Alertness and Entrepreneurship
Israel Kirzner is a British-American economist and emeritus professor at New York University. He is a leading figure in the Austrian School of Economics.
Below, we review Kirzner's "Alertness Theory" of entrepreneurship, which argues that entrepreneurs balance supply and demand by detecting market imperfections and exploiting them.
The Cause: Market Imperfections
Kirzner argues that opportunities exist because markets are not perfect. These imperfections are primarily caused by two factors:
- Information Asymmetry: Cases where different stakeholders have varying information about a business venture. If one stakeholder uses an information advantage to profit from another, it is considered opportunistic bargaining.
- Bounded Rationality: The idea that humans are not perfectly rational. While Neo-classical economics models the assumptions of "perfect" economic man, Kirzner acknowledges that real humans have limits on their knowledge and processing power.
The Solution: Entrepreneurial Alertness
According to Kirzner, the profits entrepreneurs receive are a reward for their tolerance of uncertainty as they eliminate arbitrage opportunities.
Arbitrage is the opportunity to sell the same product at a higher price than it was bought for (buying low, selling high). These gaps are created by the ignorance or incompetence of incumbent firms.
Entrepreneurs need to be alert to perceive these economic opportunities that others cannot yet see. Opportunities exist only because of the ignorance of incumbents; otherwise, they would already be exploited. Ignorance begets errors, and these errors can be corrected by the actions of entrepreneurs.
Uncertainty and Teaching Alertness
The entrepreneur acts under uncertainty and cannot know if their action will yield a profit until after the action has been taken. Thus, entrepreneurs must accept the risk that they may lose money (or that of their investors) if their judgment is incorrect.
Can it be learned? Kirzner believes that entrepreneurial alertness cannot be taught. However, this belief has been critiqued because market research and "customer discovery" processes can clearly help individuals recognize certain types of opportunities. A counter-argument might be that knowing market research was needed in the first place is the act of alertness.
Ultimately, Kirzner does not view economic actions (like buying resources or manufacturing products) as entrepreneurial in themselves. Rather, it is only the act of alertness—spotting the gap—that is truly entrepreneurial.
Video Overview: Israel Kirzner on Entrepreneurship
Sources
- Kirzner, I. M. (2015). Competition and entrepreneurship. University of Chicago Press.
