Authors Forum: The Capitalist and the Entrepreneur

0:00It's a delight to be here with you today, and it's a particular delight not to have to follow Tom Woods. As Mark said, this book, The Capitalist and the Entrepreneur, appeared last year, published by the Mises Institute. Entrepreneurship is becoming an increasingly important phenomenon as recognized by popular media, academic institutions, think tanks, politicians, and so on. The number of programs, courses, journals, books and so on devoted to the entrepreneur have increased dramatically. The number has increased dramatically in the last few years. However, the mainstream literature, mainstream economics in particular, has a very uneasy relationship with entrepreneurs and with entrepreneurship and really doesn't quite know how to handle this particular phenomenon.

0:58In some sense, this might surprise you if you remember that the first important systematic treatise on economics, the essay published originally written in the 1730s, published in 1755 by the proto-Austrian economist Richard Cantillon, gives a very central role to the entrepreneur in the organization and direction of economic activity. Activity. However, from the time of the British classical school on down through the present, and particularly the case in modern contemporary neoclassical mathematical economics, the entrepreneur simply plays little role in the economic system. Now how have mainstream economists and scholars in business administration attempted to deal with the surge of interest in the Entrepreneur, well mainly by adopting a very narrow perspective on what entrepreneurship is, specifically defining entrepreneurs as self-employed owners of small enterprises and entrepreneurship as essentially the study of small business and startup companies. Now while self-employed individuals running small enterprises, starting new small enterprises is is undoubtedly extremely important. That is a much narrower concept of the entrepreneur than one finds in Cantillon or in the contemporary Austrian

2:27school. In fact, Mises says the following in Human Action, it is impossible to eliminate the entrepreneur from the picture of the market economy. The various complementary factors of production cannot come together spontaneously. They need to be combined by the purpose of efforts of men aiming at certain ends and motivated by the urge to improve their state of satisfaction. In eliminating the entrepreneur, one eliminates the driving force of the whole market system. So for Mises, the entrepreneur is not simply a specialized actor operating in one narrowly defined part of the economy But indeed the entrepreneur is the driving force behind the entire market system.

3:19Now what I do in the book is to discuss and analyze and apply the Misesian perspective on the entrepreneur, specifically linking the entrepreneur to the capitalist system more broadly. So the book is called The Capitalist and the Entrepreneur and it represents an attempt to integrate entrepreneurship into the more general theory of markets and capitalism. The story behind the book is fairly straightforward. It collects a series of essays, mainly most of them written for academic audiences, academic publications, but also including some shorter, more popular pieces that are designed to bring together various research streams that I personally have been working on in the last decade or so. As Mark mentioned, I was a graduate fellow here at the Mises Institute long, long ago, but I received my PhD from a mainstream economics program and I specialized in my dissertation research and elsewhere in various aspects of the modern theory of organizations, the economic theory of the firm, the economic theory of firm strategy, from Organization and Structure and so on.

4:38And I worked with prominent mainstream academic economists. My dissertation chair, Oliver Williamson, was one of the last years, the 2009 Nobel Laureates. But at the same time, I was deeply immersed in the Austrian tradition and spent much of my early career thinking about ways to bring together Austrian economics and contemporary Organization Theory. And so the essays that are collected in this volume represent the fruits of much of that effort. As I mentioned, the entrepreneur is central to Austrian economics. The entrepreneur, of course, figures prominently in Mises' human action, also in Rothbard's Man Economy and State. Israel Kirzner in the 1970s and 80s produced a series of essays and books on the importance of the entrepreneur, though I take a slightly different perspective on Interpreting Mises than Professor Kirzner does.

5:40My claim that I elaborate in the volume is that applying Austrian economics more generally and the Misesian concept of the entrepreneur, more specifically, to problems in business administration, economic organization, strategic management, public policy, and so on, generates substantial insight, alternative and better explanations for many of the phenomena that we think are increasingly important in today's economy. Now you might wonder what does Austrian economics have to do with the entrepreneur, with business, with firms, with strategy and so on. Well there are some key insights from the Austrian tradition that are particularly relevant for Organizational and Managerial Issues.

6:34The most obvious one being the Austrian School's emphasis on heterogeneity. Heterogeneous resources or assets, heterogeneous markets, heterogeneous individuals. So the Austrian School has always celebrated the diversity of skills, abilities, and attributes among economic actors, as Mises explains in giving primacy to the social division of labor as the driver of the market system. The Austrian theory of the business cycle is of course founded on the notion that resources are not perfect substitutes, that investments in particular stages of production cannot easily be redeployed to other parts of the economy's intertemporal structure when interest rates change and so on.

7:24The Austrian business cycle theory is essentially A story of malinvestment, where particular resources are allocated to the wrong uses and are deployed in a way that is not suitable for producing over time the set of goods and services desired by consumers. So Austrian business cycle theory is essentially a theory of resource heterogeneity, which of course stands in stark contrast to the mainstream Keynesian approaches and neo-Keynesian and Post-Keynesian and New Keynesian approaches that dominate mainstream economics in which capital is regarded as sort of a homogeneous blob or shmoo as Robert Solow famously characterized it borrowing from the little Abner cartoon of the shmoo. The notion of heterogeneity squares in a very straightforward way with our notions of entrepreneurship and business Business Administration, firms are obviously different, entrepreneurs differ in their capacities, in their activities, in the uncertainties that they're willing to bear and so on.

8:31So Austrian economics with its emphasis on heterogeneity provides a natural foundation for applied studies of markets and organizations. Production takes time as has already been mentioned, entrepreneurs engage in economic Economic Calculation, and Mises of course has elaborated a very comprehensive account of the problem of economic calculation, its nature and implications. Market competition is a kind of selection process, selecting for entrepreneurial ability and skill. As the Austrian economist Ludwig Lachmann put it in his 1956 book, Capital and its Structure, We are living in a world of unexpected change, hence capital combinations will be ever-changing, will be dissolved and reformed. In this activity, we find the real function of the entrepreneur.

9:29So the essays in this volume attempt to tease out and elaborate on this real function of the entrepreneur. Some specific highlights or features of the treatment of entrepreneurship as a generalized function In Mises' conception, the function of bearing uncertainty through ownership and control of productive resources, not treating entrepreneurship just as a job category or as a specific type of firm or of one kind of marketing plan or whatever. Mises' notion, Mises' concept of the entrepreneur as a judgmental decision maker under conditions of uncertainty implies that the entrepreneur is a resource owner, suggesting a close link between capitalism and entrepreneurship, that the entrepreneur uses economic calculation, the comparison of present expenditures with anticipated future receipts as his primary decision-making tool, and this perspective also places an emphasis on capital markets, not only markets for tangible assets, but of course markets for financial capital as well as being sort of the primary driver of economic prosperity.

10:46And I develop a number of implications, specific implications of this perspective for applied topics in organizations and markets. The notion of firms as manifestations of entrepreneurial imaginations or visions. The idea that organizational design can be explained in terms of organizing or delegating How the entrepreneur delegates particular forms of judgment to other individuals working as part of the entrepreneurial team. Also that firms frequently change their structure, their organization, their scope, their scale and so on in response to changes in the environment and as a manifestation of a kind of experimental process in which entrepreneurs are trying to find the appropriate combinations of resources as described by Lachman.

11:44So I'd be happy to answer any questions that you have about the book and look forward to talking to you later this week. Thank you.