Hello. I'd just like to start saying I'm glad to be back here at the Mises Institute.
It's been a number of years, and I really appreciate the opportunity.
It's great to be here. Thanks to everyone in attendance and to the supporters of the Mises Institute as well.
Our paper is on Austrian business cycle theory, entrepreneurship and Austrian business cycle theory.
So we're looking at the intersection of two major strands in the Austrian economics literature.
The basic problem that we're looking to investigate, Austrian economics has extensive literatures
developed on both the theories of entrepreneurship, Mises, Hayek, Kirzner, Schumpeter to the extent
that he's an Austrian, and as well on business cycle theory, Tim got into a little bit in
his paper, but I'm sure we're all familiar with the basics of both of those areas of
research in Austrian economics.
There's not a lot of very explicit treatment of the specific roles and actions that entrepreneurs
necessarily take at each stage in the business cycle.
So we do see it mentioned in some more or less detail, sometimes more just in passing
as in Hayek.
But to develop that more specifically, and our basic question is, can we really gain
new insights into Austrian business cycle theory by focusing directly on the concrete
actions that entrepreneurs take at each stage in the cycle.
We start with Menger, one of the founding fathers of Austrian School, obviously, who
writes entrepreneurial activity includes a, obtaining information about the economic situation,
b, calculation, all the various computations that must be made, c, an act of will by which
which goods of higher order are organized, are assigned to production processes, and
finally D, the supervision.
So I outline these, A, B, C, and D, A being perceiving, which we see most characterized
in the opportunity discovery literature.
We also see this mentioned in Mises as well, of course, all of these are throughout the
different strands of Austrian entrepreneurship literature, calculations, so we have profits
and Losses, the basic arguments all around economic calculation. C is Acting. Of course,
entrepreneurs must control real resources in order to do this, something we see much
more from the Misesian tradition of entrepreneurship in Austrian economics. And then, Judgment
under Uncertainty from Knight and others. The last one, D, is one we don't see often
emphasized explicitly, but I feel is important. It really speaks to the Austrian emphasis
on Processes Occurring Over Time in Markets Through Entrepreneurial Action
here, that all three A, B and C are continuously revised and updated and occur over time in
a production process.
We classify in the paper three basic approaches in the Austrian entrepreneurship literature.
The first one starting from Boehm-Bawerk, Knight, Mises and Rothbard.
This is the judgment under uncertainty paradigm where entrepreneurs must control real resources
and take their own risks of profit and losses actually acting through the production process.
The second coming first originally from Wieser, somewhat from Hayek and really exemplified
in Kirzner where the entrepreneur is a pure opportunity discoverer, is alert to opportunities
but doesn't necessarily have to control any resources
or actually execute the investment and production plans
that need to be undertaken to exploit that opportunity.
And lastly, Schumpeter, again, to the degree
that his theory is really Austrian,
I liked what Samuel Bostaff had to say a lot
about what Schumpeter was writing the other day,
which is exemplified in creative destruction.
The entrepreneur is a disequilibrator,
taking the economy from one
Valerian equilibrium to another.
One connection that we do see in Schumpeter's entrepreneurship theories is the almost dependence
on credit creation. So there's a connection here to Austrian Business Cycle Theory already
that in order to bid real resources away from other users, entrepreneurs depend on some form
of new credit entering the economy in order to actually execute their new innovative production
Plans. My professor and co-author, of course, favors the first approach, so I strongly agree
with him. Next, moving on to the basic outlines of Austrian business cycle theory, we have
three phases, the initial being the boom, where entrepreneurs are really the active
of Agents.
None of these phases happen on their own.
The central bank could print as much money as it wanted if entrepreneurs aren't actually
investing those funds in, well, malinvesting those funds into projects of longer and longer
time horizons.
You don't have a business cycle.
So the boom, you must have entrepreneurs acting as agents, adjusting the capital structure
of the economy to the expanded level of credit, flow of credit.
and being the point of crisis, so the bust, the revelation of entrepreneurial errors here.
So now we see some effect of which projects that entrepreneurs began in the early stages
of the business cycle will actually be able to obtain the resources they need to be seen
to completion.
And last, the recession or recovery, as Mises said, the recession is the recovery.
Entrepreneurs as agents of liquidating the malinvestments and reallocating the resources
to new and more profitable, well, actually profitable projects as the economy returns
to a more efficient state.
So how do we interact these?
We look at the relationships between the three strands of entrepreneurial theory and three
phases of the business cycle here.
In the first school of entrepreneurial thought, the judgment, Misesian School, entrepreneurs
in the initial stages of the business cycle because of falsified interest rates and in
some cases over optimism about the course of the economy, expected future course of
the economy, make mistakes in their economic calculation and in the actions that they take
on the basis of those calculations because they aren't pure alert discoverers in this
tradition.
In the bust, we see an increase in uncertainty, a spike in 19 uncertainty as a flow of credit
is cut off as some plans cannot be completed, businesses fail and we have a sorting effect
between entrepreneurs whose plans can be carried through to completion and those who can't,
those who must go bankrupt, they enter the workforce, become unemployed, retire, what
have you.
and then in the recovery is actual asset reallocation and reinvestment.
So we have very active agents of the recovery here and the entrepreneurs.
In the alertness school of thought, in the boom phase, the malinvestment is essentially
a misperception of time preference.
There's not necessarily being carried through to action, but this is the alertness, the
opportunity discovery.
Of course, some of these will later be revealed not to have been opportunities, which is a
In the bust we see, are they discovering errors essentially? The opportunities that they discovered ex-ante in the boom phase turn out not to be profitable.
So apparently they're not really opportunities, not sure what those would be other than pure error.
And then the discovery of new opportunities in the recovery phase as falling prices.
We see entrepreneurs taking advantage of liquidated assets to reallocate the structure of production.
Lastly, the creative destruction, Schumpeterier paradigm, in the boom phase you have to have credit expansion again to allow that innovation to occur.
So the entrepreneurs in a way are already connected to business cycles.
At the starting point and the end point, we're in valuation equilibrium, there essentially is no role for the entrepreneur.
During the bust, we see overinvestment in some of these new technologies.
technologies, entrepreneurs get overextended into the new plans, irrational exuberance
going into things like the tech bubble, and of course the obsolescence of older technologies,
the buggy whip industry, those factories all closed down.
And the final recovery is where we actually see the creative destruction being carried
to completion as the economy moves into that new equilibrium.
So the question now is so what?
We can make laundry lists of various theories of entrepreneurship from the Austrian perspective
and the different characteristics of phases of the business cycle, but does this really
provide us new insights, and if not, is it really worth the effort?
So what we've derived basically from this analysis is three claims, first being that
the entrepreneur-discoverer, the alertness paradigm, the Kurtznerian paradigm, essentially
Actually these entrepreneurs are passive, they could be observing the economy through
a telescope from the moon, they're not actually necessarily acting on anything, they're just
perceiving opportunities and they're responding to price signals, they're responding to changes
in the market rate of interest in the boom phase, in the bust and recovery, they're responding
to falling prices for various productive factors.
But where do these prices actually come from in the first place?
It must be through the action of entrepreneurs in the first place.
And second, in Schumpeter's view, my contention is that contrary to his, the idea of the entrepreneur
being a bold leader of men, the entrepreneur is actually somewhat weak and timid.
The entrepreneur is paralyzed, absent the injection of new credit into the economy,
unable to bid resources away into his new and innovative projects, which if they were
are really worthwhile, you'd think someone would be interested in funding those, but
apparently not in Schumpeter's framework, while simultaneously being overconfident as
we see overinvestment in new technologies leading to the bust.
So there's some contradiction here within Schumpeter's framework.
Lastly, we claim that it's really the judgment-based Misesian view that best frames entrepreneurial
action over the business cycle.
This is where we see the entrepreneur really as an active agent of the economy and the
business cycle.
So this is the best way to look at how can we analyze business cycles with the emphasis
on individual entrepreneurial action.
So some theoretical implications of this.
We see that the judgment-based view best describes how entrepreneurial beliefs can impact the
Business Cycles. Entrepreneurs, as Mises said, who understand the business
cycles better, maybe we wouldn't have business cycles if they knew that
engaging in a given project would turn out to be malinvestment. Of course they
don't know that ahead of time, but it's clearly the entrepreneurial beliefs
carried into action that dictate the course of the business cycle from start
to finish. And also an ideal I got from Tim's paper, that when you have greater
uncertainty during boom phases, perhaps you'd see less investment in highly
and any specific high order roundabout production processes.
How would this affect the course of the business cycle?
We see a much longer period until reaching the final bust
as entrepreneurs invest in more of the putty assets,
the less specific capital goods.
Next we see entrepreneurial characteristics
affect business cycles over the course of the cycle.
Some recent research really follows this kind of paradigm.
Evans and Vax and Dale's work on how credit expansion induces sub-marginal entrepreneurs
to enter markets, that again, contrary to Schumpeter, it's not the bold leaders who
are engaging in new and innovative investments during the boom phase leading up to the crisis.
It's actually sub-marginal entrepreneurs, those whose judgment would not readily suit
them to become entrepreneurs under normal conditions.
Third, that the judgment-based view implies that actual entrepreneurial decisions over the cycles are not pure opportunity discovery, but must be carried through into action to actually make a business cycle happen.
Again, a central bank could print as much money as it wanted.
Entrepreneurs could be pure opportunity discoverers, could see that maybe there's some money to be made there.
But unless somebody takes action, in this case, in this paradigm, entrepreneurs take action, exercise judgment to arrange assets into constellations that are going to consist of those longer plans of production at higher orders, you don't have a business cycle.
Again, some recent research really falls into this paradigm.
paradigm. So because we see also some of the most productive empirical and
theoretical work is falling within this view, this judgment-based Misesian view
is another argument in its favor. Karelian Dempster's 2001 paper where
even if entrepreneurs know that maybe there's going to be some malinvestment
they have faced a prisoner's dilemma of they must invest in some of these
malinvested projects because everyone else is doing it and they'll be left
behind, essentially miss the boat.
Lastly, some empirical implications.
This is something I'm particularly interested in,
that the judgment-based view provides the best basis
for empirical extensions of Austrian business cycle studies
because it focuses on micro-level individual potential data
that's out there, and phenomena anyway,
rather than the large-scale aggregate data
that we see in most macro studies of business cycles,
that the actions, characteristics and beliefs
of actual entrepreneurs, those are more readily observable.
We have survey data on the opinions and attitudes
and sentiments of different types of business people
being periodically carried out.
It's easier to assemble data, you know,
really directly on the performance of different sectors
of the economy and even specific businesses
with the level of disclosure
by publicly traded firms especially.
So what we have is readily observable facts
and even some counterfactuals for time periods
or other geographic areas where the same business cycle
maybe is not proceeding,
which raises the bettenoir for Austrians at least
of testable hypotheses, you know,
actual falsifiable statements that maybe can be the basis
of empirical or even econometric work.
And here we actually have a literal bettenoir, so.
And that's the conclusion basically of our paper, so thank you for your time.