The Entrepreneurship (3/3)
Restrictions to the free entrepreneurial exercise.
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!
“The average man is both better informed and less corruptible in the decisions he makes as a consumer than as a voter at political elections.”
― Ludwig von Mises, Socialism: An Economic and Sociological Analysis
Law, Money, and Economic Calculation
The exercise of the entrepreneurial function, and human action in general, requires that the people involved in it consistently and repeatedly follow certain patterns or rules of conduct, that is, they must act according to law. This law consists of a series of norms that have evolved and been refined over time in a customary manner. These norms essentially define property rights (several property, in the more recent Hayekian terminology) and can be reduced to the essential principles of respect for life, stability in peacefully acquired possession, transfer by consent, and fulfillment of promises made.
Such an analysis, however, goes far beyond the scope of our work, so for now, we will only point out that, while the law makes human action possible, and therefore the emergence and development of society and civilization, law itself is an evolutionary result, not consciously designed by anyone, of the exercise of the entrepreneurial function.
As in comparison with cathedrals, which were built progressively over several centuries by people who were not going to see them finished. They weren’t completely sure about how was it going to look, but still they all contributed to make the final result possible.
Legal institutions, and indeed all social institutions (language, money, markets, etc.), thus arise from evolutionary processes in which a large number of people contribute, each over the course of history, their small "grain of sand" of practical information and entrepreneurial creativity, spontaneously giving rise, according to Menger's well-known theory, to institutions that are undoubtedly the product of the interaction of many people, but which were not consciously designed or organized by any of them.
This is because no human mind or organized group of human minds possesses the intellectual capacity necessary to comprehend the enormous volume of practical information involved in the gradual generation, consolidation, and further development of these institutions. Thus, the paradoxical reality is that those institutions most important and essential for human life in society (linguistic, economic, legal, and moral) could not have been deliberately created by humans, as they lack the necessary intellectual capacity, but have instead emerged from the entrepreneurial process of human interactions, spreading to increasingly larger groups through the mechanism of unconscious learning and imitation described earlier.
Moreover, the emergence and perfection of institutions make possible, through a typical feedback process, an increasingly rich and complex entrepreneurial process of human interactions. For the same reason that humans could not have deliberately created their institutions, they also cannot fully comprehend the overall role played by those existing at any given point in history. Institutions and the social order they generate are progressively more abstract in the sense that the infinite variety of particular knowledge and individual goals pursued by humans acting within their framework cannot be identified or known.
Among all these institutions, perhaps the most abstract and therefore the most difficult to understand is that of money.
Money or a generally accepted medium of exchange is one of the most vital institutions for the existence and development of our civilization, yet very few people even intuit how money makes possible an exponential multiplication of the possibilities for social interaction and entrepreneurial creativity, and what role it plays in facilitating and making possible the increasingly complex and difficult economic calculations required by modern society.
Money is crucial because, as Mises has demonstrated, it is a common denominator that makes economic calculation possible in relation to all goods and services that are subject to trade or human exchange. Therefore, economic calculation should be understood as any estimation in monetary units of the outcomes of different courses of action. This economic calculation is performed by every actor whenever they exercise the entrepreneurial function, and it is only possible thanks to the existence of money and the practical information constantly created, generated, and transmitted by the exercise of entrepreneurship.
The Essential Principle
However, what is truly important from a theoretical point of view is not who specifically exercises the entrepreneurial function (although this is indeed the most important thing in practice), but rather that, as there are no institutional or legal restrictions on its free exercise, each person can exercise their entrepreneurial talents as best as possible, creating new information and taking advantage of the practical proprietary information that they have discovered in the circumstances of each moment.
It is not the economist's role, but rather the psychologist's, to study in more detail the origin of the innate force within humans that drives them entrepreneurially in all fields of action. Here and now, we are only interested in highlighting the essential principle that human beings tend to discover information that interests them, so if there is freedom in the pursuit of goals and interests, these will act as incentives, making it possible for those exercising the entrepreneurial function motivated by such incentives to perceive and continually discover the practical information relevant to achieving the proposed goals.
Conversely, if for any reason the field for exercising entrepreneurship in a certain area of social life is restricted or closed (through coercive legal or institutional restrictions), then people will not even consider the possibility of achieving goals in those prohibited or limited areas, so, as the goal is not achievable, it will not act as an incentive, and as a result, the practical information relevant to its achievement will not be perceived or discovered. Moreover, under these circumstances, the affected individuals will not even be aware of the great value and large number of goals that they are unable to achieve due to this situation of institutional restriction.
Business Competition and Function
The business function, by its very nature and definition, is always competitive. This means that once an actor discovers a particular profit opportunity and acts to take advantage of it, that opportunity disappears and can no longer be appreciated and seized by another. Likewise, if the profit opportunity is discovered only partially, or if it is fully discovered but only partially exploited by the actor, part of the opportunity will remain latent, to be discovered and seized by another actor.
Therefore, the social process is inherently competitive, in the sense that different actors compete with each other, whether consciously or unconsciously, to perceive and seize profit opportunities before others. Every business act uncovers, coordinates, and eliminates social mismatches, and due to its essentially competitive nature, it ensures that these mismatches, once discovered and coordinated, can no longer be perceived and addressed by any other actor.
One might mistakenly think that the social process driven by entrepreneurship could eventually stop or disappear once the force of entrepreneurship has discovered and exhausted all existing social adjustment possibilities. However, the entrepreneurial process of social coordination never stops or exhausts. This is because the basic coordinating act essentially involves creating and transmitting new information, which necessarily modifies the general perception of goals and means for all involved actors. This, in turn, leads to the limitless emergence of new mismatches that represent new business opportunities, and so on, in an ongoing dynamic process that never ends and constantly advances civilization.
In other words, the business function not only makes societal life possible by coordinating the misaligned behavior of its members but also facilitates the development of civilization by continually creating new goals and knowledge that spread in successive waves throughout society.
Additionally, and this is very important, it ensures that this development is as adjusted and harmonious as humanly possible in each historical circumstance, because the mismatches that are constantly created as civilization develops, and as new information emerges, tend to be discovered and resolved by the very force of entrepreneurial human action. In other words, the business function is the force that cohesively binds society and enables its harmonious development, as the inevitable and necessary mismatches arising in this development process are also coordinated by it.
The Division of Knowledge
Given the limited capacity of the human mind to assimilate information and the increasing volume of new information created continuously by the social process driven by entrepreneurial force, it is clear that societal development requires a continuous expansion and deepening of the division of knowledge.
This idea, originally expressed in an earlier version as the division of labor, simply means that the development process involves, from a vertical perspective, increasingly profound, specialized, and detailed knowledge that requires, for its horizontal extension, a growing number of human beings (i.e., a constant increase in population).
This population growth is both a consequence and a necessary condition for the development of civilization, as the human mind's capacity is very limited and cannot replicate the vast volume of practical information needed if it is continuously created entrepreneurially and if the number of minds and human beings does not increase in parallel.
Creativity versus Maximization
The business function, or if you prefer, human action, does not essentially consist of optimally allocating given resources to given ends, but rather, as we have seen, in perceiving, appreciating, and realizing what the ends and means are; that is, in actively and creatively seeking and discovering new ends and means.
Rather than exclusively allocating given resources to given ends, what humans actually do is constantly seek new ends and means, learning from the past and using their imagination to discover and create the future step by step. Moreover, as Kirzner has pointed out, even actions that seem merely maximizing or optimizing always have an entrepreneurial component, as it is necessary for the actor involved to have realized beforehand that such a seemingly automatic, mechanical, and reactive course of action is the most appropriate.
Conclusion: Our Concept of Society
In summary, we could define society as a process, that is, a dynamic, spontaneous structure, characterized by the following features:
Not consciously designed by anyone.
Very complex, consisting of billions of people with an almost infinite variety of goals, tastes, valuations, and practical knowledge.
With countless human interactions, which are essentially exchange relationships that often manifest in monetary prices and always occur according to certain norms, habits, or behavioral patterns.
The business function that continually creates, discovers, and transmits information about ends and means, adjusting and coordinating the contradictory plans of individuals competitively.
And, finally, making possible the specialization of knowledge and the communal life of all these individuals with an increasing number and complexity of nuances and elements.
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