While Austrian economists have made great contributions in many subdisciplines of economics, their critiques of mainstream views of entrepreneurship have received arguably the most praise. Modern-day finance and entrepreneurship classes even use Austrian ideas dating back to Carl Menger’s Grundsätze der Volkswirtschaftslehre (Principles of Economics).
But has Austrian Entrepreneurship Theory remained constant ever since?
Well, throughout the 20th century, three views in particular developed that were distinct from each other. Below, we’ll analyze them; together, they suggest that the answer to our question is a resounding “no.”
Schumpeterian creative destruction
The earliest of the three ideas came from Joseph Schumpeter, an Austrian-born economist who studied under renowned capital theorist Eugen von Böhm-Bawerk. Although Schumpeter was the least ideologically aligned with the Austrian School of Thought, he did share many of its core values, in particular his emphasis on the role of the entrepreneur in driving economic growth.
Much of mainstream economics assumes that we’re always reaching an equilibrium through economic growth and various other factors. Schumpeter doesn’t disagree in a broader sense, but he believed the role of the entrepreneur was special, and thus had unique effects on equilibrium as we know it.
Schumpeter believed entrepreneurs create their own profit opportunities. They do not seek to meet existing demand nor tailor their products to existing supply constraints, but rather innovate and disrupt the given state of things.
Steve Jobs and Apple are a great example. Had Jobs merely looked to accommodate demand, he would’ve found ways to increase the number of songs a Walkman could play. (Here, I’m also reminded of the quote often attributed to Henry Ford: “If I’d asked people what they wanted, they would’ve said ‘a faster horse.’”)
To Schumpeter, simply being alert to profit and loss mechanisms is not what makes an entrepreneur. Jobs created the iPod, something people didn’t even know they desired yet, and took the necessary steps in advertising the product he introduced to the market. This process radically changed supply and demand for other goods, and disequilibrated the market from its previous state of affairs.
This idea of Schumpeter’s was pretty radical. One might even say Schumpeter was entrepreneurial in his conception of the entrepreneur!
Israel Kirzner was one of the foremost economists of the “Austrian Revival” in the 1970s, bridging the gap between Neoclassical and Austrian economics at New York University. While still far from mainstream, Kirzner’s works were often communicated in a language closer to the mainstream than that of his Austrian colleagues.
Unlike Schumpeter, Kirzner neglected the equilibrium-destroying role of the entrepreneur and instead focused on its role as an arbitrageur. Kirzner believed that entrepreneurs in the economy search for profit opportunities, and are alert to opportunities to which others turn a blind eye.
Take a scenario where bookstores in New York City are selling copies of Atlas Shrugged for $10, and stores in Philadelphia are selling copies for $15. If shipping costs from New York City to Philadelphia are less than $5, a Kirznerian entrepreneur would take notice and begin to buy copies of Atlas Shrugged in New York City and sell them in Philadelphia at a profit. This would continue until New York City bookstores began selling Atlas Shrugged for a higher price, Philadelphia bookstores lowered costs, or a mix of both.
For this reason, Kirzner looked at entrepreneurs as an equilibrating force in the economy, in stark contrast to Schumpeter.
Then there’s Ludwig Lachmann. Possibly the most controversial of the three among libertarians due to his professed support for various Post-Keynesian ideas in the late stages of his career (even prompting Murray Rothbard to belittle Lachmann’s growing influence in Austrian circles as “Lachmania”), Lachmann nonetheless made significant contributions to the understanding of the structure of capital within Austrian economics.
Lachmann emphasized two seemingly obvious but often forgotten facts of economics: First, capital is heterogeneous; second, we cannot perfectly predict the future.
For example, a restaurant oven is not the same thing as a factory for manufacturing cars or cobalt used to make a magnet (who would’ve guessed?) Each of these capital goods has different use cases, some goods having more uses than others. Given the uncertainty of the future, people’s desires might change or be forced to reprioritize based on changing conditions around them. So, an entrepreneur might find that capital goods used in one use case are no longer profitable but might be more profitable when used differently. This was the crucial role Ludwig Lachmann attributed to entrepreneurship, and why he believed it to be so important.
Thus, the Kirznerian entrepreneur is alert to solving the equilibrium problem we see in many economic models, whereas Lachmann views the entrepreneur as someone necessarily applying a purely subjective analysis to specifying capital goods’ best uses, and disequilibrating markets for the better.
While these three economists each had radically different views of the role of the entrepreneur, all three agreed that the entrepreneur was key for real economic growth and the betterment of the population. There are, of course, many other pertinent views on entrepreneurship, including that of Ludwig von Mises and Frank Knight, which I’ll cover in a future post.
For modern works on entrepreneurship, see Peter Klein and Per Bylund, who have synthesized the work of these economists and provide a more holistic view of entrepreneurship. Their work, and the differences among Schumpeter, Kirzner, and Lachmann, suggest that Austrian Entrepreneurship Theory has evolved — and will continue to do so.
For more on the dynamic history of Austrian Economics, see our video, in which we hit all the highlights in less than 7 minutes:
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