Kirzner on Entrepreneurship

Release Date
July 13, 2017


Basic Economics Economics Entrepreneurship

Israel Kirzner showed us how entrepreneurs make the world better: they specialize in discovering missed opportunities. To learn more about entrepreneurs, click to watch.

    1. Competition and Entrepreneurship by Israel Kirzner (book): To learn more about Kirzner’s theory of entrepreneurship, check out his book on the topic.
    2. Are Entrepreneurs Modern Day Heroes? (video): Professor Donna Matias explains the role of entrepreneurs on the economy.
    3. Prosthetic Limbs: 3D Printers Making Superhero Hands for Children – Learn Liberty (video): Volunteers around the world are designing and 3D printing “superhero” hands for kids with limb differences or missing fingers. The hands are free. The designs are crowdsourced. And they’re often customized to match the individual kids’ favorite superheroes. Check out this video to find out how entrepreneurs are making life better for kids with limb differences.

Daniel Russell: Kirzner on entrepreneurship. Israel Kirzner’s book, Competition and Entrepreneurship, changed how people thought about the role of entrepreneurship in the process of wealth creation. Here are two of Kirzner’s biggest contributions.
First of all, Kirzner started with a deep view of how people act and he focused on the fact that people don’t just try to fit familiar means to familiar ends. They also become uneasy with the status quo and look for new ways of bettering themselves that may have never even occurred to them. One thing they do is look for new means of achieving their ends. You do this in your own life. If you’re studying business, you might experiment by taking your next business class online or at night, just to see if that’s something that works better for you.
But, at an even deeper level, people also find new ends and they look for new things that might interest them and give them a richer experience. You might try taking a class in something like geology or philosophy or Greek mythology to give yourself the chance to discover something you’re interested in but never even knew it. In other words, we don’t just take our means and ends as fixed and try to figure out how to efficiently match the one to the other. We know that we don’t know everything. And so at any given time, there are sure to be opportunities we’re missing without even realizing it, so we try to stay alert to those opportunities.
That alertness is what Kirzner called the entrepreneurial element in all our everyday lives. In that sense, we’re all entrepreneurial. The trouble with alertness, though, is that it is costly. It costs something to find out what new opportunities there might be. It’s risky to try them out and then there’s regret and loss when they don’t work out.
What Kirzner realized was that there is, therefore, value to be created for other people by specializing in alertness, bringing people the benefits of new discovery while relieving them of most of the cost and risk. And that, Kirzner thought, is the role of entrepreneurs in the market process. Really, entrepreneurship is just another example of the division of labor. Entrepreneurs specialize in the curious and risky task of trying to see what new profit opportunities might be waiting around the next corner by identifying new goods, services, methods, and resources that people might value more than what it costs to discover them.
Kirzner also observed that even though entrepreneurial innovations usually look like they disrupt a stable allocation of resources in the status quo, that appearance is actually deceiving. What entrepreneurs really do is correct misallocations of resources by finding better uses for those resources that no one has noticed yet.
For example, when Kirzner published his book in 1973, no one had any idea that within about 10 years, the music industry would start moving from vinyl records to something called a CD. It’s tempting to say that when the vinyl record industry was in full swing, the resources employed in making and selling and distributing vinyl records were all allocated correctly because the supply of records was matching people’s demand for records.
Likewise, it’s tempting to say that when the CD came along, that efficient allocation was upset. Some people made a lot of money, some people lost a lot of money, until everything smoothed out again and returned to equilibrium. But a different way of looking at it is that when the CD came along, that innovation revealed that the allocation of all those resources to make records really wasn’t an efficient allocation after all. There was a better alternative allocation that no one had noticed yet and the entrepreneurial job was to find that alternative that other people in the market really did prefer and all the people trying to find it would know when they had found it by the profits they made. This wouldn’t be a disruption of an efficient allocation of resources. It would be a correction of an inefficient allocation of resources because it moved towards a new allocation that better satisfied people’s preferences.
Now, we already know that the CD wasn’t the optimal use of resources either. We know that because of the success of the MP3 and that’s probably not optimal either. And somewhere out there, someone is trying day and night to look around corners for that next better alternative right now.
Of course, there were many other observations that Kirzner made about entrepreneurship. But even with just these two, Kirzner clarified the role of entrepreneurship in the market process as the job of correcting misallocations by specializing in the discovery of missed opportunities.