The Entrepreneurship (2/3)
And its characteristics.
Welcome Austrian reader!
In today’s post we’ll be introducing The Entrepreneurship.
One of the main fundaments on The Austrian School of Economics.
Hope you enjoy it!
“Many who are self-taught far excel the doctors, masters, and bachelors of the most renowned universities.”
― Ludwig von Mises
Characteristics of the Entrepreneurial Function
Entrepreneurial Function and Insight
The entrepreneurial function, in a strict sense, consists basically of discovering and appreciating (prehendo) the opportunities to achieve some end or, if preferred, to achieve some profit or gain, that present themselves in the environment, and acting accordingly to take advantage of them. Kirzner says that:
“Exercising entrepreneurship involves a special insight (alertness), that is, a continuous state of being alert, which enables the human being to discover and realize what is happening around them.”
Perhaps Kirzner uses the English term "alertness" because the term "entrepreneurship" is of French origin and does not carry in the Anglo-Saxon language the idea of "prehendo" that it has in the continental Romance languages.
In any case, in Spanish, the adjective "astute" is very appropriate for the entrepreneurial function, as it applies, according to the Dictionary of the Royal Spanish Academy, to "a very sharp sight or look that reaches far." This idea fits perfectly with the activity of the entrepreneur when deciding what their actions will be and estimating the effect of them in the future.
On the other hand, it should be noted that there is a great similarity between the insight that a historian must show when selecting and interpreting the relevant facts of the past that interest them and the insight that an entrepreneur must show concerning the facts they believe will happen in the future. That is why Mises states:
“The attitudes of the historian and the entrepreneur are very similar, and even goes so far as to define the entrepreneur as one who looks at the future with the eyes of a historian.”
Information, Knowledge, and Entrepreneurship
One cannot deeply understand the nature of the entrepreneurial function as we have been approaching it, without understanding how it modifies or changes the information or knowledge possessed by the actor.
On one hand, perceiving or realizing new ends and means implies a modification of the actor's knowledge, in the sense that they discover new information.
On the other hand, this discovery modifies the entire map or context of information or knowledge that the subject possesses. Now, we can ask the following essential question:
What characteristics does the information or knowledge relevant to the exercise of the entrepreneurial function have?
It is a subjective type of practical knowledge, not scientific.
It is private knowledge.
It is dispersed in the minds of all people.
For the most part, it is tacit knowledge and therefore not articulable.
It is knowledge that is created ex nihilo, out of nothing, precisely through the exercise of the entrepreneurial function.
It is knowledge that is transmissible, mostly unconsciously, through complex social processes, the study of which is the subject of Economic Science research.
Subjective and Practical Knowledge, Not Scientific
First of all, the knowledge we are analyzing, the most important or relevant for the exercise of human action, is above all a subjective type of practical knowledge and not of a scientific nature. Practical knowledge is that which cannot be formally represented but is acquired or learned by the subject through practice, that is, through the very human action exercised in its corresponding contexts. It is, as Hayek says:
“The relevant knowledge about all kinds of particular circumstances regarding their subjective coordinates in time and space.”
In short, we are talking about knowledge of concrete human valuations, that is, both the goals the actor aims to achieve and his knowledge regarding the goals he believes other actors aim to pursue. Likewise, it is practical knowledge about the means the actor believes he has at his disposal to achieve his goals, and in particular, about all the circumstances, personal or otherwise, that the actor considers may be relevant within the context of each specific action.
Private and Dispersed Knowledge
Practical knowledge is private and dispersed knowledge. This means that each man-actor possesses only some "atoms" or "bits" of the information that is generated and transmitted globally at the social level, but which paradoxically only he possesses, that is, only he consciously knows and interprets.
Therefore, each man who acts and exercises entrepreneurial functions does so in a strictly personal and unrepeatable way, as he tries to achieve goals or objectives according to a vision and knowledge of the world that only he possesses in all its richness and variety of nuances, and which is identical in no other human being.
Thus, the knowledge we are referring to is not something given, something available to everyone in some material storage medium (newspapers, specialized magazines, books, computers, etc.). On the contrary, the knowledge relevant to human action is essentially practical and strictly private knowledge, which is only "found" scattered in the minds of each and every one of the men and women who act and make up humanity.
Tacit, Non-Articulable Knowledge
Practical knowledge is, for the most part, tacit, non-articulable knowledge. This means that the actor knows how to do or perform certain actions (know-how) but does not know what the elements or parts of what he is doing are, and whether they are true or false (know-that). For example, when a person learns to play golf, they are not learning a set of objective scientific laws that allow them to make the necessary movements as a result of applying a series of mathematical physics formulas. Rather, the learning process consists of acquiring a series of practical behavioral habits.
Similarly, following Polanyi, we can cite the next example:
Imagine someone learning to ride a bicycle by trying to maintain balance by moving the handlebars toward the side they are beginning to fall and thus causing a centrifugal force that tends to keep the bicycle upright. This is done without practically any cyclist being aware of or knowing the physical principles underlying their skill. On the contrary, what the cyclist uses is their "sense of balance," which somehow indicates how they should behave at each moment to avoid falling.
Besides, the new formalized knowledge that we can acquire through formulas, books, graphs, maps, etc., is mainly important because it helps reorganize our entire information context from different, richer, and more fruitful perspectives, opening new possibilities for the exercise of creative intuition.
It must be emphasized that all tacit knowledge, by its very nature, is difficult to articulate.
If we ask a young lady who has just purchased a skirt of a certain color why she chose or bought it, the most likely answer would be that she bought it "because it looked good on her," or simply "because she liked it," without perhaps being able to give us a more detailed or formalized explanation of why she made that choice.
Another type of non-articulable knowledge that plays an essential role in the functioning of society is the set of habits, traditions, institutions, and legal norms that constitute the law, make society possible, and are learned by humans to obey without being able to theorize or articulate in detail the precise role these norms and institutions play in the various situations and social processes in which they intervene.
We can, therefore, conclude that the exercise of the entrepreneurial function as we have defined it (the ability to discover and appreciate profit opportunities, engaging in conscious behavior to exploit them) consists essentially of tacit, non-articulable knowledge.
Essentially Creative Nature
The entrepreneurial function does not require any means to be exercised. That is, entrepreneurship does not entail any cost and is therefore essentially creative. This creative nature of the entrepreneurial function is reflected in the fact that it generates profits that, in a sense, arise from nothing and which we will call pure entrepreneurial profits. To obtain entrepreneurial profits, it is not necessary, therefore, to have any prior means, but only to exercise the entrepreneurial function effectively.
These observations constitute both the most important and elementary teachings of social science, allowing us to conclude that:
“The entrepreneurial function is, without a doubt, the essential social function, as it makes life in society possible by adjusting and coordinating the individual behavior of its members.”
Without the entrepreneurial function, the existence of any society is inconceivable.
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