The Why of The Capitalist and the Entrepreneur

Email Print
FacebookTwitterShare

 

 
 

Introduction
to The
Capitalist and the Entrepreneur: Essays on Organizations and Markets

As far back
as I can remember, I always wanted to be an Austrian economist.
Well, not quite, but I was exposed to Austrian economics early on.
I grew up in a fairly normal middle-class household, with parents
who were New Deal Democrats. In high school, a friend urged me to
read Ayn Rand, and I was captivated by her novels. I went on to
read some of her nonfiction works, in which she recommended books
by Ludwig von Mises and Henry Hazlitt. I don’t remember which economics
books I read first, maybe Hazlitt’s Economics
in One Lesson
or Mises’s Anti-Capitalistic
Mentality
. I didn’t understand the more technical parts
of their analyses, but I was impressed with their clear writing,
logical exposition, and embrace of liberty and personal responsibility.
I took a few economics courses in college and, while they lacked
any Austrian content, I enjoyed them and decided to major in the
subject. I had a very good professor, William Darity, who himself
preferred Marx and Keynes to Mises but who appreciated my intellectual
curiosity and encouraged my growing interest in the Austrians.

As a college
senior, I was thinking about graduate school – possibly in
economics. By pure chance, my father saw a poster on a bulletin
board advertising graduate-school fellowships from the Ludwig von
Mises Institute. (Younger readers: this was an actual, physical
bulletin board, with a piece of paper attached; this was in the
dark days before the Internet.) I was flabbergasted; someone had
named an institute after Mises? I applied for a fellowship, received
a nice letter from the president, Lew Rockwell, and eventually had
a telephone interview with the fellowship committee, which consisted
of Murray Rothbard. You can imagine how nervous I was the day of
that phone call! But Rothbard was friendly and engaging, his legendary
charisma coming across even over the phone, and he quickly put me
at ease. (I also applied for admission to New York University’s
graduate program in economics, which got me a phone call from Israel
Kirzner. Talk about the proverbial kid in the candy store!) I won
the Mises fellowship, and eventually enrolled in the economics PhD
program at the University of California, Berkeley, which I started
in 1988.

Before my first
summer of graduate school, I was privileged to attend the Mises
University, then called the "Advanced Instructional Program
in Austrian Economics," a week-long program of lectures and
discussions held that year at Stanford University and led by Rothbard,
Hans-Hermann Hoppe, Roger Garrison, and David Gordon. Meeting Rothbard
and his colleagues was a transformational experience. They were
brilliant, energetic, enthusiastic, and optimistic.

Graduate school
was no cake walk – the required core courses in (mathematical)
economic theory and statistics drove many students to the brink
of despair, and some of them doubtless have nervous twitches to
this day – but the knowledge that I was part of a larger movement,
a scholarly community devoted to the Austrian approach, kept me
going through the darker hours.

In my second
year of graduate school, I took a course from the 2009 Nobel laureate
Oliver Williamson, "Economics of Institutions." Williamson’s
course was a revelation, the first course at Berkeley I really enjoyed.
The syllabus was dazzling, with readings from Ronald Coase, Herbert
Simon, F. A. Hayek, Douglass North, Kenneth Arrow, Alfred Chandler,
Armen Alchian, Harold Demsetz, Benjamin Klein, and other brilliant
and thoughtful economists, along with sociologists, political scientists,
historians, and others. I decided then that institutions and organizations
would be my area, and I’ve never looked back.

The essays
collected in this volume reflect my efforts to understand the economics
of organization, to combine the insights of Williamson’s "transaction
cost" approach to the firm with Austrian ideas about property,
entrepreneurship, money, economic calculation, the time-structure
of production, and government intervention. Austrian economics,
I am convinced, has important implications for the theory of the
firm, including firm boundaries, diversification, corporate governance,
and entrepreneurship, the areas in which I have done most of my
academic work. Austrian economists have not, however, devoted substantial
attention to the theory of the firm, preferring to focus on business-cycle
theory, welfare economics, political economy, comparative economic
systems, and other areas. Until recently, the theory of the firm
was an almost completely neglected area in Austrian economics, but
over the last decade, a small Austrian literature on the firm has
emerged. While these works cover a wide variety of theoretical and
applied topics, their authors share the view that Austrian insights
have something to offer students of firm organization.

The essays
in this volume, originally published between 1996 and 2009, deal
with firms, contracts, entrepreneurs – in short, with the economics
and management of organizations and markets. Chapter 1, "Economic
Calculation and the Limits of Organization," first presented
in Williamson’s Institutional Economics Workshop in 1994, shows
how the economic-calculation problem identified by Mises (1920)
helps understand the limits to firm size, an argument first offered
by Rothbard (1962). It also offers a summary of the socialist-calculation
debate that has worked well, for me, in the classroom. Along with
chapter 2, "Entrepreneurship and Corporate Governance,"
it offers an outline of an Austrian theory of the firm, based on
the Misesian concept of entrepreneurship and the role of monetary
calculation as the entrepreneur’s essential tool. "Entrepreneurship
and Corporate Governance" also suggests four areas for Austrian
research in corporate governance: firms as investments, internal
capital markets, comparative corporate governance, and financiers
as entrepreneurs. Chapter 3, "Do Entrepreneurs Make Predictable
Mistakes" (with Sandra Klein), applies this framework to the
problem of corporate divestitures.

Chapter 4,
"The Entrepreneurial Organization of Heterogeneous Capital"
(with Kirsten Foss, Nicolai Foss, and Sandra Klein), shows how Austrian
capital theory provides further insight into the firm’s existence,
boundaries, and internal organization. The Austrian idea that resources
are heterogeneous, that capital goods have what Lachmann (1956)
called "multiple specificities," is hardly surprising
to specialists in strategic management, a literature that abounds
with notions of unique "resources," "competencies,"
"capabilities," "assets," and the like. But
modern theories of economic organization are not built on a unified
theory of capital heterogeneity, simply invoking ad hoc specificities
when necessary. The Misesian concept of the capital-owning entrepreneur,
seeking to arrange his unique resources into value-adding combinations,
helps illuminate several puzzles of firm organization.

Management
scholars, and some economists, are familiar with Israel Kirzner’s
concept of entrepreneurship as "discovery," or "alertness"
to profit opportunities, typically seeing it as "the"
Austrian approach of entrepreneurship. Kirzner, Mises’s student
at NYU, has always described his approach to entrepreneurship as
a logical extension of Mises’s ideas. However, as I argue in chapter
5, "Opportunity Discovery and Entrepreneurial Action,"
one can interpret Mises differently. Indeed, I see Mises’s approach
to the entrepreneur as closer to Frank Knight’s (1921), a view that
makes asset ownership, and the investment of resources under uncertainty,
the hallmark of entrepreneurial behavior. This suggests a focus
not on opportunities, the subjective visions of entrepreneurs, but
on investment – on actions, in other words, not beliefs. I
suggest several implications of this approach for applied entrepreneurship
research. Chapter 6, "Risk, Uncertainty, and Economic Organization,"
written for the Hoppe
Festschrift
(Hülsmann and Kinsella, 2009), further
discusses the Knightian distinction between "risk" and
"uncertainty," or what Mises called "class probability"
and "case probability."

Chapter 7,
"Price Theory and Austrian Economics," challenges what
I see as the dominant understanding of the Austrian tradition, particularly
in applied fields like organization and strategy. Scholars both
inside and outside economics tend to identify the Austrian school
with Hayek’s ideas about dispersed, tacit knowledge, Kirzner’s theory
of entrepreneurial discovery, and an emphasis on time, subjectivity,
process, and disequilibrium. Despite renewed interest in the Mengerian
tradition, the Austrian approach to "basic" economic analysis
– value, production, exchange, price, money, capital, and intervention
– hasn’t gotten much attention at all. Indeed, it’s widely
believed that the Austrian approach to mundane topics such as factor
productivity, the substitution effect of a price change, the effects
of rent control or the minimum wage, etc., is basically the same
as the mainstream approach, just without math or with a few buzzwords
about "subjectivism" or the "market process"
thrown in. Even many contemporary Austrians appear to hold this
view. Chapter 7 suggests instead that the Austrians offer a distinct
and valuable approach to basic economic questions, an approach that
should be central to research by Austrians on theoretical and applied
topics in economics and business administration.

A final chapter,
"Commentary," collects some shorter essays on the nature
and history of the Internet, the role of the intellectuals in society,
the relationship between management theory and the business cycle,
biographical sketches of Carl Menger and F. A. Hayek, and a note
on Williamson’s contributions and his relationship to the Austrian
tradition. Some of these first appeared as Daily Articles at Mises.org
and were written for a nonspecialist audience. Indeed, I think scholars
in every field, particularly in economics and business administration,
have an obligation to write for the general public, and not only
for their fellow specialists. Ideas have consequences, as Richard
Weaver put it, and economic ideas are particularly important.

In preparing
these essays for publication in book form I have made only light
revisions in the text, correcting minor errors, eliminating some
redundant material, and updating a few references. I think they
work well together, and I hope readers will see the end result as
an integrated whole, not simply a collection of "greatest hits."

I’ve been greatly
influenced and helped by many friends, teachers, colleagues, and
students, far too many to list here. Three people deserve special
mention, however. From my father, Milton M. Klein, a historian who
taught at Columbia University, Long Island University, SUNY Fredonia,
New York University, and the University of Tennessee, I learned
the craft and discipline of scholarship. He taught me to read critically,
to think and write clearly, to take ideas seriously. Murray Rothbard,
the great libertarian polymath whose life and work played such a
critical role in the modern Austrian revival, dazzled me with his
scholarship, his energy, and his sense of life. Rothbard is widely
recognized as a great libertarian theorist, but his technical contributions
to Austrian economics are not always appreciated, even in Austrian
circles. In my view he is one of the most important contributors
to the "mundane" Austrian analysis described above. Oliver
Williamson, who supervised my PhD dissertation at Berkeley, is my
most important direct mentor and a constant source of inspiration.
Williamson is no Austrian, but he appreciated and supported my interest
in the Austrian school and encouraged me to pursue my intellectual
passions, not to follow the crowd. His encouragement and support
have been critical to my development as a scholar.

I’m deeply
grateful to the Contracting and Organizations Research Institute,
the University of Missouri’s Division of Applied Social Sciences,
the University of Missouri Research Foundation, the Coase Foundation,
the Kauffman Foundation, and, above all, the Mises
Institute
for generous financial and moral support over the
years. I’ve learned so much from my university colleagues, coauthors,
fellow bloggers, conference participants, and other members of the
academic racket that it would be impossible to name all those who’ve
influenced my work.

My frequent
coauthor Nicolai Foss, who thinks and writes more quickly than I
can listen or read, keeps me on my toes. I’ve learned much about
Austrian economics, firm strategy, economic organization, and a
host of other topics from Joseph Salerno, Lasse Lien, Joseph Mahoney,
Dick Langlois, Michael Cook, Michael Sykuta, and many others. Others
who offered specific comments and suggestions on earlier versions
of these chapters include Sharon Alvarez, Jay Barney, Randy Beard,
Don Boudreaux, Per Bylund, John Chapman, Todd Chiles, Jerry Ellig,
David Gordon, Jeff Herbener, Stavros Ioannides, Dan Klein, Mario
Mondelli, Jennie Raymond, David Robinson, Fabio Rojas, Ron Sanchez,
Ivo Sarjanovic, Narin Smith, Sid Winter, and Ulrich Witt. My colleagues
have also tried to teach me about deadlines, but I’m still working
on that one. I agree with Douglas Adams, "I love deadlines.
I like the whooshing sound they make as they fly by."

Special thanks
go to Doug French for suggesting this project and to Jeff Tucker,
Arlene Oost-Zinner, Paul Foley, and Per Bylund for seeing it to
fruition. Most important, I thank my wife Sandy and my children
for putting up with my frequent absences, endless hours in front
of a computer screen, and occasional irritability. They are my greatest
inspiration.

Reprinted
from Mises.org.

May
20, 2010

Peter
G. Klein [send him mail] is the author of The
Capitalist & the Entrepreneur: Essays on Organizations & Markets
.
He is an associate professor and associate director of the Contracting
and Organizations Research Institute at the University of Missouri
and an adjunct professor at the Norwegian School of Economics and
Business Administration. Klein teaches in the Mises
Academy
and is offering a
course in the Summer of 2010
, based on The Capitalist &
the Entrepreneur. He blogs at Organizations
and Markets
. See his webpage.

Email Print
FacebookTwitterShare
  • LRC Blog

  • LRC Podcasts