WEBVTT NOTE Authors Forum: Organizing Entrepreneurial Judgment: A New Approach to the Firm 1 00:00:00.000 --> 00:00:07.000 Good morning all. My name is Nikolaj Fass. I'm one of the two authors of this book. 2 00:00:07.000 --> 00:00:15.000 You know the other one, Peter Klein. A few words about myself. I'm a professor at the Copenhagen Business School, Europe's largest business school, 3 00:00:15.000 --> 00:00:29.000 and I'm heading the Department of Strategic Management. And I've known Peter Klein for 15-plus years. 4 00:00:29.000 --> 00:00:33.720 And we have rather similar, rather converging research interests. 5 00:00:33.720 --> 00:00:38.080 We share an interest in the economics of organizational, 6 00:00:38.080 --> 00:00:40.320 the economic theory of the firm, if you like. 7 00:00:40.320 --> 00:00:43.120 And of course, we also share a deep interest 8 00:00:43.120 --> 00:00:45.560 in Austrian economics, not the least, 9 00:00:45.560 --> 00:00:48.520 the theory of entrepreneurship. 10 00:00:48.520 --> 00:00:51.440 And as you all know, one of the strong selling points, 11 00:00:51.440 --> 00:00:53.320 as it were, in the Austrian Renaissance 12 00:00:53.320 --> 00:00:57.560 in the beginning of the 1970s was that the Austrians, 13 00:00:57.560 --> 00:01:05.160 Much in contrast, mainstream economists had a clearly articulated theory of entrepreneurship. 14 00:01:05.160 --> 00:01:10.080 Now that competitive advantage may have ceased somewhat over the years because we have witnessed 15 00:01:10.080 --> 00:01:15.140 in economics and also in other social science fields like sociology and anthropology really 16 00:01:15.140 --> 00:01:21.400 a renaissance on increasing interest at least for thinking about entrepreneurship. 17 00:01:21.400 --> 00:01:25.400 So in management we have thinking on strategic entrepreneurship, 18 00:01:25.400 --> 00:01:34.400 economics, mainstream economics is intensely preoccupied with understanding new firm formation and so on. 19 00:01:34.400 --> 00:01:41.400 And again, Peter and I, we have shared for many years an interest in entrepreneurship and the economics of the firm 20 00:01:41.400 --> 00:01:49.400 and it pleases us that we have witnessed this search of interest in the economics of entrepreneurship and in the management of entrepreneurship. 21 00:01:49.400 --> 00:01:54.520 There has been a parallel development of course in the economics of the firm with a lot of 22 00:01:54.520 --> 00:02:03.040 exciting developments all building on Ronald Coase's seminal 1937 paper, The Nature of 23 00:02:03.040 --> 00:02:04.040 the Firm. 24 00:02:04.040 --> 00:02:09.680 And of course we welcome all these developments, but we also think that these two literatures 25 00:02:09.680 --> 00:02:14.360 may have missed important insights from the other. 26 00:02:14.360 --> 00:02:22.720 And our book is essentially written to address these gaps and it's written for, it's a light 27 00:02:22.720 --> 00:02:29.360 book, it's non-technical, no mathematical notation whatsoever, no game theory, it can 28 00:02:29.360 --> 00:02:35.480 be written by ordinary human beings we think, particularly of course if these are scholars 29 00:02:35.480 --> 00:02:40.840 with some interest in the economics of the firm and in entrepreneurship, but you really 30 00:02:40.840 --> 00:02:46.840 We don't need to be an entrepreneurship or a theory of the firm scholar to be able to benefit from the book. 31 00:02:46.840 --> 00:02:50.840 Is this when I should wave this with the order form? 32 00:02:50.840 --> 00:02:53.840 Is our copy circulating? 33 00:02:55.840 --> 00:03:01.840 So what we do in order to bridge these two fields of entrepreneurship and the theory of the firm 34 00:03:01.840 --> 00:03:10.840 is to return to an idea that was really first launched by Cantillon in the 18th century, 35 00:03:10.840 --> 00:03:17.840 very much present in the thinking of Frank Knight, certainly present in the thinking of Ludwig von Mises, 36 00:03:17.840 --> 00:03:22.840 namely the idea of entrepreneurship as judgment. 37 00:03:22.840 --> 00:03:30.840 The judgment is sort of the cognitive faculty that you apply in situations where there is no clear decision rule. 38 00:03:30.840 --> 00:03:33.720 They'll do the trick for you. 39 00:03:33.720 --> 00:03:37.440 Of course entrepreneurial decisions are examples of such decisions. 40 00:03:37.440 --> 00:03:44.160 There's a need to make decisions over the use of scarce, heterogeneous resources, 41 00:03:44.160 --> 00:03:52.760 including heterogeneous capital assets and deploy them for the purpose of servicing future consumer preferences, 42 00:03:52.760 --> 00:03:57.360 under conditions of uncertainty and for a profit. 43 00:03:57.360 --> 00:04:11.960 And quite a substantial part of the book, at least two chapters, are preoccupied with detailing the differences between the Knight-Mises view of judgment and contrasting it with the Kirznerian discovery view. 44 00:04:11.960 --> 00:04:15.080 Because we think there are fundamental differences here. 45 00:04:15.080 --> 00:04:23.840 And particularly we criticize, I guess, the management literature that has taken its cue from Kirzner's notion of entrepreneurship as alertness and discovery. 46 00:04:23.840 --> 00:04:39.840 and we argue that Knightian and Misesian judgment is a much better foundation for thinking about entrepreneurship and also for linking the economics of organization and the theory of entrepreneurship. 47 00:04:39.840 --> 00:04:46.840 Very briefly, the story we tried to tell is that judgment is non-tradable. 48 00:04:46.840 --> 00:04:52.840 So in order to exploit his judgment, the entrepreneur needs to set up a firm 49 00:04:52.840 --> 00:05:22.840 that gives us a basic take on why firms, success why firms and merge why firms, arise in the market economy and we extend this kind of reasoning to classical issues in the theory of the firm like the boundaries of the firm and the internal organization of the firm and I think we really have something new to bring to the table in terms of new insights for economic organization. I think the division of labor is that Peter would walk you very briefly through the contents. 50 00:05:22.840 --> 00:05:31.840 So, Nikolai is the idea man and I handle practicalities like telling you how to buy the book. 51 00:05:31.840 --> 00:05:40.840 Actually, I only received the first hard copies. They were sent to my office on Tuesday. 52 00:05:40.840 --> 00:05:48.840 The publishers' website, the publishers' Cambridge University Press, according to their website, the book is now available for purchase in the United Kingdom. 53 00:05:48.840 --> 00:05:53.840 in the Kingdom, the U.S. version of the site indicates an April 30th publication date. 54 00:05:53.840 --> 00:05:55.200 I don't know what that means. 55 00:05:55.200 --> 00:06:01.960 You can pre-order on Amazon, either on the U.S. site, and you can order on the U.K. Amazon 56 00:06:01.960 --> 00:06:02.960 site. 57 00:06:02.960 --> 00:06:08.240 I understand that there will be copies available in the Mises Institute bookstore, and we'll 58 00:06:08.240 --> 00:06:14.640 be able to order from the Mises store online at some point when the books are available. 59 00:06:14.640 --> 00:06:26.640 If you just can't wait until then, you'll find on the book table downstairs some order forms where you can place your order directly with the publisher and receive a discount. 60 00:06:26.640 --> 00:06:34.640 The paperback edition can be yours for only $29.59, which is pretty good for an academic text. 61 00:06:34.640 --> 00:06:43.640 There also is a hardback available for those of you who would prefer to spend $79.20 for the same thing with a little more durable cover. 62 00:06:43.640 --> 00:07:13.640 cover. Let me just say a word or two about the contents of the book. Let me see if I can get this all to fit. I'm sorry, I can't get it all on one page. Just to give you a sense of sort of the structure of the book, and maybe a better idea of the intended audience for the book. As Nikolai mentioned, this is a scholarly book. It's aimed at researchers and teachers and lay readers who may have an academic 63 00:07:13.640 --> 00:07:20.640 are a scholarly interest in the theory of entrepreneurship, in Austrian economics, in the economic theory of the firm. 64 00:07:20.640 --> 00:07:29.640 As Nikolai mentioned, it does not presuppose any specialized knowledge in the areas of entrepreneurship or economic organization. 65 00:07:29.640 --> 00:07:41.640 The introductory chapters, for example, the second and third chapters, provide fairly wide-ranging reviews of the contemporary entrepreneurship literature in management and in economics, 66 00:07:41.640 --> 00:08:11.640 And then an overview of how various scholars within the Austrian tradition have approached the entrepreneur, placing particular emphasis on figures like Mises and Kirzner, of course, and then contrasting or using that as a way of positioning our own approach, which builds on Mises, of course, but also, as Nikolai mentioned, on Frank Knight. The third chapter, for example, is a bit of a critique of the contemporary management literature, which is very strongly 67 00:08:11.640 --> 00:08:41.640 adopted the so-called opportunity discovery perspective, which is based on Kirzner's notion of entrepreneurship as alertness to exogenously given profit opportunities, a perspective which we think offers potentially much insight into processes of market clearing, but we argue in other ways is misleading in terms of understanding what entrepreneurship is and what entrepreneurship does. We describe this idea of judgment 68 00:08:41.640 --> 00:08:47.920 Judgment, which comes from Frank Knight in somewhat greater detail. 69 00:08:47.920 --> 00:08:56.560 So the fourth chapter is all about how Knight approaches judgment and how we, using various 70 00:08:56.560 --> 00:09:03.720 insights from other approaches within economics, cognition theory and so forth, try to unpack 71 00:09:03.720 --> 00:09:06.400 the concept of judgment a little bit more. 72 00:09:06.400 --> 00:09:14.400 We have a chapter on Austrian capital theory, that's chapter five, criticizes contemporary 73 00:09:14.400 --> 00:09:21.160 economics and some parts of management theory for adopting an inappropriately undifferentiated 74 00:09:21.160 --> 00:09:25.700 notion of capital. So building on classic works in the Austrian tradition, we explain 75 00:09:25.700 --> 00:09:31.520 the importance of capital heterogeneity for understanding what the entrepreneur does. 76 00:09:31.520 --> 00:09:37.280 We frequently quote a line from Ludwig Lachmann, whose 1956 book, Capital and Its Structure, 77 00:09:37.280 --> 00:09:42.440 contains a number of insights on entrepreneurial processes that have not been widely adopted 78 00:09:42.440 --> 00:09:45.920 even within the Austrian school. 79 00:09:45.920 --> 00:09:50.960 Lachmann says, he says, we are living in a world of unexpected change, hence capital 80 00:09:50.960 --> 00:09:55.720 combinations, tell me if I get this right, will be continually forming and reforming. 81 00:09:55.720 --> 00:10:00.460 In this activity, we find the real function of the entrepreneur. 82 00:10:00.460 --> 00:10:05.340 So we characterize the real function of the entrepreneur following Lachman is the continual 83 00:10:05.340 --> 00:10:12.060 combination and recombination of heterogeneous capital resources under conditions of genuine 84 00:10:12.060 --> 00:10:17.460 uncertainty, Nidian uncertainty if you like, or what Mises calls case probability instead 85 00:10:17.460 --> 00:10:18.900 of class probability. 86 00:10:18.900 --> 00:10:25.860 And we also develop a number of implications for the economic theory of the firm in the 87 00:10:25.860 --> 00:10:27.980 sixth, seventh and eighth chapters. 88 00:10:27.980 --> 00:10:48.980 And in the conclusion, we discuss some implications, not only for academic work, but also for public policy, some critique of contemporary economic policy on the grounds that it fails to take into account things like heterogeneity of resources, tacit knowledge, of course, entrepreneurial judgment, and so forth. 89 00:10:48.980 --> 00:10:54.820 We'd be happy to take any any questions. I think we have, Mark, if it's okay if 90 00:10:54.820 --> 00:10:58.740 anyone has a question or a comment. Excuse me, something I meant to 91 00:10:58.740 --> 00:11:02.500 mention before in terms of audience. Some people have asked, would this be 92 00:11:02.500 --> 00:11:06.420 suitable for a textbook, for textbook use in the classroom? I certainly think it 93 00:11:06.420 --> 00:11:13.940 would. I mean, again, its aim, the intended audience is, would be, you know, 94 00:11:13.940 --> 00:11:18.420 students with some prior exposure to a little bit of basic economics. So maybe 95 00:11:18.420 --> 00:11:24.420 may be not a freshman level undergraduate course, but an intermediate or advanced undergraduate course. 96 00:11:24.420 --> 00:11:30.420 We think the book in entrepreneurship, in Austrian economics, in the theory of the firm, in strategic management, 97 00:11:30.420 --> 00:11:36.420 we think it would be very suitable for those uses and even more so for graduate level courses, 98 00:11:36.420 --> 00:11:39.420 masters or doctoral courses in any of these areas. 99 00:11:39.420 --> 00:11:43.420 We think the book, you know, it offers an original contribution, 100 00:11:43.420 --> 00:11:47.420 but also quite a lot of review and synthesis of prior contributions. 101 00:11:47.420 --> 00:11:52.420 It could be very effective as a textbook for advanced undergraduate or graduate classes. 102 00:11:52.420 --> 00:11:54.420 Yes, someone in the back had a question. 103 00:11:54.420 --> 00:11:55.420 Yes. 104 00:11:55.420 --> 00:12:19.840 Yes, yes, I don't want to get too much into the substance of the arguments, but we do address that point in the book. 105 00:12:19.840 --> 00:12:49.840 and for now I'll simply say that we distinguish between sort of think of a very broad general notion of entrepreneurship and Mises talks about this he says entrepreneurship deals with acting man under conditions of uncertainty which of course includes all human action right but there's also a narrower more specific notion of entrepreneurship focusing on individuals who are acting in the market in the commercial realm attempting to earn money profits 106 00:12:49.840 --> 00:12:54.480 and Avoid Money Losses, and typically when we talk about entrepreneurial activity in 107 00:12:54.480 --> 00:12:59.240 a capitalist economy, we have in mind that narrower, more specific kind of business entrepreneurship 108 00:12:59.240 --> 00:13:04.360 notion, though many of the concepts do generalize, you know, to all aspects of human behavior. 109 00:13:04.360 --> 00:13:05.360 Yes, Sean? 110 00:13:05.360 --> 00:13:06.360 Schumpeter had a few things to say about entrepreneurship. 111 00:13:06.360 --> 00:13:07.360 Have you given him any information? 112 00:13:07.360 --> 00:13:08.360 Yes. 113 00:13:08.360 --> 00:13:19.640 I mean, I would say Schumpeter plays a smaller role in our argument than Knight or Mises, 114 00:13:19.640 --> 00:13:23.520 Yes, we do talk about Schumpeterian creative destruction. 115 00:13:23.520 --> 00:13:28.700 We see Schumpeter in this context as, while providing tremendous insight, standing a little 116 00:13:28.700 --> 00:13:34.680 bit outside the Mangerian tradition and really coming from more of a Volrasian perspective. 117 00:13:34.680 --> 00:13:38.080 But we certainly recognize the significance of his insights and we do discuss them in 118 00:13:38.080 --> 00:13:39.080 the book. 119 00:13:39.080 --> 00:13:44.080 I mean, I suppose I should flip to the index right now and see how many times people like 120 00:13:44.080 --> 00:13:48.800 Schumpeter are mentioned, but I won't do that in case what I'm saying is off the mark. 121 00:13:48.800 --> 00:14:00.800 If judgment is the role of the entrepreneur, would you say that the Kirznerian view of profit discovery is the causal effect? 122 00:14:00.800 --> 00:14:12.800 I mean, right. One interpretation of Kirzner is that what, you know, Kirzner's interest is not entrepreneurship per se, but equilibration. 123 00:14:12.800 --> 00:14:18.080 But how do we get from conditions of disequilibrium to equilibrium? How do markets clear? 124 00:14:18.080 --> 00:14:21.840 And Kirzner invokes the entrepreneur in a very kind of indirect, 125 00:14:21.840 --> 00:14:24.320 a sort of instrumental way. 126 00:14:24.320 --> 00:14:28.800 Entrepreneurship is that which takes markets from disequilibrium to equilibrium. 127 00:14:28.800 --> 00:14:32.520 Because if they're in equilibrium, there must be profit opportunities. We think they tend to be 128 00:14:32.520 --> 00:14:36.080 exploited. That's why markets clear. 129 00:14:36.080 --> 00:14:40.680 One can criticize that argument even on its own terms, and we do offer a little 130 00:14:40.680 --> 00:14:46.460 a little bit of criticism about how the way we think that argument is situated in a particular 131 00:14:46.460 --> 00:14:52.100 understanding of the market that could be challenged even from within the Austrian perspective. 132 00:14:52.100 --> 00:14:57.000 But holding that aside, we also criticize the modern entrepreneurship literature for 133 00:14:57.000 --> 00:15:03.100 saying that look, you know, that perspective may be significantly limited in the extent 134 00:15:03.100 --> 00:15:06.680 to which it offers insight into entrepreneurship itself. 135 00:15:06.680 --> 00:15:15.040 And to justify this claim, we rely on none other than Israel M. Kirzner, who has written 136 00:15:15.040 --> 00:15:20.040 to management scholars something along the lines of roughly paraphrasing, you guys didn't 137 00:15:20.040 --> 00:15:23.000 understand me at all, you don't know what you're talking about, my work is really not 138 00:15:23.000 --> 00:15:24.920 all that relevant for you. 139 00:15:24.920 --> 00:15:30.180 He didn't say it in exactly those words, but in an interesting published article in 2009, 140 00:15:30.180 --> 00:15:33.960 he criticized entrepreneurship scholars for misunderstanding what his project was all 141 00:15:33.960 --> 00:15:39.040 about, namely about explaining equilibration, not explaining entrepreneurship. 142 00:15:39.040 --> 00:15:41.560 But we do have some discussion of that in the text. 143 00:15:41.560 --> 00:15:47.360 Maybe just one more so we have time for everybody else. 144 00:15:47.360 --> 00:15:50.380 Professor Foss and I would be happy to answer questions or talk to you about the book at 145 00:15:50.380 --> 00:15:52.520 any time during the rest of the conference.