The Micro Lens Perspective of Equilibrium and Disequilibrium – Kirzner’s Entrepreneurship vs Schumpeter’s Entrepreneurship

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Economic Piece by Josh L. Ascough

There is a fierce differentiation between Professor Israel Kirzner’s entrepreneur and his role, and that of the late Joseph Schumpeter’s entrepreneur and the role he plays in the market.

For those who are unaware, the entrepreneur, as according to Professor Kirzner, is an equilibrating force who, through discovery, perceives unseen opportunities for pure profit due to imperfect knowledge of market participants; under the market process and the state of disequilibrium, he moves the market closer to a state of equilibrium. The late Schumpeter had, as would appear on the surface, the complete opposite view of the entrepreneur. To Schumpeter, the state of equilibrium is a set routine; an even state of circular flow, and the entrepreneur, for Schumpeter, breaks away from convention; he is a disruptive force, who breaks away from the set and known; to destroy existing structures, creating a new state of disequilibrium by dislodging it from the state of equilibrium.

At a first glance these two concepts can easily be seen as separate theories of entrepreneurship; and they are. However, both theories can also be looked at as being the same, but under a different lens of perspective; one expanding to see a wider view, another contracting to focus on a singular area of interest.

This is what I hope to share with the reader; an idea that Kirzner’s and Schumpeter’s entrepreneurial actor and process can be seen as merely being witnessed from differing angles of the same lens and can, in theory, be woven together.

It should be noted I will be referencing Professor Kirzner’s work; Competition and Entrepreneurship, solely for this. Due to Schumpeter’s passing before Kirzner’s work on entrepreneurship began, we cannot know of his views of Kirzner’s work, or what his perception of Professor Kirzner’s entrepreneur would have been. In such case, I shall refer to Kirzner’s work to give insight into the perceived theoretical difference between the two concepts of the entrepreneur.

If we look into Professor Kirzner’s writings on the monopolist, he speaks of how, if a perceived monopolist holds his position due to a claim of ownership over a particular resource required for production, from a short-run view he would appear to be a monopolist. However, if our view is not focussed on a particular period, and is instead expanded to before he acquired the resource and it is that of a long-run view, if his acquiring was due to other profit seekers not knowing of the profit opportunities of this resource, due to a state of disequilibrium, then he is an entrepreneur who; through discovery, saw an absence of information and a missed opportunity for pure profit.

Taking this understanding into mind, if we return to the two arguments from Krizner and Schumpeter on the topic of the entrepreneur, we can theorize that the two are true, but merely being viewed through the same lens at a short-run, contracted view, and a long-run, expanded view of the entrepreneurial process and market state of equilibrium and disequilibrium.

What is meant by this? Let us go into a bit of investigation.

According to Schumpeter’s view of the entrepreneur, when the market is in states of equilibrium; producers produce the same quantities of goods and services as that of previous periods, the entrepreneur detracts from this convention and breaks away into a new route of market activity; distorting existing structures and moving the system into uneven states of disequilibrium. This, according to Schumpeter, is the creative destruction of the market economy, and the market process.

If we contract our lens to view the perception of the market actors prior to the entrepreneur’s activities, then we can see how, to the understanding of what is known to said actors, they were in a state of equilibrium and the “pest” known as the entrepreneur, had unravelled what they perceived to know as being all information available. We are now looking at the economic process prior to the entrepreneur’s arrival, within a short-run period.

As explained earlier, according to Professor Kirzner’s view of the entrepreneur, at any given time, the market is paved with ignorance of the individual economic actors, with missed, unknown opportunities, and that the market is in these states of disequilibrium, due to no actor having perfect knowledge; no economic actors are omniscient. The entrepreneur, as an outside observer, sees these missed unperceived pieces of information of resources to which could have more profitable uses, consumer desires not being met, and want/needs unknown to consumers to which they had no prior understanding for their satisfaction; he prepares forward looking, multi-period plans in order to achieve pure entrepreneurial profit. It is this outcome, if successfully perceived, which brings market activity via a process, closer to a state of equilibrium.

If we now expand our lens to ex-post the entrepreneurial actor’s seeking of the opportunity for pure profit, we see; through our expanded lens, that there were unnoticed, unknown opportunities for profitable market activity, to which the producers prior faced an absence of information (they don’t know what they don’t know), or, they faced optimal ignorance (they know what it is they don’t know, but it is more costly than beneficial, and so efficient to be ignorant).

While Kirzner and Schumpeter did have different theories around the subject of the entrepreneur; there is no doubt to be had, if we take Professor Kirzner’s short-run and long-run argument of examining the monopolist; with regards to looking at the matter from a shorter or longer period, it becomes possible to see why a state of equilibrium was perceived by the economic actors with regards to their known information ex-ante the entrepreneurs arrival.

This short piece should not be seen as a criticism of either Professor Kirzner’s or Schumpeter’s work; on the contrary, it is an attempt to explain that the two theories can be examined to be perspectives of differing periods of time, from the perspective of the economic actors of said differing times; the ex-ante and ex-post of the entrepreneur.

This is purely designed to be a short piece on the matter; if further examination is desired, you may find it in the following books:

  • Competition and Entrepreneurship – Israel Kirzner
  • Discovery, Capitalism, and Distributive Justice – Israel Kirzner
  • Essays on Capital and Interest – Israel Kirzner
  • Theory of Economic Development – Joseph Schumpeter
  • Capitalism, Socialism and Democracy – Joseph Schumpeter