the title of this talk is
Entrepreneurship in the market process and I'd like to emphasize something from the very beginning
I'll be I'm going to be talking at a very elementary level and and many of you may feel insulted
by the
elementary level of this discussion and
I apologize for that
but on the other hand I
Am
convinced that
It's important to understand the most sophisticated levels of Austrian economics to get the Foundation's
clearly stated at the foundational level
so without further apology
I'm going to be talking as if you were high school students who had never heard of any economics
And I apologize for any implied
disrespect
Which is not meant at all
Now we've been talking [about] economic law
economic causation the idea is that there are systemic chains of causation in
in the economic sphere and at first glance this is
This is counterintuitive. This is the reason why economics in General is
Is really counterintuitive?
Because when you think of it, [god] as I mentioned this morning
[you've] got a lot [of] people each doing their own thing each free to do whatever they want and
You're supposed to get
constraints, you're supposed to get
[you're] supposed to get
systemic
chains of cause and effect now a chain of cause and effect means that if I
Pick up something and drop it. It's going to go one way not [that] not the other way okay now
What is it now? What constrains this watch from flying up to the ceiling is the law of gravity okay? Now? What constrains?
individual activity
such that you can you can argue for the existence of systemic chains of cause and effect the the
The fundamental message of economics is that there are?
Chains systemic chains of cause and effect and the question is how can they possibly be?
After all market participants are unconstrained
So there is a standard approach and there will be an austrian approach the standard approach is that individuals are constrained?
We are constrained by what other people do and there's a lot of that makes a lot of sense. That's true
We are constrained by what other people do
Not only are we constrained by what other people do in
The sense that if you've sat on that chair somebody else can sit on that chair, okay?
So you're constrained to look for another chair okay? That's that's that's true. That's straightforward
But you're also constrained by what your expectations of [what] other people are going to do, and that's true as well
You are constrained by what you think other people are going to pay for that chair?
if if you if you sit down on it
And so on you you you you don't go through the red light because you are constrained not you're constrained
Not merely because there's a there's a policeman with a gun
It's going to shoot you if you if you go through the red light, but because there is a certain a certain percentage
Likelihood that you may be
you may be found guilty and have enough to pay a fine so that that constrains your your actions, so
I've no quarrel with that basic insight that individuals are constrained
But how does that generate systemic chains of cause and effect in?
economic in the economic sphere well the standard approach is that if you take everybody's actions and
Recognize that all those actions have to fit in with each other in other words if you sit there
something's going to sit someplace else if that's if B sits on that chair then
Somebody's got to sit on the third chair and if you recognize [that] then you recognize that sooner or later
All of these all of these activities are mutually constraining. They are mutually determining, and that is the approach of them the
standard approach of a mainstream economics, and it's a brilliant insight that it is possible to
sue
[-] dt. D market the particular
configuration that would permit all of these mutually constraining activities to take place on melt endlessly or
Over some chronological period That's a that's a fundamental
Insight that is of course the inside of while raising equilibrium
Theory it is a powerful with a powerful insight a profound insight
from this perspective
Everybody's actions are constrained by everybody else's actions. If there's anybody whose actions are not constrained
that's going to throw a monkey wrench into this analysis so in order for this - this system to
To work in order for us to be able to say
Consistently that everybody's actions are mutual was constrained
But everybody else's actions
You've got to leave out the possibility of any a so-called
Unconstrained activities which means that you have to leave out the entrepreneur because the entrepreneur by definition, err no matter how you define it is
Someone who who acts in a way?
Which [is] not directly constrained with what other people do he's breaking through into a new product is breaking through into in your market
he's his he's
acting in a way, which is
Inconsistent with what other [peoples] expect people to do
so in order to occur to sustain
The well region or if you want mainstream vision of an economic system
it's necessary to eliminate the entrepreneur as I sometimes put it the entrepreneur is an
analytical Pest
like roaches and
rats
He's got to be
eliminated for civilized living so if the civilized economic understanding is necessary to
filter out all
entrepreneurial activity and
This when you think about think about it. This is a rather curious way of understanding the the the market economy
understanding the Market economy by deliberately
extruding by deliberately leaving out the
The Agency which everybody understands is what is what drives Marcus everybody understands [that] what keeps [markets]
Moving is entrepreneurial activity. It's the only way you can understand it is by living out entrepreneurial activity. There's something wrong
the Austrian approach is
That there are systemic processes, which not only do not require
the elimination of the entrepreneur
but to the contrary they require the presence of the entrepreneur in fact the systematic processes depend on the
Entrepreneur and they are generated by the entrepreneur, this is the this is the general
core of the Austrian approach the Mississippi the Massassi on approach
the now the role of the entrepreneur
in the market economy as compared to the role of
agents in a well raising economy the comparison between them has a parallel and that
parallel is between the the activities of
the Standard Decision maker in
in mainstream microeconomics and the action of the human agent in
mis Essien economics as you know missus is Missis's magnate magnum opus is the human action it was a it was a
powerful statement calling they his book human action focuses attention on the
fundamental difference between his economics and mainstream economics mainstream economic deals with thee with the
constrained Maximizer
the constrained maximize of the Arab Indian
Decision Maker who is
Who is confronted with the series of alternatives?
He's got a given set of goals that he wants to achieve and it's a mathematical problem how to achieve those goals in
the best possible way given the constraints of the
Resources that he has at its disposal
This is the standard this maker in microeconomics that consider constraint maximizer
for mises on the other hand the unit of decision making is the human actor and
I sometimes like to
to
illustrate the meaning of the the massage and act or human human actors as distinct from the
from the [constrained] Maximizer by
Imagining that there's a room
with a
Little label outside notice outside says this is the [decision-making] room. You want to make [a] decisions
This is the place to come you come here and and you can make your decisions here
Okay, so you're knocking [the] door [gonna]. Make a decision. What is your decision, but what is what?
[what] if decides whether you're going to get married on our let's go to Medical school whether whether I should join the national guard?
Okay, you might got a decision to make
Well, you knock on the door and you and you tell him you want to make some decisions fine
this is the place to make decisions, but you know what tell us your
objectives give us a complete listing your objective function [give] us a complete listing of the
various goals that you are interested in with the order of the of their
precedence in your preference ranking give us a list of all your constraints and
Then you can go and have a cup [of] coffee and come back in 10 minutes, and we'll tell you what you have decided
That's the decision making room that captures
That captures the meaning of constrained maximization. It's a mathematical problem
if you know what it is, you want in terms of the different degrees of
Urgency of your needs and if you know exactly what you have available to you
Then the the decision is a mechanical one it is a mathematical
One since it is what it is a constrained maximization exercise, so you don't have to stay up at nights
Agonizing whether you're going to get married or not?
You simply feed in the information and come back in ten [minutes] after you had a cup of coffee
And you will know what you have decided
Well that that obviously is not quite satisfactory. It doesn't quite capture
The [agonising] that you that we do when we have to make decisions in life
and
this I think
this this
gives us a picture [of] the difference between a
Real decision human decision it was it was it was George Shackle who?
who
Emphasized how far away the standard decision-making theory of microeconomics?
How far away that theory is from the way in which human beings make decisions, and that's completely consistent with
with the with the meaning of
Mr.. Sheean action as
Opposed to the what I call the Ribbons [ian] economizer
When I use the term Ribbons ian economizer, [I] don't want to in any way to
disparage the work of Lionel Robbins
I used to incur the displeasure of my my revered colleague Ludwig huffman
Who used to be very upset when I used to talk [in] these terms he used to deny vehement lee that
Robbins had this view of the economic decision and
You know I can I can only throw up my hands please read read Robbins if it's if it's not robbins
then whoever whoever wrote the latest the latest version of mainstream microeconomics I'll
Substitute his name or her name but but but but but I still call it [their] benzion
Economizer because that's the way I read robbins of in
1932 in fact it was robbins book that as I mentioned earlier that in fact inspired
the the way in Which
late 20th century microeconomics developed
So it's the difference between the robbins ian decision maker and the human at the human agent that that
Puts the finger on the entrepreneurial element there is an entrepreneurial element in human action in other words
Where you when you're deciding whether or not to get married when you're deciding whether or not to go to Medical school
Which medical school to go to when you making that decision you [are] making an entrepreneurial decision you're deciding at that point
whether you think people are going to are going to need doctors in the in the
With in the years to come you're going to have to make that make anticipations as to whether you think whether or not you think
Medicine is going to be completely
Socialized or not in the years to come you're going to have to make decisions
[based] on your estimate to see whether you can make it through medical [school]
You're going to have to make all those decisions these are our imponderables unknowns
these are
Predicting prediction issues a prediction, and that's what decision-making is all about that's why people
Stay up at night agonizing over decisions because you cannot simply
Make a decision based on on the mathematics. It's the the decision includes determining
What the functions are which you have to feed into your computer. That's the entrepreneurial element, okay?
now I
Think to illustrate how the entrepreneurship entrepreneurship in this sense
Relates to the market process. I think perhaps a useful way of
Doing it of achieving this will be to for me to
to recall a statement made orally by
Hayek. He made it at New York University and back in the early 60s
Was at the late 50s early 60s
[I] heard him he made her off-the-cuff remark. [he] said the most
Fundamental law of economics is the law of single price
That there is a law that you can't have two prices for the same item
He quickly added on of course. This is a tendency
One of me by adding that on. He said well
He's not denying that you [could] have two prices for the same item corn is saying is that the fundamental law of economics?
is that there is a tendency for it for the prices of a single item to
to converge to a single price
throughout the Market
And he said this is the most fundamental
I don't remember he appears the most powerful most fundamental made far-reaching law and economics, and he was absolutely right [and] I'd like to
To illustrate the idea [of] an entrepreneurial process by focusing on this law and as I say this is
very Elementary
Very elementary, but I think it can be instructive
Imagine that potatoes
can be had for [ten]
At the bottom of the Hill here in Irvington, and they can be had at [twenty] at the top of the Hill
Okay, does that violate that violate the law of hayek's [to] hayek's law let me call hayek's law
It doesn't violate the law [first] well first of all hayek said, it's only a tendency okay
is there a tendency for the price of the of the Potatoes at the Bottom of the Hill to equal the price of the
Potatoes at the top of the Hill. Well you'll say not really because it may cost some
Transportation costs to lug up
A sack of Potatoes from the bottom of the hill to the top of the hill especially on a hot day like today
You've got to pay somebody to lug those potatoes up. Oh well when you take into account the [cost] of transportation
Okay, the cost of the [potatoes] the bottom of the hill plus the cost of transportation
we'll we'll give you the exact price of the
Potatoes at the top of the hill or if they don't it [there'll] be a tendency that will make them the same, okay?
Okay, that's that sounds reasonable it sounds reasonable. Let's go a little bit further
Supposing the reason why their cost of potatoes the bottom of the hill is
Less than the price of potatoes at the top of the hill supposing the the reason for that besides
Transportation basing you include transportation costs the cost of of
Bringing up potatoes to the top of the hill from the bottom of the hill is such that
That they price the total price of the potatoes
As having been brought from the bottom of the Hill is
Still lower than the price of potatoes at the top of the hill right so things that were the case when you say there are
powerful forces that are going to make these meats the same either that means that the price [of]
Transportation is going to rise the price of the potatoes are going to rise or the
Price potatoes at the top of the other is going to fall something is going to happen to tech to cause the prices to converge
Okay
supposing now
Supposing now that the reason for the discrepancy is not transportation cost you've taken account of that
But the these are there's an absence of information
There's an absence of information because at first glance
You know I'm speaking to high school kids, so please forgive me at first at first glance. You know
It's just impossible for the price to be different
It's miss ridiculous to say the price is going to be different available from the top of Hill
Why would anybody pay a high price at the top of the hill if you could get?
Potatoes at the lower price at the bottom of the hill, okay?
why would anybody sell at the bottom of the hill for a price when you can get a higher price at the top of the
Hill including transportation costs. It's ridiculous right so cathy
Obviously, the price, it must be the same, well, we know that's not true
Why is it not true it because there may be an absence of information right, okay?
We understand that we all we're all high school kids. We aren't we understand that
There's such a thing is an absence of information
You know the answer to [that] we don't know the answer to the examination question we understand that there is such a thing as ignorance
Yes
so
There's a price isn't there a price to pay for information
isn't there a price to pay for information in other words is it cannot information be obtained at a price if
information can be obtained at a price that it would seem that the the cost of
Information is not that that much different [from] the cost of transportation if all you need to make [sure] that you've correctly
Incorporated all the costs necessary to make the potato is comparable evenly a view included the cost of lugging up the sack of potatoes
to the top of the hill if you included that then why can't you do [that] with the
With the terms of in with information, [why] can't you say well it costs it costs information
It costs there are costs involved in transmitting information in looking up information
In calling up people say what's the price of the potato to the top of the hill and what's the price of the potatoes is?
The top the bottom of the Hill that cost telephone cost because it cost their communication cost put them into the equation
Everything should work out right right everything should work out that there should be there should be an immediate tendency for the prices to be?
to be
to be to be the same including the cost of of the cost of information and
Indeed this is the neoclassical view of information cost
George Stigler eminent, Chicago a Chicago school economist developed the economics of [information] where in fact in fact
Information is purchased information is purchased
To the extent that it's worthwhile
Which means that the amount of information necessary to make [the] two prices the same?
Will be will be
Will be paid unless
The cost of information doesn't make it worthwhile
supposing it costs
it costs 300 dollars to do to lug up a sack of potatoes from the bottom of the hill the prices will be different and
There's no problem with the law
But with a lower price because these are different potatoes right the cost of the potatoes the bottom [hill] is not the same as potatoes
At the top of the hill potatoes the top of the hill require the expenditure of three hundred dollars to to lug them up
so if the cost of information is
going to be such that it doesn't pay to get the
information [then] your
Information will not be purchased the information will not be produced it will not be purchased in the price will be different
But that doesn't violate the law of the single price
Because you have not ate you're not able to transfer to translate the potatoes level on the hill to be
Corresponding potatoes at the top of the hill because you don't you don't have the information of the cost of providing the information is is?
Is is is so great that it doesn't pay?
Which means that in effect the prices are really all they're all the same prices of the same item in [other] words
Where you could translate one one form of the item is another form of the item are always going to be the same?
But we know [that] they're not [the] same. That's the crucial point. We know that. They're not the same. We see the economics of information
Misses the point that you've got to know
What information [you're] going to need and you've got to know the price of that information in order to make
[this] theory of information work
but in fact one of the absolute unknowns is the
cost of information
Not just the cost of information one of the more fundamental unknowns is the need for information if if there is a wall
Separating the the from the bottom of the Hill to the top of the hill
there is no way which people might realize that for a cost you could you could find out whether the whether there are potatoes with
A different price at the top of the hill [you] don't know that there's anything to discover
most of our ignorance and
Believe me. I'm including myself most of our ignorance is in the form of not knowing what it [is] that we don't know
[right] that's most of our ignorance is some of our ignorance is
Rational ignorance that means I take a look at the book how to speak Sanskrit?
and I take I thumb through the book and I decide I'm
[not] going to learn Sanskrit [I]
have made a conscious decision to be ignorant [I]
Love ignorance, what does that mean? I love ignorance that means that the value [of] the knowledge of Sanskrit
I have evaluated it and determined that the cost of learning is too great so [that] it pays for me
It's rational to me [it] efficient for me to remain ignorant
efficient optimal ignorance
We are high school students optimal ignorance optimal ignorance
but there is such a thing as suboptimal ignorance and
Suboptimal ignorance takes what form it takes the form of not knowing that for a very small cost I could I could I?
Could know what's necessary to make me very rich
That's a shame right because it's inefficient
But it's a fact of life. We do not know what it is
We do not know we do not know the true cost of finding out what it is
We do not know and finding out whether or not. It's worthwhile. No, we don't know that
The that's where entrepreneurship comes in the world is a world in which
The decisions that we have to make our decisions that we make in
ignorance where ignorance means
Absolute ignorance, we don't know what it is that we might want to know we don't know okay?
So the potatoes at the bottom of a hill the potatoes at the top of the hill. There's a wall in between and
some and somebody
Some somebody wanders up and down the  up and down the hill and notices he notices the prices are here at 10 when there's the price
of 20 and
He moves to make a profit [okay]. What does he do he buys he buys
Forget about transportation costs he buys
The potatoes including transportation costs 10 and sells the potatoes at 20
Makes a profit [as] he does that what does that tend to do to the price of?
Potatoes at the bottom of the hill tends to increase them. What does it do to the price of?
Potatoes at the top of the hill tends to depress them in this way the entrepreneurial activity which is what he's engaged in right?
He grasps the profit opportunity and that the grasping of their profit opportunity
Generates a price convergence that's [hayek's] law right the fundamental law
That there is a tendency. What is the nature of that tendency it is an entrepreneurial process
There [is] a tendency for an entrepreneurial process to be generated that will tend to bring prices into line with each other
notice how how far-reaching
This law is when [hi] accorded the fundamental. I believe that was his phrase fundamental
Foundation, I don't know the exact phrase I do use but I think you'll agree when you think about it it covers everything think about
Spices in India and and and in Europe I think about international trade think about inter inter [gen]
intergenerational trade
think of think about production in this most complex forms
We're not to preneur buys resources at 10 and so cars at at 20
Okay, all of that is our examples of Hayek's foundations of law
There is a tendency for prices to equal to tend to equality because if the resource can be had for 10a
What I'd like to talk about oranges you take oranges at [10:00] and turn them into orange juice at 20 then
Oranges plus the squeezing
activity it pretend and sell the orange juice for 20
Well you have found an entrepreneurial [opportunity] and that tends to bring the prices together
Until there's no, no longer any pure profit to be obtained by engaging in that entrepreneurial activity
This is a far-reaching law all examples of entrepreneurial activity throughout the market are
examples of Hayek's fundamental law
Notice the there is an exquisite
Fascination that I can't I can never get over that
Is that that the circumstance that?
[leads] to the Discovery
that there's more than one price and
the circumstance that
Inspires action to eliminate that price discrepancy the circumstance is that the price discrepancy?
Constitutes an opportunity for pure profit just grasp that for a moment. It is a mind-boggling insight
that the miss that the mistakes are
responsible for the lure to correct those mistakes it is a it is a
Marvelous, I can't think of any other term Hayek once talked about the [marvel] of the market
This is the Marvel of the market
What is the [marvel] of the market is that the mistakes?
the initial mistakes that were responsible for the price of potatoes being different in one part of the
country than another or the fact that resources were not being used to produce the products that could be produced the
circumstance that inspires discovery of these mistakes and the circumstance that [disconnect] that
Inspires the exploitation and correction of these mistakes is the circumstance that mistake
Constitutes an opportunity for pure profit if you can buy at ten sell at [twenty] that is ice cream
That allures you that that gets your attention
It gets your attention. [what] gets your attention is the direct consequence of the mistake that had been made?
Notice that the mistake was a tragic mistake
Tragic why was a tragic well if the price [of] potatoes down there was ten?
the Pride Imitators up here was
20 there are presumably people up here that would be glad to buy potatoes at [fifteen] and they couldn't get
They were they went hungry they starved to death
They starved to death
And there were low down there
That starved to death you know why because they had potatoes that that but that that they weren't able to sell attend?
There they though they were happy to sell at ten, but there was nobody buying so they had they were they had to
Suppose so that there's a there's a tragedy here the people who had potatoes at ten they would have been
Delighted to sell at fifty the people who?
Couldn't pay twenty would have been delighted to pay fifty. It's a tragedy
when the ships pass in the night, and they don't see each other it is a shame a societal shame and
This is corrected. How how is this corrected? This is corrected by entrepreneurial discovery?
By entrepreneurial discovery this is the basic meaning of entrepreneurship now I
Repeat in neoclassical economics. There is no such thing as pure profit. It doesn't exist in
Neoclassical economics which is equilibrium economics the word profit does not exist now. You may say that's not true because you
went through
the theory of the firm and
You the diagrams that you were taught?
Told you you were maximizing
Profit and you even given little squares a little wrecked angles that showed on the diagram. How you are maximizing
Maximizing profit than you had and you had you use the calculus to
calculate exactly how how
Decisions will be made order to maximize profit, but that's not true. That's not that's not pure profit
It's not it's not the profit in the in the true sense of the word profit if anything that that profit was simply quasi rent
Attributable to a fixed plant that other words in the in the [short-run]
The there may be there [may] be gravy to be gotten from the from a plant
But that's quasi rent in fact the value of the plant will have been bit up already in the classical economics to capture that
So that the the profit is simply simply the so-called profit is simply equation
I rented the the going rate of interest going equilibria rate of interest on the capital in that
In that the capital that's the nuke the newly calculated capital
That cut is constituted by that by that fixed plant there is no pure profit in neoclassical economics there cannot be
Because everybody knows everything
Everybody knows everything that means prices are already equal
What higher calls a tendency in year classical economics is not a tendency it is an achieved result
Prices are already equal there is no profit there cannot be profit because prices are already fully
equated throughout the system
But for Austrian economics pure profit is a fact of life
It signifies it signifies that at any given time [any]
[given] time there is there are mistakes being made?
With any given time there [are] discoveries to be made
The world is full of profit opportunities at all times
The what keeps the market in motion what keeps the market process
working is
the continual discovery by entrepreneurs of these profit opportunities
In grasping profit the entrepreneur is correcting what what we would call wasteful arrangement
The present arrangements are wasteful in the sense that there are potatoes down there the lower price there
But [too] there are hungry consumers at the top of the hill willing to pay a higher price, and they're not getting
I'd like to point out a
remarkable circumstance in this circumstance is
That entrepreneurship is always competitive
Always competitive, let's just Mileva that what do we mean by competition?
What do we mean by competition?
Well the textbooks have a chapter on competition
And if you read the textbook, and you boned up for the quiz on the on competition you will find out that
Following Frank Knight's formulation
competition requires
perfect knowledge it requires an infinite number of Buyers and sellers
It requires that no buyer and seller can affect the price and it requires that the product be [homogeneous] throughout the system
If you've got those those conditions fulfilled you have perfect competition if you don't have them. Well you may have
imperfect competition you may have
Sort of 80% competition whatever that means, but you don't have to learn a perfect competition we want perfect competition
why do you want perfect competition because perfect competition is
the only
Thing is the only type [of] competition that's consistent with our fundamental premises namely that we're always in equilibrium
That's the fundamental [as] the fundamental reason why?
perfect competition
Has captured the mate has captured the the headlines in our in our
elementary textbooks
That's not the competition that we know
That's not the competition that you grew up with
That's not the competition that you that your parents told you you better shape up because it's a [committed] competitive world out there
That's what they told you and they were dead right it is a competitive world out there
Not a world in perfect competition let me let me emphasize
It's a competitive world out there in what sense is there a competitive world out there?
Well, it's a world out there where everybody is trying to is trying to outstrip each other
They are trying to a strip each other [in] perfect competition
There's no point in trying to add strip each other in perfect competition everybody knows everything in
Perfect competition we've defined the system that no buyer and seller can affect the price so you're kind of you you can
Get get ahead by cutting price. You can't get ahead by improving quality
Because if you've improved quality you have violated the condition that the product is emerging is
You violated the rules of the game the rules of the game are that everybody knows everything everybody is charging the same price
Everybody is selling the same the same product
Everybody knows everything. There's no way of competing you cannot compete in perfect competition
it's it's it's sort of I I can never get over the sort of the the
Really amazing use of language from this use of language or abusive language
That the perfectly competitive model is called perfectly competitive, okay?
But that's the way it's used
but that's not the competition that we know and that's not the competition that we're talking about when we
Maintain when we claim that entrepreneurship is always competitive
What does competition really mean? What did your parents mean when that when they when they told you that there's a competitive world out there?
What they told you is that there is something called freedom of entry?
Freedom of entry that means that if you're making a very nice tidy profit very comfortable profit
there's nothing to stop other people from coming into your market and
beating your profit down by by charging a lower price in your charge this freedom of entry if
you're producing a
Product at a certain quality, and you're making a nice comfortable living. Thank you
But there's nothing stopping somebody else from making an improved product
Which will out which will out sell your product because it's a better price back to the same price
In other words wherever you're making a comfortable profit. What is that profit? What is that profit an
invitation to somebody else to enter
Profit is an invitation for entry with freedom of entry with nothing no
institutional blockages against Entry
You've got competition that's freedom of entry and that's what a dynamic market economy [requires] nothing more
nothing more
over the history of the 20th century
We heard the Brilliant lecture this morning by by by professor white on the clashes of ideas in the 20th century
Some of the some of the clashes of ideas had a lot to do with competition
It was maintained at certain times. You've got to maintain
competition
And very often maintaining competition meant
blocking competition
Blocking entry you got it. You got to keep everybody doing the same thing if
Maintaining competition means making sure that nobody charges a price less [than] anybody else. That's not maintaining competition
That's blocking competition. That's blocking entry if if if
if maintaining competition means
preventing mergers
Because the merger firm mike might cut prices that's not that's not maintaining competition
That's blocking competition is blocking entry
competition requires
Competition requires freedom of entry and nothing more what is freedom of entry [means] no?
institutional blockage
Preventing anybody from using his or her or her own resources
Including of course borrowed resources to do what they believe can capture a profit
that's freedom of entry and if there's freedom of entry that keeps everybody on their toes because if you're an incumbent
But you know that other people are free to enter your industry
You are not going to overlook the post overlook any opportunities for improving your profit
You're not going to overlook any opportunities for cutting your for cutting your price because if you don't cut your price
You know that somebody else will enter
Now does that mean to say that people never make profit because if you make profit, you're inviting other people no
No it it's precisely the kind of competition is the grasping of pockets of profit?
that's what competition means grasping puppets of profit [is] [the] continual process of
Perceiving profits where other people have made mistakes or other people have have not
Have not given the best possible service to consumers and take advantage of that of those opportunities
the continual process of
grasping profit opportunities is the
Competitive process it is that process upon which the market depends for for any efficiency as it is able to achieve
Freedom of entry this is this is now entrepreneurship is always
Free of entry is free let me just point that out you see if you're making orange juice it
Is conceivable that you can you can capture all the orange groves?
You may try [and] establish complete?
Complete control over all the orange groves [if] you own all the oranges nobody can compete [with] you
Well, just one minute can anybody still produce grapefruit juice. [oh], oh yeah, but but [but] I've got a monopoly of
Orange juice [well] that's true. But grape juice grapefruit juice is a is a
fairly good
compare competitive
Beverage to orange juice, and if you've got the if you've got the grapefruits [to] if you've got them, [so] [they've] got the grapefruit
Groves [tied] up as well. Well. There's such a thing as apple juice. There's such a thing as bottled [warner]
This there are many other things to do and if you've got the whole beverage industry buckled up in more ways than one
Okay
Then there are other things that
there are innumerable products if if if or if all the [beverages]
Are going to be monopolized people will find other ways in which to satisfy their thirst
okay, in other words any one commodity is a
Competitive commodity everything else the idea that you're talking about a single homogeneous commodity, okay is
either
artificial very artificial it's so artificial that think that the quantum theorists themselves began to realize how
unworkable it was and that's what generated in the thirties and forties the
Eduard Chamberlain's theory of monopolistic competition which was a way of having it having the best of both worlds
Recognizing that there's more than one [variety] of product and yet staying within an equilibrium, theory theoretic context
The fundamental idea is that all entrepreneurship is competitive because to be an entrepreneur
You don't need any resources nobody can nobody can monopolize?
All the resources for entrepreneurship because there are no resources necessary for entrepreneurship you may say well is that true?
Don't you need eyes don't you need ears don't you need a telephone?
Well, yes, there's a market for telephones. There's a market for ears in the market for eyes
To see we're talking about see in quotation marks [you] [have] to see that the there are possibilities of hiring
Researchers and hiring people who can bring we can work the telephones in such a way that is going to be profitable
That's entrepreneurship. No resources are required for entrepreneurship itself the entrepreneur requires resources. [he's] he buys resources
the entrepreneur buys resources and sells products
Those resources May involve May involve research
the the entrepreneur who hires the scientists do the research and the research and the scientist discovers a
technological breakthrough A
Pharmaceutical breakthrough, who is the entrepreneur not they not the scientist who made the breakthrough?
But the the employer who hired the scientists the scientists didn't wasn't an entrepreneur?
He didn't have confidence that he's going to be profitable
That's why he sold his services for effort for a fixed salary, okay in
the soviet in the soviet Union
They recognized that you have to be innovative
so the yesterday planning authorities in the soviet union used to
Set up people to make innovations, and that always reminded me of Dean's
In in colleges forgive me. I had [I] lived a sheltered life in Academia. Okay my oh my examples are from
Academia [and] what I
Experienced was [that] from time to time Dean's get the idea
We've got to change their course
Course content got to change the course structure you got that you got to have new courses because all courses are old courses you might
Want you courses so what did what did that? What did they?
what did the faculty do they take the old reading list and
Add a [few] [other] add a few items and switch things around so [that] they will
Meet so that session number one becomes session number five you you switch things around. There's new
What's new is not necessarily better?
What's new what's new in the capitalist economy is only going to come into effect if it promises a profit
The fact that it's new doesn't mean it's profitable at all doesn't mean that it's better for consumers at all
competition is
entrepreneurial and
Entrepreneurship is competitive all
Competition is entrepreneurial that when when you when anybody competes that means he enters
when the person enters he is
Making an entrepreneurial step he I can see profit opportunity. I'm moving to grasp it
That's an entrepreneurial step that's competition
Competition is entrepreneurial
entrepreneurial is
entrepreneurship is
It's competitive
So the market process is the process of mutual
Entrepreneurial discovery, that's what it is. It's a continual process of
discovery
By the way, let me just add a footnote here. This is a footnote. I'm interrupting myself
[I] talk very often talk as if the only in which an entrepreneur can act is a profitable way I
Have news for you entrepreneurs, [make] losses [too], and I have properly been criticized for
For not always emphasizing that fact I've sometimes made it seem to the reader that
Entrepreneurs always see profits and they and they make profits an entrepreneur can think him can think
He makes he sees a profit opportunity and really it may be a loss because [you're] your entrepreneurial
Activity is not choosing between givens that are here today. They're choosing between
Givers that are here today and giving us that [will] be here to give us that would be given tomorrow
And you may not see them correctly the entrepreneur may see losses that's absolutely true
And I and I [don't] want to be miss to be misunderstood
There is a process of mutual discovery in which when people make mistakes
They they realize they realize their mistakes. They
can realize your mistake and
[make] a correction or you can realize [your] mistakes and realize that maybe you should maybe you should be chopping wood rather than being an
entrepreneur
people people learn from their mistakes
now
How does this relate to the Standard?
Theory of the market
that is expressed in the
in the
Good old Marshallian cross
All right, you got a supply curve and the demand curve and in a competitive market you [ask] the students
Where is the price and they say this is the price?
That's the quantity that's the quantity this is the price how does all this relate to
to
to this diagram
Well, I think all of us. [I] [said] all of us. I mean all of us teachers
We're all teachers not high school students anymore Rose to all teachers
Role Teach economics, and we all teach the supply and demand diagram. I teach I taught it to in
My earlier career, okay? I taught this to
And I taught this in Dynamic terms
I showed how this [indicators] teaches us how price Gravitates towards towards equilibrium?
And the way you teach it is you say supposing prices above Equilibria?
Right supposing this was the price well you got an excess supply over demand excess quantity supplied over quantity demand
What does that tend to do to price forces it down?
Right if you've got an excess supply
that forces price down
On the other hand if price is below you've got a shortage because the quantity demanded exceeds the quantity supplied
If there's a shortage, what does [that] do to price well obviously price goes up?
So you've got a dementor dynamic
process in which the price is
Gravitating towards the equilibrium price towards the price where the quantity supplied is equal to the quantity demanded
[I] taught that you taught that we all taught that and it's all wrong
It's all wrong not look not that there's no [value] in this there is value in this but it's not right
It's not right because when you when you analyze
This supply [dub] supply curve and demand curve
you will realize that the
conditions to be fulfilled by this diagram
violate the possibility of disequilibrium
what I mean by that well
How do you define a point? How do you define this point this point this point call it [R]?
How do you how do you define the point R well the point R gives you the answer to the question supposing?
Suppliers would know they can sell as much as they want at that price piece of art, okay?
What would they what quantity would they offer for sale that gives you the answer?
Okay, that's what it means, but to say that
means that you are
Hypothetically assuming a demand curve going through there
With that with with so that at that price you can see you can sell as much as you want
your hypothetical similar in fact
Every point on the supply curve assume is a demand curve
Going to that point
Think about it in fact every point on the demand curve assumes that the got a supply curve going through that point
That's what the points me the points have no meaning outside the equilibrium context
Not only is that nonsense to say supposing. There's a single price as a price at this level
How can there be a single price what made it a single price?
We said it's a tendency didn't we we didn't say that. It's always [true] [the] probability [of] the price is above equilibrium
What do you mean by the V price there are many prices?
Okay, so obviously that you're you're begging the question when you talk about a single price
But even the idea you can imagine a single price being up there
And they're drawing these curves you are contradicting your you're contradicting the basic premise of whether about what a point means I?
often point out
Forgotten which economist once once made a very cogent remark you says
Really the only relevant portion of this diagram that makes any sense is this point?
Really what we should do is to draw a point and say that's the supply and demand diagram
Except the people in the back of the room wouldn't see it say make it bigger
Right now there's a profound truth in that way of putting it
Because what it means is that your diagram is really inconsistent
with an open-ended
Situation in which you do not have perfectly a competitive equilibrium
This diagram what this argument is that if you had?
You had a series of points define the way we defined them and if you had a series of points [defined] all the way you
Have them the only situation that is consistent would be that point which means that's the only point of the diagram
That's what you have. Well, that's what equilibrium it. That's what they can live you theory means [you] [defer] you're starting out
You are starting out with the assumption [that] [your] [error] erratic will it be you start out with you something you got a single price?
You start out [with] the assumption that that there is no situation
where
Any come up see some?
I'm just useful to think of this note in horizontal terms of the vertical terms take this quantity take this quantity quantity quantity
UJ
Quantity J. The question [can] two questions can be asked. What is the highest price that is low enough?
to get
Demanders to buy this quantity the answer is up there
What is the lowest price that is high enough to get suppliers to offer this quantity answer will be there?
Which means that there is a gap?
there is a there [is] a
Possible price that is higher than the prices that that
Would be sufficiently high to get a producer to get producer to produce the commodity it's that gap
That invites entrepreneurial activity by drop by drawing at this diagram and focusing on this we are assuming at all
Possible all entrepreneurial activity to to eat up to to whittle away the this price
differential has been taken advantage of
Obviously nothing is going to happen Beyond this because the highest price that is sufficiently low to get demand [is] to
To buy is lower than the lowest price efficiently high to get supplies to offer it for sale
So obviously that's not going to happen so the the presumption on the basis of which we draw this diagram
Locks us in to the intersection price. That's not the way markets operate
That's not it's a very you don't dennis understand me. I thought I've taught that too I
Taught that too, and I don't regret it
There's there's probably no tool in economics
That's less useful than that a very useful tool, but you are your are
Skipping the market process. Do you want to get a short answer what happens if there's a sudden increase in demand?
That's the diagram to use the America will shift over to the right the price goes up
But you haven't explained how the price goes up for that you need Australian price theory?
but this the again
Mises had mises has no qualms about using this diagram
He didn't [you'd] won't find it in human action not because he didn't think it was useful
But because it doesn't get to the essence of the market process
but it's highly useful diagram and [missus] recognize that if you if you want to teach if you want to teach students
Who know nothing about economics not your nanny more you know everything about economics. I taught you right
Right if you if you want to teach [people] who know nothing about economics something in [a] in 1/2 hour that will be?
Extremely valuable to the economic understanding. That's what you should teach, so please don't misunderstand what I'm hey
But that does not include that that skips the essence of the market process itself
Let me let me just try and sum up let me try and sum up
There is an exquisite Paradox
that that
That I think emerges from all of this
remember what we said before that for neoclassical economics on to the entrepreneur is an
analytical pest like roaches and rats
the exquisite Paradox
That austrian economics reveals. Is that what is responsible for?
order
What is responsible for?
systemic chains of cause and effect is
Precisely that activity which had to be pushed out of mainstream economics namely undaunted entrepreneurial activity
That's the exquisite paradox. It's not that you can consider can reconcile
Entrepreneurship with economic order you can't get any economic order, you cannot understand any?
Economic order without bringing in the entrepreneur, that's the exquisite paradox that emerges from this discussion
we
Empirically empirically we see that the market works. We see that as some people used to say Paris gets fed
Paris is best used to point out everyday requires enormous quantities of different kinds of Foods and
Miraculously, they're all here today
Harris guess what how does it work it gets work, but [it's] get worse because of the entrepreneurial process I
Mentioned this morning that I might if there's time, I might say something [about] entrepreneurship and ensure Peter
Schibetta [as] you mentioned earlier was an austrian that is he was he was an austrian trained economist on the bamber work
who of course never
was never part of the of the
of the mises hayek
version of Austrian Economics
But he was responsible way back in 1911 all the way to his book in 1942
Capitalism Social Democracy he was responsible for
emphasizing the role of the on top of the entrepreneur and
He's very often being
cited as an example
As a proponent of free markets after [all] if you recognize the advantages of entrepreneurship [we] champagne today
His entrepreneur was the fellow who comes he comes in with a new idea
he comes in with a new product [he] comes in with A
Discovering a new market and your technique [hits] what keeps the market the diner that the [dinan] dynamism of the market is
Inspired by the entrepreneur [okay], so it would seem at that this it
provides a powerful argument for
For for free markets, and it does it does much more?
Powerful than the argument of the war raisins you see the world raisins the equilibrium theorists they too are
Supposed to be in favor of the free market because in a perfectly competitive equilibrium
You can show that the other result is pareto optimal. Which is great wonderful
however
It's very easy for a critic of free markets to point out you don't have perfect competition the only perfect knowledge
You don't have infinite number of ideal sellers right said the conditions are not for phil, and it's very easy for for
for
[for] critics of the free market to point to things like externalities. It's very easy to find holes in the in the
Neoclassical Mainstream Equilibrium theory
But when you come when you reach onto when you begin to talk about entrepreneurship, whether schumpeterian
Entrepreneurship or what I will call miss [su] [in] entrepreneurship
Then you've got a different argument then the argument for the free market is freedom of entry
freedom of entry is what drives the market freedom of entry is what is what generates the
Efficiency in the discovery and the dynamism of the market you've got it. You've got a different argument and
I believe this is the this [is] the fundamental and really truthful argument in favor of the free market
Without free markets there is no, Guarantee whatsoever
That mistakes will not be perpetuated. There is no guarantee whatsoever that mistakes will ever be discovered
There [is] no guarantee
There are to see there are two types of error the types of error where?
Where the error is such that you bump your head against the ceiling
Well if you bump your head against the ceiling you realize [there's] [a] ceiling [that] and you don't do it again
But there could be also the type of mistake where you don't see that
There's a lump of gold over there. If you didn't see yesterday that there was a lump of gold
What is going to guarantee that you're going to see it tomorrow, and the world is full of lumps of gold
technological lumps of gold which we haven't seen
What inspires the discovery of those lumps of gold the answer is the opportunity to make pure profit?
that's what inspires them, and that is the
The basis for from making it a claim that
entrepreneurship and the market process demonstrates not [only]
what actually causes markets to
To work, but also why they present a powerful case for the free market
Thank you very much
you
