Competition and Entrepreneurship [ペーパーバック]

Competition and Entrepreneurship is a book with many interesting insights. Kirzner attacks the use of equilibrium models in mainstream economics, and rightly so. Mainstream economists places great emphasis on equilibrium, but have little to say about how equilibrium is attained. Undergraduates are told a simple story about excess supply and excess demand. The story at the graduate level and in professional journals is even worse. At this level, economists often ignore the issue of equilibration altogether.

Kirzner challenged the conventional view by focusing on the process by which entrepreneurs move market prices towards equilibrium. "The market process is set into motion by the ignorance of the market participants". "Gradually, competition between the entrepreneurs as buyers, and again as sellers, will succeed in communicating to market participants correct estimates of other market participants' eagerness to buy and sell". Of course, Kirzner is building upon the work of Mises and Hayek, whereby competing market participants learn to adjust their plans mutually as prices change. But Kirzner does add greater detail about the specifics of entrepreneurship.

Unfortunately, this book was published at a time when the economics profession was unwilling to listen to such arguments. In 1973 professional thought was so clouded by ideology that there was really no chance for Kirzner to gain the recognition he deserved. The mindset of the profession is less ideological now, but the professions obsession with math has reached new heights. Very few graduate students learn this sort of economics these days.

On the bright side, economists have moved in Kirzner's direction by taking greater interest in informational and coordination issues. Most of this is done with game-theoretic models, rather than with the verbal logic that Kirzner uses. For anyone interested in learning Austrian economics, Competition and Entrepreneurship is a good place to start. It is a relatively easy read, both clear and concise, and it reveals much about the workings of markets.

This book represents the culminating point that was started in the research of Ludwig von Mises during the 1920's in his socialist calculation argument and Hayek's business cycle theory during the 1930's. During their research, Hayek and Mises discovered that many points of economic theory previously believed to be well developed in reality were lacking basic theoretical foundations, this is especially true in modern microeconomic theory.

These problems were only unsatisfactorily addressed by Hayek in his economics and knowledge papers and even less satisfactorily addressed by Mises in his Human Action. Hence many problems remained: What's the implications of the knowledge problem to the basis of economics? How the market systems utilizes dispersed knowledge? What's the real nature of competition for economic science? Hayek and Mises provided some answers, but they were still laking a well developed theoretical framework.

In this ground breaking book, Kirzner provides the greatest advance in economic theory of the second half of the 20th century. He does that by explaining how the market manages to solve the knowledge problem, with is the problem of integrating dispersed bits of individual knowledge and hence, he explains how the market generates equilibrating tendencies. This theory finally explains how supply and demand tends to be equated, how prices tend to correspond to marginal cost and how the pattern of resource availability tends to be allocated to satisfy consumer's preferences. The answer is that competition for profit opportunities is the process by with gaps of the knowledge currently utilized by the economic system are filled by entrepreneurial discovery. Entrepreneurs compete because there is undiscovered knowledge awaiting to be discovered, and the ones with discover and exploit the opportunity first are the ones with will reap the surplus of mutually beneficial exchanges.

The model of "perfect competition" in reality represents the state were competition has ceased, the state were knowledge has been discovered and fully transmitted. Hence, this model fails to explains the emergence of market efficiency, but assumes it implicitly. However, the model of perfect competition explains clearly how a society in general equilibrium would look like. While the numerous models of imperfect competition in reality are useless to explain any economic phenomena, since they were developed because of a misunderstanding of the role to be performed by the perfect competition model.

The authors of the models of imperfect competition thought that the concept of perfect competition was developed to directly describe economic reality, and since it is an equilibrium model, it clearly didn't. However, the problem was in the equilibrium nature of the model, not in the characteristics of demand curves, as these authors thought. If we assume that everybody has perfect knowledge (with is the defining characteristic of equilibrium) prices will equal marginal costs, since if prices were higher than marginal costs, that would mean that the cost of producing one unit of a good would be smaller than the price of selling this good in the market. Hence the current level of production would be inconsistent with perfect knowledge, hence, not equilibrium.

The reality is that monopoly, defined as a barrier to entry, is inefficient because the knowledge of the opportunity to make mutually beneficial transactions is not fully utilized if any individual that is not the monopolist discovers such knowledge. That's because this possibility of pareto improving transaction will go unexploited from lack of utilization of existing knowledge. Hence, monopoly defined as a single seller is not always inefficient if the single seller emerges because he makes better offers than any other potential seller. In that case there are no other sellers because either all opportunities of mutual beneficial transactions are already exploited or those opportunities haven't been discovered by anybody yet.

A thorough economics ('Austrian') perspective on how a free market performs - with competition and the role of the entrepreneur in it. For the non-economics reader, I would recommend Peter Drucker's Innovation and Entrepreneurship.