Computational modeling of entrepreneurship grounded in Austrian economics: Insights for strategic entrepreneurship and the opportunity debate

• Author: Mohammad Keyhani
• DOI: http://doi.org/10.1002/sej.1311
• Published date: 01 June 2019
• Date: 01 June 2019

RESEARCH ARTICLE

Computational modeling of entrepreneurship

grounded in Austrian economics: Insights for

strategic entrepreneurship and the opportunity

debate

Mohammad Keyhani

Haskayne School of Business, University of

Calgary, Calgary, Alberta, Canada

Correspondence

Mohammad Keyhani, Haskayne School of

Business, University of Calgary, 2500

University Dr NW, Calgary, Alberta T2N 1N4,

Canada.

Email: mohammad.keyhani@haskayne.

ucalgary.ca

Funding information

University of Calgary, Grant/Award Number:

1027454

Research Summary:This paper makes three key arguments: (a) that

computational modeling is a key methodological tool that can aid in

the development of formal economic foundations for entrepre-

neurship that are grounded in Austrian economics; (b) that compu-

tational modeling grounded in Austrian economics can serve to

integrate models of competitive advantage in equilibrium (eco-

nomic foundations of strategy) with models of the entrepreneurial

function in disequilibrium (economic foundations of entrepreneur-

ship), thereby providing an economic foundation for strategic

entrepreneurship; and (c) that the mathematical precision of com-

putational modeling grounded in Austrian economics can serve to

clarify the logic behind differing perspectives that have led to

debates fueled by the imprecision of natural languages, such as the

opportunity debate in the entrepreneurship literature.

Managerial Summary:This paper asks: what are the implicationsfor

strategic entrepreneurship if we model it on the foundations of an

economic logic developed by the Austrian economics school of

thought in a way that integrates into existing economic logics of

strategy and competitive advantage? The Austrian economics logic

highlights the role of disequilibrium, creative imagination, time and

uncertainty, while the traditional economic logic emphasizes the

importance of structural sustainable advantages in equilibrium. In

this integrative view, even if a firm does not enjoy any competitive

advantage over rivals, opportunities for profit or development of

competitive advantage still exist through entrepreneurial action. An

entrepreneur adopting this view in practice would recognize their

own agency, butalso the limits to it and the role of externalfactors.

KEYWORDS

Austrian economics, computational modeling, entrepreneurial

opportunities, market process theory, value capture theory

Received: 22 March 2016 Revised: 18 October 2018 Accepted: 8 January 2019 Published on: 20 February 2019

DOI: 10.1002/sej.1311

© 2019 Strategic Management Society

Strategic Entrepreneurship Journal. 2019;13:221–240. wileyonlinelibrary.com/journal/sej 221

1|INTRODUCTION

Some of the main theories in strategic management have been firmly rooted in the mathematical analysis of

equilibrium-based economics (Conner, 1991). While this economics framework has its weaknesses, it provides the

strategy theories with a foundation in which their logic is clarified (Adner, Pólos, Ryall, & Sorenson, 2009). Entrepre-

neurship theory, on the other hand, has not had any formal roots, although its economic foundation is usually traced

to the dynamic disequilibrium-based school of thought known as Austrian economics (Böhm-Bawerk, 1891; Hayek,

1948; Kirzner, 1973; Lachmann, 1986; Menger, 1981; von Mises, 1949). This gives rise to a challenge for those aim-

ing to formalize the economic foundations of entrepreneurship theory: how to build models that capture the entre-

preneurial function and be consistent with Austrian economics at the same time?

Although some scholars have made the effort to analyze the economics of entrepreneurship

1

with mathematical

models (Lévesque, 2004; Parker, 2005), these efforts have typically evaded the question of alignment with Austrian

economics. However, given the heavy reference to Austrian economics as the economic foundation of entrepreneur-

ship in the broader literature (Alvarez & Barney, 2007; Chiles, Bluedorn, & Gupta, 2007; Minniti & Koppl, 2003; Ven-

kataraman, 1997), this elephant in the room cannot be ignored much longer by the modelers.

A handful of modeling efforts have already made progress in incorporating Austrian insights in entrepreneurship

research (e.g., Littlechild, 1979a; Littlechild, 1979b; Littlechild & Owen, 1980; Minniti, 2004, 2005; Minniti &

Bygrave, 1999, 2001; Yang & Chandra, 2013). But it is not just the entrepreneurship literature that benefit from for-

mal models grounded in Austrian economics. Recent advances suggest that such models can break new ground in

bridging the gap between the equilibrium-based economics of strategy and the disequilibrium-based economics of

entrepreneurship (Denrell, Fang, & Winter, 2003; Keyhani & Lévesque, 2016; Keyhani, Lévesque, & Madhok, 2015;

Makowski & Ostroy, 2001).

In this paper, I advance three key arguments: (a) that computational modeling is a key methodological tool that

can aid in the development of formal economic foundations for entrepreneurship that are grounded in Austrian eco-

nomics, (b) that computational modeling grounded in Austrian economics can serve to integrate models of competi-

tive advantage in equilibrium (economic foundations of strategy) with models of the entrepreneurial function in

disequilibrium (economic foundations of entrepreneurship), thereby providing an economic foundation for strategic

entrepreneurship (Hitt, Ireland, Camp, & Sexton, 2001; Hitt, Ireland, Sirmon, & Trahms, 2011; Ireland, Hitt, & Sirmon,

2003), and (c) that the mathematical precision of computational modeling grounded in Austrian economics can serve

to clarify the logic behind differing perspectives that have led to debates fueled by the imprecision of natural lan-

guages, such as the opportunity debate in the entrepreneurship literature (Alvarez & Barney, 2007, 2013; Alvarez,

Barney, McBride, & Wuebker, 2017; Davidsson, 2015, 2017; Eckhardt & Shane, 2013; Foss & Klein, 2017; Klein,

2008; Ramoglou & Tsang, 2016, 2017; Shane, 2012; Suddaby, Bruton, & Si, 2015; Wood, 2017).

Throughout thispaper, I will use my own computationalmodeling work (Keyhani, 2016; Keyhani et al., 2015; Key-

hani & Lévesque,2016) both as a point of reference and a point of departure.This is useful to the extent that this work

represents a recent and comprehensive computational model of entrepreneurship at the macro/market level explicitly

based on Austrianmarket process theory. Hencethroughout this paper, I use theKeyhani–Lévesque model (henceforth

referred to as the KL model)as a key reference point to appraise the prospectof grounding simulation models in Aus-

trian economics.The KL model is particularlyunique in its ability to play an integrativerole, because it builds directlyon

a game-theoretic modeling framework that captures the equilibrium-based logic of competitive advantage, recently

referred to as value capturetheory or the value capture model (VCM; Gans& Ryall, 2017; Ross, 2018; Ryall, 2013), and

on this foundation, adds disequilibrium-based dynamics of the entrepreneurial function using a computer simulation

approach.

2

Hence the KL modelcan be viewed as a computational modelof strategic entrepreneurshipin the sense of

1

In this paper, in line with Austrian economics and the strategic entrepreneurship literature, I take a broad view of the definition of

entrepreneurship, encompassing all entrepreneurial action, not just the creation of new firms.

2

In this sense, the KL model could be referred to as a Dynamic Value Capture Model.

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