This is the final installment of my comments at Liberty Matters in the discussion of Israel Kirzner’s theory of entrepreneurship and its interpretation by Peter Boettke.
by Richard M. Ebeling*
This year marks the hundredth anniversary of the publication of Herbert J. Davenport’s (1861-1931), The Economics of Enterprise, which appeared in the early months of 1913.
Both mainstream economists as well as many “Austrians” seem to have long since forgotten Herbert Davenport. But during his time he was recognized as one of the early formulators of a subjectivist conception of opportunity cost, a harsh critic of Alfred Marshall’s attempt to partly preserve the “real cost” doctrine of the Classical Economists, and a lucid expositor of the central role of the entrepreneur in a dynamic vision of the market process.
His earlier article, “Proposed Modifications in Austrian Theory and Terminology” (Quarterly Journal of Economics, May 1902), and his book, Value and Distribution (1908) were “friendly criticisms” meant to clarify inconsistencies or ambiguities in the “Austrian” approach with which he was, in general, highly sympathetic.
Born in Vermont, he earned a PhD in economics under J. Laurence Laughlin (a strong defender of laissez-faire economics) at the University of Chicago, but was also influenced by (though critical of) Thorsten Veblen. For many years he served as the Dean and Department Chair of the College of Business at the University of Missouri. He later served as a professor of economics at Cornell University.
According to Paul Homan, he was a captivating classroom professor: “One remembers him most vividly and typically leaning back in his chair, his penetrating eyes touched with the shadow of a smile, as of triumph, while he deployed his arguments, humorously but with devastating order and precision, usually at the expense of someone, preferably Marshall, whom other people took seriously and whom he regarded as hopelessly muddle-headed.”
The Economics of Enterprise presents his full analysis of the market order in terms of subjectivism, causality, and entrepreneurial competitiveness. Continue reading
by Gene Callahan
Dan Klein’s Knowledge and Coordination has something interesting to say about Bayesian inference, although he never explicitly addresses that topic. Consider the following:
Here, we have the distinction between responding to the realization of events within a framework of recognized variables and relationships and the discovery of a fresh opportunity to embrace a new and better framework or interpretation. This element of epiphany, of finding fortune by interpreting the world differently, is the subtle and vital element in human decision making. Yet, it is absent from equilibrium model building. In equilibrium stories, agents never have a “light bulb” moment… (p. 13)
Kirzner’s alertness is the individual’s re-interpretation of that world [of a world of already-interpreted “facts”]. (p. 14)
“Equilibrium” is meaningful only in reference to a specified model… (p. 28)
Bayesian inference, similar to equilibrium theorizing, works within a fixed frame of interpretation: it “is meaningful only in reference to a specified model.” It cannot extend across instances when a new interpretive framework takes the place of the old. Continue reading
by Mario Rizzo
The incessant discussion and demand for job-creating infrastructure spending on the part of the news media, Democratic politicians, and some unreconstructed Keynesian economists is both frustrating and pathetic. It is frustrating because how many times can people repeat the same thing without listening to the objections? It is pathetic because the level of understanding is akin to pre-Newtonian physics. Continue reading
by Gene Callahan
The Mets recently hired Paul DePodesta, one of the key developer’s of the “Moneyball” approach to finding and hiring baseball talent in Oakland. DePodesta describes what Moneyball really is here:
DePodesta, who left Oakland to serve as the Los Angeles Dodgers’ general manager for two seasons before becoming an executive with the San Diego Padres, said that Lewis’s 2003 book — which remains a bible for statistics-minded fans — was a caricature. Statistics are important, he said, but the Moneyball philosophy is more an approach to evaluating talent, not a constrictive road map.
“In my mind, Moneyball really has absolutely nothing to do with on-base percentage; for that matter, it doesn’t really have anything to do with statistics,” he said Tuesday on a conference call with reporters. “Rather, Moneyball is really about a constant investigation of stagnant systems to see if you can find value where it isn’t readily apparent.”
by Chidem Kurdas
Last week the WSJ published a list of the past decade’s best-paid chief executives. You might nod approvingly at some names but gag at others. In the former group is Steve Jobs of Apple, whose company’s share value grew by about 11-fold in the period from 2000 to 2009. In the latter category is Richard Fuld, the last chief executive of Lehman Brothers, whose $457 million compensation during the decade is hard to swallow given what happened to Lehman.
It is notable that these compensation figures consist almost entirely of the value of company shares the executives received via stock options or as restricted stock. It is stock awards that account for the big numbers, starting with the $1.84 billion that won Larry Ellison of Oracle the top spot in the ranking. Cash salaries by comparison are miniscule.
The obvious argument in favor of stock options is that they give executives incentive to work at boosting share value—thereby serving the owners of the company. But do they really have to be given such large blocks of stock? Smaller amounts of stock are likely sufficient incentive. Continue reading
by Thomas McQuade and Chidem Kurdas
Though it should be obvious to all that markets are of immense benefit to humanity, any appreciation of these institutions is almost always hedged with a perceived need to constrain and regulate—in short, to subject them to conscious outside control. The reasoning is understandable: the unconstrained pursuit of self-interest can only lead to chaos.
But the preference for constraint through centralized direction betrays a profound misunderstanding of the way markets work.
Can we explain that claim any better than the volumes already written on the topic? We find that, when we discuss the issue, we agree on the basics, but differ in emphasis and details—and details matter. Here is part of our discussion, in point/counter-point format. Continue reading
by Mario Rizzo
The market is a “marvel.” What does that mean? According to Marcus Tullius Cicero, the Roman orator and senator, a marvel is something contrary to or surpassing common understanding.
In that sense, the market is a true marvel – so much so that it even surpasses the understanding of many economists.
Richard Thaler (a University of Chicago Business School professor) and Cass Sunstein (a Harvard law professor and Obamian regulatory czar) have illustrated the benign qualities of paternalism with a curious example of cafeteria food placement. (An interesting and important exchange between Glen Whitman and Richard Thaler – among others – is now taking place at Cato Unbound.) Continue reading
by Jerry O’Driscoll
That is the title of yesterday’s “Wonderland” column by Daniel Henninger in the Wall Street Journal.
Henninger distinguishes between market entrepreneurs and political entrepreneurs. Market entrepreneurs innovate and create new products. Political entrepreneurs make money by gaming the political system. “We need vision, vitality and commercial moxie. The government is draining it away.”
The real cost of TARP and stimulus is the diversion of resources and talent from creating value into transferring money from one pocket to another. The stimulus bill was a cover for a massive income transfer from the productive to the unproductive classes in society. TARP transferred money from profitable firms and hardworking Americans to profligate bankers.
Market entrepreneurs create products that generate the revenue needed to reproduce themselves and then grow. The political variety creates dependency and the need for new tax revenues to sustain unproductive activities. Markets create wealth and governments transfer it for a fee.
by Sandy Ikeda
The New York Times, in “Amid Housing Bust, Phoenix Begins a New Frenzy”, reports that “Real estate got just about everyone into trouble in Phoenix, and the thinking seems to be that real estate is going to get everyone out.”
If the property looks promising, Mr. Jarvis puts in a bid on behalf of any of his dozens of clients eager to become landlords. When he wins, he offers to let the family stay in the house and rent for much less than their mortgage payment.
Phoenix is also where “supermarket health clinics”and urgent-care centers for the uninsured have proliferated. Some have been able to adjust quickly to a souring economy.
Health clinics located inside grocery stores typically offer less-comprehensive medical service than urgent-care centers such as NextCare and Maricopa Urgent Care… NextCare, which has 17 clinics in the Phoenix area, has responded to the downturn with a series of moves aimed at reaching more patients.
by Roger Koppl
The issue of creativity has arisen in a fun discussion on Schumpeter over at The Austrian Economists. I have often heard people say that we cannot model creativity. I suppose that must be true in some sense, and yet there is much we can say about “creativity” and social institutions. Early in the Wealth of Nations Adam Smith gives us a good account of what creativity is, namely, the “combining together the powers of the most distant and dissimilar objects.” As my old friend Dick Langlois taught me years ago, creativity is recombination. I think we can have an economic theory of recombination. Indeed, the elements are out there. Continue reading
by Roger Koppl
Jake Young of Pure Pedantry has a nice post using the neuroscience of preconscious processing to address the issue of Kirznerian alertness. He was responding to Sandy’s post, “Stumbling on Profit Opportunities.” Jake gives a negative reply to Sandy’s conjecture that preconscious processing, whereby we leap away from a snake before processing that it was a snake, might be an example of Kirznerian entrepreneurship.
I think it’s a mistake to look for “the” neuroscience correlate to entrepreneurial alertness. The praxeological categories of “entrepreneurship,” “alertness,” and “discovery” were constructed for use in social science, not neuroscience. It would be a surprise if there were precisely one process identified in neuroscience that covers all and only cases of entrepreneurial alertness in social science. More likely, several processes that are considered distinct and unrelated in neuroscience would all be examples of entrepreneurial alertness and discovery. And the neurological processes generally corresponding to entrepreneurial discovery might sometimes be activated when there is no entrepreneurial discovery. Why should social science and neuroscience carve up the world in the same way? Continue reading
by Sandy Ikeda
I’ve been thinking about the following from Daniel Gilbert’s Stumbling on Happiness:
Experiments have demonstrated that the moment we encounter an object, our brains instantly analyze just a few of its key features and then use the presence or absence of these features to make one very fast and very simple decision: “Is this object an important thing to which I ought to respond right now? […] As such, our brains are designed to decide first whether objects count and to decide later what those objects are. This means that when you turn your head to the left, there is a fraction of a second during which your brain does not know that it is seeing a wolverine but does know that it is seeing something scary (Emphasis original, p.62). Continue reading