What Is Entrepreneurial Judgment?
While Israel Kirzner asserts “alertness” as a quality among entrepreneurs that allow them to recognize (and then correct) errors through arbitrage, others (like Nicolai J. Foss and Peter G. Klein) rely on “judgment” as the distinctly entrepreneurial quality that explains success. While the latter is arguably a thicker conceptualization of what entrepreneurship entails than the former, both are supposedly derived from Ludwig von Mises’s theorizing on the entrepreneur as the “driving force” of the market – the “creator” of the market process.
Kirzner’s “alert” entrepreneur has been both adopted and reinterpreted in the mainstream entrepreneurship literature (see here, ungated version here). So there is a lot of literature attempting to understand (and sometimes misunderstand) the concept, and Kirzner himself has published several books on this topic trying to clarify what he means. But what is entrepreneurial “judgment”?
The original discussion on entrepreneurship as “superior” judgment can be found in Frank H. Knight’s dissertation (and book) Risk, Uncertainty, and Profit. But while the discussion is interesting, it isn’t all that helpful in terms of defining the quality. Rather, it comes across as almost a residual (though front and center) as entrepreneurship is often interpreted in Schumpeter’s Theory of Economic Development. But this doesn’t necessarily make it unimportant; Knight has a discussion on how the original entrepreneur makes an “estimate of an estimate” to figure out the state of the market and whether certain actions toward that state will then be profitable. He also discusses how the entrepreneur knows who knows rather than knows directly, which is enlightening.
There is no exact definition, however. We are not here talking about defining entrepreneurship in such terms as “uncertainty bearing,” which only defines the necessary component for the function, but what makes successful entrepreneurship. This is a much harder issue than simply delineating the sort of activity that is going on. So what could it be? What does it mean to have “superior judgment.”
First of all, it should mean some kind of foresight or understanding for what the future brings. It means decision-making that is neither random nor arbitrary, but that is instead repeated and repeatable as well as significant – though not necessarily perfect. What we’re dealing with here, in other words, is some type of understanding for how the market works and what consumers may (will) demand so that one can act to provide supply at a future point in time.
In my view, this problem is much easier than one may first think. It is neither supernatural nor extraordinary but rather an intuition based on understanding. A lot of entrepreneurs fail, but this does not mean that there is no entrepreneurial quality – only that the future is, in fact, uncertain. Though it is not random and it is not completely open-ended. At least, it is not so if one has an understanding for how the market works and how people work. This, I think, is key to understanding entrepreneurial judgment.
This type of ability therefore falls into the same category as the Misesian-Weberian method of the social sciences, which generates an understanding for what to expect but cannot provide exact answers (such as “price inflation will be 2% higher due to X”). Having an intuition for the causal processes (“X will increase price inflation, ceteris paribus“) goes a long way toward figuring out what the future will bring. Adding to this the correct identification of (a) what people value (and perhaps how) as well as (b) what other entrepreneurs are up to, provides a rather detailed picture – but exact neither in timing nor in exact numbers.
Successful entrepreneurs, I hypothesize, have a “feel” or “intuition” for the market that is similar to the understanding that theories of economics (Austrian such, primarily) provide to the scholar. But for the entrepreneur, there is the added normative dimension of what is valued – which is out of bounds for the scholar.
What this means – or should mean – is that entrepreneurs basically rely on (at least partly) the same type of understanding for the market as Austrian economists. To the degree they do not have this understanding, they are more prone to fail (though this shortcoming can be balanced with a greater normative “intuition”). The understanding is often tacit and even unknown, which may also explain why so many entrepreneurs engage in trial-and-error (especially error) as well as fail. It could also mean that entrepreneurs in fact would benefit from a more formal understanding for how the market works (that is, the causal processes). In some limited extent, therefore, there could be a place for entrepreneurship education in a very practical sense.
If this is the case, that it means that we have indirectly explained what underlies and brings about the wealth creation process and consequently economic growth. And it seems there is a chance to increase entrepreneurs’ success rates through providing formal understanding for the market (or, more likely, how their specific industry is affected by the market processes). It also means that the anti-economism combined with the policy-centered mathematized statistics people refer to as economics is leading the wrong way and is in fact hurting the economy.
There is much more work needed here, of course, because what I’ve drafted above doesn’t do much more than indicate a potential direction for research and implications of it. But there are several reasons to believe that there is a real connection between practical entrepreneurship and Austrian economic theory. What those reasons are will be covered in future posts on this blog.
Structured, rational thinking about community, cooperation, and the market