No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Ten: It’s all About the Institutions! 243 GREAT ECONOMISTS IN HISTORY ISRAEL KIRZNER 1930-Present Israel Kirzner is perhaps the greatest little-known economist. Few are familiar with his work, yet Kirzner is a leading proponent of entrepreneurship and the market process, having expanded the ideas of Mises and Hayek to a broader audience. Kirzner obtained his Ph.D. under Ludwig Von Mises at New York University, where he still serves as Professor Emeritus. To those who are aware of Kirzner’s work, they are likely to be aware of the concept of the “alert arbitrageur” as a model for entrepreneurship (as introduced early on in this book). Yet the essence of the function of entrepreneurship (for Kirzner it is alertness; for Knight it is uncertainty-bearing; and for Schumpeter it is creative destruction) is less important than how the entrepreneur is the central figure of economic life. The entrepreneur not only identifies previously unseen profit opportunities because of pricing differentials, but the entrepreneur is the corrective actor to move the economy constantly towards equilibrium. The presence of profit opportunities are because all economic actors’ plans are not perfectly dovetailed, or coordinated. As the entrepreneur corrects these, he progressively brings more social coordination. Kirzner identifies the entrepreneur as working through the market process to discover consumer preferences, to identify better ways to ensure social plan coordination, and “sniff out” profit opportunities. Kirzner’s focus is on the “alertness” of entrepreneurship; for Kirzner, this is the essence. In a sense, Schumpeter’s creative destroyer is embedded in Kirzner’s alert arbitrageur. Because Kirzner’s entrepreneur is alert to an opportunity no one has ever seen, he is creative. And by arbitraging price differentials, he destroys less coordinated plans and creates more coordinated plans (from a social perspective). But his view of entrepreneurship is always as a coordinating function. And we need to think of this coordinating function very broadly; for Kirzner the entrepreneur is not just tweaking the market process to improve it—the entrepreneur is the locus of the market process since the market is a discovery process. He guides the process to discover true preferences and dovetail discordant plans. For Kirzner, entrepreneurship can only occur in an institutional setting that encourages it. Since competition is a discovery process, institutions that support competition are more likely to foster entrepreneurial alertness and market coordination. Photograph of Isreal Kirzner 4