and entrepreneurship really couldn't be found in the index even when they were found in the book it was like a table or a note right a side note on half a page Bommel neoclassical basically says it's a specter which haunts economic models so it's hard to to find who the entrepreneur is these two authors wrote a couple books and And they've written quite a bit

3:13Entrepreneurs are a homogenous lump of individuals in these models. They have a measurable degree of risk, so every entrepreneur is given the same amount of risk in the model, and they're all termed innovators, which probably again goes back to Schumpeter. So Kirzner talks about these entrepreneurs being sort of automated maximizers, so they're basically reduced to a mathematical formula.

4:04So in the model, if there's a problem with the entrepreneur, it's just a problem with arithmetic, right? So you change a few equations and numbers and what not and you produce a better model of entrepreneurship. So in my paper, I eventually said that this leads me to conclude that the neoclassical theory of the entrepreneur is essentially entrepreneurialist. So it's basically non-existent. So I want to go through some of these main themes now. And instead of giving you specific ideas, I'm trying to map out the literature so hopefully you can take some ideas from this ideally. So the first ones were creative destruction and innovation and I gave this example in the Cantillon talk so I don't want to go through it again but for those that weren't there of course Cantillon mentions it's the circular flow of economic life and basically there's three options either we're in equilibrium or we're in disequilibrium right so that would be the second option and I guess the third option of two parts would be there we're tending toward equilibrium meaning the entrepreneurs equilibrating

5:08Entrepreneurial Function, Uncertainty and Risk, Minimized, Profit and Loss, Profit and Loss, Profit, The Theory of Profit and Loss Different from Uncertainty Uncertainty is basically the future is just not knowable It's because of uncertainty that entrepreneurship exists where entrepreneurs come in and forecast and use their judgment to identify ideally profitable opportunities So those that consistently make failures or Entrepreneurial Opportunities Scott Shane here. This is one of the most quoted articles on entrepreneurship, which was in the Academy of Management. Is that right?

6:42Is that what it was? And he's written a book called the Entrepreneurship Opportunity Nexus. Is that right? Something like that. Individual Opportunity Nexus. individual opportunity nexus anyway and he comes at it from the more of an economics background and he seems more susceptible to Austrian economics you probably know that better than I do but that's right he's not immune to it so in the literature opportunities can be subjective or objective subjective of court according to the entrepreneur but their objective in the sense that if the The Entrepreneur makes a profit out of these opportunities, that means it was an actual opportunity that could have been pursued by anyone.

7:29Jeff makes the distinction here of whether or not opportunities are generalizable, meaning they can be generalized and others can take advantage of them. Whether they're accurate, meaning making a profit or not, and timeless. Okay, so let me just go through to the next one because I'm running out of time a bit. And you can come back to the more, you know, during this session. Yeah, that's right. Okay, so talking about the origins, so here in this picture, if you can't read it, it's a Rudolph-guided sleigh rental, right? So create an entrepreneurial opportunity, a business out of this opportunity. Talking about where do opportunities actually come from, and again, this would get into more ontology, an ontological or epistemological perspective or question, which I think is is also fundamental, and that's an area for research, I think.

8:23Anyway, it's due to information asymmetry. So this is a very big theme of, right, we're all here, we're all participating in the same sort of event, yet we're all interpreting things differently, we have the same information. But even given that, we have information that is imperfectly distributed, it's understood in a subjective, imperfect way, maybe. So entrepreneurs are discovering ideas and they're equilibrating in this way, which is the main theme in the Austrian economics literature, so Kirzner says it's, and Rothbard says the same thing, we're moving towards the ERE even though we'll never reach that. So through this discovery, entrepreneurs that make incorrect judgments, meaning they're making a loss, are eventually eliminated and those that continually make profits are the ones that continue to exist, thus errors in the system become fewer and fewer.

9:16Of course, the problem with equilibrium models is everything's already given, right? There's no real opportunity, there's no room for arbitrage there. Supply equals demand, price equals cost. This is Hayek's big thing, and just so you know, I mean, Kirzner and Hayek are some of the most quoted in the entrepreneurship literature, and it's interesting because some of the discussion here has been on problems that other Austrians have with critiquing Kirzner, right, not problems with critiquing, but problems with Hayek, the Hayek and Kirznerian framework, which I think is one of the reasons that entrepreneurship research uses that more is it's less, not intimidating, but less, that's the word I'm looking for, they don't have to take on the entire Austrian perspective, they can just use kind You can come back to more points when we get into the discussion.

10:24Is your summary view that, as you mentioned, both Hayek and Kirzner are very frequently cited and in the example of the Academy of Management, the Entrepreneurship Division statement is explicitly so, listed as sort of founders, founding fathers, if you like, of the discipline. Is it your view that the mainstream entrepreneurship literature has correctly interpreted them and has sort of run with their ideas and applied them in a direction that maybe Hayek and Kirzner did not themselves do but would fully approve of, or at the other extreme is the literature to paying lip service to some sort of obscure theorist because it gives some credibility somehow to the enterprise but haven't really grasped the essence of what those writers were all about. Is it more towards the first or the second?

11:15More towards the second. I know you've mentioned this in a talk. I just listened to it again the other day and how they've been misinterpreted. Kirzner has been misinterpreted and interpreted and those opportunities now become research for like cognitive type research, right? So how is it that person A understands an opportunity compared to person B? What is it that makes that person more alert to the opportunity? So yeah, they're citing Kirzner's competition and so what I'm talking about, an entrepreneurship book, right? So I doubt even more that people have actually read the entire book and usually, you know, You know, just as common in any literature, you're just citing the person that cited someone else ad infinitum.