Entrepreneurial Errors in a Kaleidic Democracy.

Author:Bilo, Simon
  1. Introduction

    Uncertainty, subjectivity, and purposeful behavior are three features of human interaction that constrain potential market outcomes but also politicians who want to regulate these outcomes. The features, however, play out differently in the market arena when compared to the political arena, and they lead to two separate response patterns to the same type of event, particularly to a cluster of entrepreneurial errors. Whereas political responses seem arbitrary to outside observers and inject into the economy additional uncertainty, the market gives people the incentives and the knowledge to respond to errors in a more constrained--and therefore more predictable --pattern of creativity. As long as the overarching policy goal is to minimize economic uncertainty, using the term "uncertainty" here not in the Knightian sense but to refer to the general unpredictability of the future, responses to clusters of entrepreneurial errors should be left out of the political arena of a democratic polity. This conclusion is in line with the theory of Big Players, which points out that entities and people, particularly those of the state, are less predictable when they are not subject to constraints of profit and loss (Butos and Koppl 1993, pp. 322-25; Koppl 2002). I add to this theory by explaining the lower predictability in the particular context of governmental response to a cluster of entrepreneurial errors.

    Understanding the reasoning behind the conclusion that responses in the political arena to entrepreneurial errors relatively increase uncertainty starts with recognizing that uncertainty is a general characteristic of the world, which means that although the future might be imaginable, it is also unknowable (Lachmann 1976, p. 59). People living in an uncertain world therefore use their imaginations to envision the future, which inevitably leads to some errors later on. Such errors in entrepreneurial decisions represent allocations of production factors that entrepreneurs end up regretting, likely for being unprofitable or not profitable enough. Such an entrepreneur could, for example, be a car manufacturer who is not able to sell enough cars to cover at least his variable costs, or a real estate developer who overestimated the demand for apartments when she decided to build an apartment complex.

    In addition to the option of letting entrepreneurs deal with entrepreneurial mistakes within the marketplace, people in democracies can hope to use the democratic political arena to respond to the mistakes in two analytically distinct ways. Their representatives can either decide on corrective actions in the parliamentary assembly or they can delegate the decisions to bureaucracy. Both types of responses face behavioral and epistemological constraints that lead to a less predictable pattern of allocations of production factors, which in comparison to the market-based solution increases the uncertainty in the economy. This conclusion combines Hayek's (1967) emphasis on the importance of pattern prediction and Sweezy's (1938) discussion of the role of the circumstances under which people form expectations. Hayek (1967) argues that while recognizing a pattern in a society does not allow us to perfectly predict the future, it does help us to rule out possible future states of the world that are inconsistent with the pattern. But one pattern can be more useful in ruling out potential future states than another, as Sweezy (1938, p. 236) recognizes, and it is in this sense that responses to previous entrepreneurial errors through the political arena introduce more uncertainty than entrepreneurial responses.

    My discussion regarding the response to entrepreneurial errors through bureaucracies builds on Mises (1944), who argues that bureaucracies cannot be judged on the basis of profit-and-loss accounting because their output is not bought or sold through the marketplace. Since correcting entrepreneurial errors requires discretionary powers over the allocation of production factors, a bureaucrat given such a task makes decisions that have an arbitrary pattern from the perspective of outside observers. His resource-allocation decisions depend on his incentive structure, which is hard for observers to understand because it does not relate to a measurable, objective goal such as profit maximization.

    Realizing the difficulties bureaucracies face to identify and fix errors, one might turn to a parliamentary assembly with the expectation that the assembly can give a proper hearing to the concerned parties and to the experts who understand the businesses at stake. With all the information, the assemblies can then decide which entrepreneurial errors to fix and how to do it, while being aware that they have to take responsibility for the decision in the next election. Unfortunately, even when parliamentarians have an incentive to search for genuine errors and to solve them, people who try to predict their actions still face the knowledge problem that results when parliamentarians supersede profit-and-loss calculation with other concerns. In addition, de Jouvenel (1961) points out that the assemblies also face a time constraint, which is more likely to become binding when several failing entrepreneurial projects compete for an assembly's attention during economic recessions. The time constraint then may skew the information the assembly receives, making its decision even less predictable. Both features of the parliamentary process thus make its results less predictable. To connect this observation with Koppl's (2002) argument, bureaucracies and the assemblies are Big Players, as their decisions tend to be "unrelated to anything objective, regular, and predictable" (p. 122). To predict them, one has to have what Machlup (1936) would consider to be a relatively intimate knowledge of specific decision-makers' preferences, which are often hard, if not impossible, to know.

    The situation in the political arena contrasts in my framework with the free-market process, where profit-seeking entrepreneurs respond to the errors themselves. This is not because entrepreneurial decisions would be as good as the decisions of a fictitious ideal social planner. Rather, in contrast to parliaments and bureaucracies, one does not need intimate knowledge of particular people, in this case entrepreneurs, to be able to predict the pattern of their responses to previous entrepreneurial errors. While better predictability does not eliminate all the uncertainty in the economy, it comes with what one might call "constrained creativity" in the market process within which entrepreneurs are induced to respond to previous errors. Entrepreneurs seek profits, or at least try to avoid losses, which is a measurable goal under specific circumstances. This goal is permanently tested against visions of other entrepreneurs in the marketplace in a process Mises ([1920] 1990, p. 12) calls intellectual division of...

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