Radical subjectivism theory of entrepreneurship
What is the Radical Subjectivist Theory of Entrepreneurship?
German Economist Ludwig M. Lachmann proposed the Radical Subjectivist Theory as an alternative to existing Austrian School frameworks, such as:
Core Concepts of the Theory
According to Lachmann, entrepreneurs develop plans based entirely on their subjective knowledge and expectations. Because the future is unknown, these expectations are formed by the entrepreneur's creative imagination, which envisions multiple competing futures.
Key elements of Lachmann's view include:
- Capital Regrouping: Capital is not static. It is continually recombining. As investments are made sub-optimally, errors occur, leading to new stocks of capital that must be redeployed toward new purposes.
- Continuous Revision: Entrepreneurs continually revise their plans as they encounter new bits of market information during exchanges.
- Institutions as Signposts: Institutions provide the "rules of the game," acting as signposts that allow millions of individuals to coordinate their actions.
The Evolution of Knowledge
Lachmann assumes that individuals experience time differently and that the only way to interpret events is to reconstruct them from bits of information after they have occurred.
Have you ever looked back on a past experience and realized that your interpretation of it has changed over time? Maybe a memory that once filled you with regret now brings you a sense of gratitude for the lessons it taught you. This is the crux of Lachmann's theory: our understanding of the past and our expectations for the future are constantly evolving.
A Practical Example: The Pivot
Imagine you are a startup founder with a grand vision for disrupting an industry. You have done your research and mapped out a plan.
But according to Lachmann, your interpretation of the market is bound to change. Perhaps you discover your initial assumptions were wrong, or a competitor enters the market. These new developments force you to:
- Revise your strategy.
- Pivot your focus.
- Scrap the original idea entirely.
For some, this constant revision sounds daunting. However, Lachmann argues that flexibility and adaptability are the keys to success. By viewing setbacks as opportunities to learn rather than failures, entrepreneurs cultivate the resilience needed for the long run.
Sources & Further Reading
While other Austrian views have received more attention, scholars are working to reintroduce the radical subjectivist perspective into mainstream literature.
Chiles, T. H., Bluedorn, A. C., and Gupta, V. K. (2007). Beyond creative destruction and entrepreneurial discovery: A radical Austrian approach to entrepreneurship. Organization Studies, 28(4), 467-493.
Lachmann, L. M. (1977). Capital, expectations, and the market process. Kansas City.
