Disequilibrating entrepreneurship banks on global ignorance not on human error. To be unaware of opportunities is something other than to err. Being blind is not the same as seeing illusions.

For example, having a blank canvas rather than a beautiful painting is not an evil. The painting is under no necessity to exist; it is not something that ought to be; therefore, its absence cannot be called evil. But creating a painting does improve the global state of affairs and is, therefore, good.

Similarly, it is not the case that various types of market knowledge ought to be had by men; therefore, ignorance is not an evil as error is an evil; though, again, discovery of truth is good.

Saying that entrepreneurial profits are made possible by errors in human actions condemns our entire civilization to be a gigantic mistake, because things can always be better. But that I am enjoying a cup of coffee does not seem to me to be a lamentable sin for which I should scold myself and resolve never to do likewise, just because in a decade, the quality of coffee will improve. (SAtK, I, 10)

At the same time, though there is no doubt certain beauty to the construction of the perfectly coordinated evenly rotating economy, this beauty is deceptive, because something still better can always be created. Beauty is a real if subjective property, unless one does not want to treat such imperfect knowledge equilibriums as containing an aspect of perfection.

A true final equilibrium, then, would be a “heavenly” society, where there cannot in principle be any improvement. It is next to impossible to imagine such a thing, but that is exactly the implication of Kirzner’s (2000) strange artifice of treating even an ERE as still discoordinated, because it can develop further. This is paradoxical, for an inventor’s action could be coordinative in Kirzner’s sense with regard to a previous state of affairs but discoordinative with regard to some succeeding state.

As a result, the term “coordination” comes to mean “closeness to absolute perfection” which is entirely unhelpful. (I, 11)

Any introduction of a novel plan into the free market economy starts with an act of saving money with the goal of purchasing capital goods. When I save, I lower my demand for existing goods. Their producer, surprised by my behavior, may have to sell his existing inventory below costs, thereby incurring a loss. He will likely restore equilibrium in the next round of production. A smaller quantity will be produced and sold at a lower price.

Meanwhile, once I have accumulated some cash, I buy the factors of production. Unless I specifically ordered a custom-made good, there is an increase in the demand for these factors. There is now a temporary shortage of them, again remedied in the next round of their production. A greater quantity will come into existence at a higher price.

From my point of view, the factors were underpriced and will continue to be underpriced even after the factors’ supply and demand are equilibrated. If I am right, then upon combining them and creating the final product, I will be able to sell it at a profit. This means that the consumers will lower their demand for existing goods in order to have the funds to buy my stuff. Once again disequilibrium is reinforced.

But my goods and my revenues are public. Every potential entrepreneur can observe me profiting without laboring. This is too fun and lucrative an opportunity for them to pass up. They help themselves to my profits by imitating my production process. In so doing they bid on the same factors, raising both my and their costs and try to compete with me on price, lowering their prices. The costs and revenues converge, eventually eliminating all my profits.

(Since my method of production is private, commencing imitation can take some time during which my profits will be more or less secure. This period will also give me a chance myself to improve my products so as to stay ahead of the imitators.)

Finally, new entrepreneurs enter the market and by the exact same process just described turn my now profit-less even rotation into losses. My business starts out with a bang, then grows old, and finally dies with a whimper, supplanted with firms producing superior goods.


0 Comments

Leave a Reply

Your email address will not be published. Required fields are marked *