Israel Kirzner- The Entrepreneurial Process

Entrepreneurial process has 2 meanings:

1. Process of entrepreneurial competition responsible in the short run, for the
tendencies for the market clearing level, for the array of outputs to reflect the
pattern of consumer preferences in the light of currently available technology
possibilities and for pure profit opportunities to be grounded down to zero.
2. Process of entrepreneurial discovery, invention and innovation through which
long-run economic growth is stimulated and nourished.
The second is more well-known and discussed by Joseph Schumpeter.
The long run entrepreneurial process evolves from the consistent implication and
extension of the short run entrepreneurial process.
Economic development can proceed:
1. Through expansion of opportunities arising through increased availability of
resources: allows for planning most efficient allocation of resources.
2. Discovery of hitherto unperceived opportunities: cannot be planned.
Allocative view of economic development: in a world of given resources,
growth arises from resource allocation. This economics analysis often neglects the
role of entrepreneurship.
Ex) Robinson Crusoe on an island
Entrepreneurial view of economic development: open-endedness of economic
systems and incentives to stimulate new perceptions of possibilities. This theorys
serious handicap: specific outcome selected in decision cannot be predicted.
To be human is not merely to calculate correctly within in already perceived
environment, it is to be able, by peering into a murky present and even murkier
future, to obtain a reasonably useful grasp of ones true situation.
Markets allow for Entrepreneurship:
Market processes consist of a sequence of entrepreneurial decisions, each of which
is only partially correct, and leaves room and incentive for further mutual discovery.
Markets have capacity to translate errors and mistakes made to opportunities for
entrepreneurial profits.
Incentive for pure profit drives innovation. In market economy opportunities are
found only where they have been overlooked by others.
Institutional Practices in market economy that encourage entrepreneurship:
1. Free and open access, no barriers to entry
2. Guarantee of ownership, private property
3. Stability of institutional practices

Types of Entrepreneurial Activity:

1. Arbitrage Activity- acting on discrepancy between prices at which a given
item is bought and sold. This is a discovery of an error, but calls for no
innovation.
2. Speculative Activity- arbitrage across time. Discovery of discrepancy between
prices bought today and sold in the future. Incentivizes entrepreneurs to
undertake these opportunities and if correct, prices stabilize over time. Also
calls for no innovation.
3. Innovative Activity- creation of output, method of production or organization
currently not in use.
Alertness: Perception of all three types of entrepreneurial activity. Qualities include
restive temperament, thirst for adventure, ambition and imagination.
Two ways in which policy may affect emergence of entrepreneurial
discovery:
1. Policy that may affect entrepreneurial attitudes and character of a population
2. Policy that may stimulate population to be more alert to entrepreneurial
activities.

Discussion Questions:
What are your thoughts on Kirzner including arbitrage and speculative activity as
entrepreneurial? This is not traditionally how entrepreneurship is thought of.
Kirzner warns of the dangers in overlooking the role of entrepreneurs in policy
creation. He proposes to end government privileges and blockages to entry. How
does this proposal line up with the argument that patents (a gov granted privileged
to block entry) are necessary for continued increased innovation?
What impact does this articles conclusions on allocative vs. entrepreneurial growth
have on development economics?
In this article, an example of differences in entrepreneurial attitudes is explained by
the differences in institutions that are in place, (i.e. East and West Berlin, North and
South Korea). But can ethnic and geographical factors be important in determining
the extent to which a population displays an entrepreneurial attitude? Or is it purely
based on the institutions? Kirzner himself proposes this question at the end of the
article