Authors Forum: Organizing Entrepreneurial Judgment: A New Approach to the Firm

0:00Good morning all. My name is Nikolaj Fass. I'm one of the two authors of this book. You know the other one, Peter Klein. A few words about myself. I'm a professor at the Copenhagen Business School, Europe's largest business school, and I'm heading the Department of Strategic Management. And I've known Peter Klein for 15-plus years. And we have rather similar, rather converging research interests. We share an interest in the economics of organizational, the economic theory of the firm, if you like. And of course, we also share a deep interest in Austrian economics, not the least, the theory of entrepreneurship.

0:48And as you all know, one of the strong selling points, as it were, in the Austrian Renaissance in the beginning of the 1970s was that the Austrians, Much in contrast, mainstream economists had a clearly articulated theory of entrepreneurship. Now that competitive advantage may have ceased somewhat over the years because we have witnessed in economics and also in other social science fields like sociology and anthropology really a renaissance on increasing interest at least for thinking about entrepreneurship. So in management we have thinking on strategic entrepreneurship, economics, mainstream economics is intensely preoccupied with understanding new firm formation and so on.

1:34And again, Peter and I, we have shared for many years an interest in entrepreneurship and the economics of the firm and it pleases us that we have witnessed this search of interest in the economics of entrepreneurship and in the management of entrepreneurship. There has been a parallel development of course in the economics of the firm with a lot of exciting developments all building on Ronald Coase's seminal 1937 paper, The Nature of the Firm. And of course we welcome all these developments, but we also think that these two literatures may have missed important insights from the other. And our book is essentially written to address these gaps and it's written for, it's a light book, it's non-technical, no mathematical notation whatsoever, no game theory, it can be written by ordinary human beings we think, particularly of course if these are scholars with some interest in the economics of the firm and in entrepreneurship, but you really We don't need to be an entrepreneurship or a theory of the firm scholar to be able to benefit from the book.

2:46Is this when I should wave this with the order form? Is our copy circulating? So what we do in order to bridge these two fields of entrepreneurship and the theory of the firm is to return to an idea that was really first launched by Cantillon in the 18th century, very much present in the thinking of Frank Knight, certainly present in the thinking of Ludwig von Mises, namely the idea of entrepreneurship as judgment. The judgment is sort of the cognitive faculty that you apply in situations where there is no clear decision rule. They'll do the trick for you.

3:33Of course entrepreneurial decisions are examples of such decisions. There's a need to make decisions over the use of scarce, heterogeneous resources, including heterogeneous capital assets and deploy them for the purpose of servicing future consumer preferences, under conditions of uncertainty and for a profit. And quite a substantial part of the book, at least two chapters, are preoccupied with detailing the differences between the Knight-Mises view of judgment and contrasting it with the Kirznerian discovery view. Because we think there are fundamental differences here. And particularly we criticize, I guess, the management literature that has taken its cue from Kirzner's notion of entrepreneurship as alertness and discovery.

4:23and we argue that Knightian and Misesian judgment is a much better foundation for thinking about entrepreneurship and also for linking the economics of organization and the theory of entrepreneurship. Very briefly, the story we tried to tell is that judgment is non-tradable. So in order to exploit his judgment, the entrepreneur needs to set up a firm that gives us a basic take on why firms, success why firms and merge why firms, arise in the market economy and we extend this kind of reasoning to classical issues in the theory of the firm like the boundaries of the firm and the internal organization of the firm and I think we really have something new to bring to the table in terms of new insights for economic organization. I think the division of labor is that Peter would walk you very briefly through the contents.

5:22So, Nikolai is the idea man and I handle practicalities like telling you how to buy the book. Actually, I only received the first hard copies. They were sent to my office on Tuesday. The publishers' website, the publishers' Cambridge University Press, according to their website, the book is now available for purchase in the United Kingdom. in the Kingdom, the U.S. version of the site indicates an April 30th publication date. I don't know what that means. You can pre-order on Amazon, either on the U.S. site, and you can order on the U.K. Amazon site. I understand that there will be copies available in the Mises Institute bookstore, and we'll be able to order from the Mises store online at some point when the books are available.

6:14If you just can't wait until then, you'll find on the book table downstairs some order forms where you can place your order directly with the publisher and receive a discount. The paperback edition can be yours for only $29.59, which is pretty good for an academic text. There also is a hardback available for those of you who would prefer to spend $79.20 for the same thing with a little more durable cover. cover. Let me just say a word or two about the contents of the book. Let me see if I can get this all to fit. I'm sorry, I can't get it all on one page. Just to give you a sense of sort of the structure of the book, and maybe a better idea of the intended audience for the book. As Nikolai mentioned, this is a scholarly book. It's aimed at researchers and teachers and lay readers who may have an academic are a scholarly interest in the theory of entrepreneurship, in Austrian economics, in the economic theory of the firm.

7:20As Nikolai mentioned, it does not presuppose any specialized knowledge in the areas of entrepreneurship or economic organization. The introductory chapters, for example, the second and third chapters, provide fairly wide-ranging reviews of the contemporary entrepreneurship literature in management and in economics, And then an overview of how various scholars within the Austrian tradition have approached the entrepreneur, placing particular emphasis on figures like Mises and Kirzner, of course, and then contrasting or using that as a way of positioning our own approach, which builds on Mises, of course, but also, as Nikolai mentioned, on Frank Knight. The third chapter, for example, is a bit of a critique of the contemporary management literature, which is very strongly adopted the so-called opportunity discovery perspective, which is based on Kirzner's notion of entrepreneurship as alertness to exogenously given profit opportunities, a perspective which we think offers potentially much insight into processes of market clearing, but we argue in other ways is misleading in terms of understanding what entrepreneurship is and what entrepreneurship does. We describe this idea of judgment

8:41Judgment, which comes from Frank Knight in somewhat greater detail. So the fourth chapter is all about how Knight approaches judgment and how we, using various insights from other approaches within economics, cognition theory and so forth, try to unpack the concept of judgment a little bit more. We have a chapter on Austrian capital theory, that's chapter five, criticizes contemporary economics and some parts of management theory for adopting an inappropriately undifferentiated notion of capital. So building on classic works in the Austrian tradition, we explain the importance of capital heterogeneity for understanding what the entrepreneur does.

9:31We frequently quote a line from Ludwig Lachmann, whose 1956 book, Capital and Its Structure, contains a number of insights on entrepreneurial processes that have not been widely adopted even within the Austrian school. Lachmann says, he says, we are living in a world of unexpected change, hence capital combinations, tell me if I get this right, will be continually forming and reforming. In this activity, we find the real function of the entrepreneur. So we characterize the real function of the entrepreneur following Lachman is the continual combination and recombination of heterogeneous capital resources under conditions of genuine uncertainty, Nidian uncertainty if you like, or what Mises calls case probability instead of class probability.

10:18And we also develop a number of implications for the economic theory of the firm in the sixth, seventh and eighth chapters. And in the conclusion, we discuss some implications, not only for academic work, but also for public policy, some critique of contemporary economic policy on the grounds that it fails to take into account things like heterogeneity of resources, tacit knowledge, of course, entrepreneurial judgment, and so forth. We'd be happy to take any any questions. I think we have, Mark, if it's okay if anyone has a question or a comment. Excuse me, something I meant to mention before in terms of audience. Some people have asked, would this be suitable for a textbook, for textbook use in the classroom? I certainly think it would. I mean, again, its aim, the intended audience is, would be, you know, students with some prior exposure to a little bit of basic economics. So maybe may be not a freshman level undergraduate course, but an intermediate or advanced undergraduate course.

11:24We think the book in entrepreneurship, in Austrian economics, in the theory of the firm, in strategic management, we think it would be very suitable for those uses and even more so for graduate level courses, masters or doctoral courses in any of these areas. We think the book, you know, it offers an original contribution, but also quite a lot of review and synthesis of prior contributions. It could be very effective as a textbook for advanced undergraduate or graduate classes. Yes, someone in the back had a question. Yes. Yes, yes, I don't want to get too much into the substance of the arguments, but we do address that point in the book.

12:19and for now I'll simply say that we distinguish between sort of think of a very broad general notion of entrepreneurship and Mises talks about this he says entrepreneurship deals with acting man under conditions of uncertainty which of course includes all human action right but there's also a narrower more specific notion of entrepreneurship focusing on individuals who are acting in the market in the commercial realm attempting to earn money profits and Avoid Money Losses, and typically when we talk about entrepreneurial activity in a capitalist economy, we have in mind that narrower, more specific kind of business entrepreneurship notion, though many of the concepts do generalize, you know, to all aspects of human behavior. Yes, Sean?

13:05Schumpeter had a few things to say about entrepreneurship. Have you given him any information? Yes. I mean, I would say Schumpeter plays a smaller role in our argument than Knight or Mises, Yes, we do talk about Schumpeterian creative destruction. We see Schumpeter in this context as, while providing tremendous insight, standing a little bit outside the Mangerian tradition and really coming from more of a Volrasian perspective. But we certainly recognize the significance of his insights and we do discuss them in the book. I mean, I suppose I should flip to the index right now and see how many times people like Schumpeter are mentioned, but I won't do that in case what I'm saying is off the mark. If judgment is the role of the entrepreneur, would you say that the Kirznerian view of profit discovery is the causal effect?

14:00I mean, right. One interpretation of Kirzner is that what, you know, Kirzner's interest is not entrepreneurship per se, but equilibration. But how do we get from conditions of disequilibrium to equilibrium? How do markets clear? And Kirzner invokes the entrepreneur in a very kind of indirect, a sort of instrumental way. Entrepreneurship is that which takes markets from disequilibrium to equilibrium. Because if they're in equilibrium, there must be profit opportunities. We think they tend to be exploited. That's why markets clear. One can criticize that argument even on its own terms, and we do offer a little a little bit of criticism about how the way we think that argument is situated in a particular understanding of the market that could be challenged even from within the Austrian perspective.

14:52But holding that aside, we also criticize the modern entrepreneurship literature for saying that look, you know, that perspective may be significantly limited in the extent to which it offers insight into entrepreneurship itself. And to justify this claim, we rely on none other than Israel M. Kirzner, who has written to management scholars something along the lines of roughly paraphrasing, you guys didn't understand me at all, you don't know what you're talking about, my work is really not all that relevant for you. He didn't say it in exactly those words, but in an interesting published article in 2009, he criticized entrepreneurship scholars for misunderstanding what his project was all about, namely about explaining equilibration, not explaining entrepreneurship.

15:39But we do have some discussion of that in the text. Maybe just one more so we have time for everybody else. Professor Foss and I would be happy to answer questions or talk to you about the book at any time during the rest of the conference.