ON THE ORIGINS OF ENTREPRENEURIAL ALERTNESS: DID BAUER AND YAMEY PRECEDE KIRZNER?

• Author: Subrick, J. Robert

After the Second World War, the entrepreneur virtually disappeared from economic analysis (Baumol 1968). This neglect followed from the emerging models of general equilibrium that formed one aspect of the core of economic theory. (1) By assumption, the Walrasian auctioneer knew the appropriate prices necessary to equate quantity supplied with quantity demanded in each market. In addition, the auctioneer knew when and by how much to adjust prices when an exogenous factor changed such as income or production technology. Trade only occurred at equilibrium prices so that markets cleared. No market participant chose or changed prices; it occurred exogenously.

Kenneth Arrow recognized the lack of real world mechanisms to determine and adjust prices in competitive markets. He identified a logical gap in the perfectly competitive model. He wrote that "there is no place for a rational decision with respect to prices as there is with respect to quantities" (Arrow 1959: 42). Prices exist independent of consumer and firm behavior. A complete model would have to provide a solution to the conundrum. (2)

Israel Kirzner (1967, 1971, 1973) responded to Arrow's challenge. He argued for the reintroduction of the entrepreneur into economic analysis in order to explain how markets work. He offered a novel interpretation of the role of the entrepreneur in explaining how markets adjust to changes in conditions. Entrepreneurs recognized profit opportunities that no one else had. What appeared as an equilibrium price was not; it was a disequilibrium price that once recognized would yield profits. The fundamental aspect of entrepreneurship is alertness. Entrepreneurs, wrote Kirzner (1997: 72), notice "hitherto unnoticed profit opportunities" that arise from disequilibrium prices.

Kirzner did not devote many pages in his writings to discussing economic development. He focused on microeconomic processes, especially those pertaining to the mechanisms necessary to attain or approach equilibrium states. He devoted less time to understanding the role of entrepreneurship in explaining the differences in income per capita around the world. However, early in the development of his theory of entrepreneurship, he did critically examine the role of the entrepreneur in explaining comparative economic development.

In "Entrepreneurship and the Market Approach to Development," Kirzner (1971) offered a definition of the entrepreneur that predated his more well-known 1997 definition. He argued that development economics in the 1960s, outside of the Schumpeterian variety, did not include the entrepreneur and, as a result, explanations regarding the differences in income around the world were not adequate. Like general equilibrium models, models of economic development lacked an endogenous source of innovation, invention, and resource reallocation.

Kirzner's critique of development economics included a citation to P.T. Bauer and Basil Yamey's 1957 book, The Economics of UnderDeveloped Countries. He argued that their contribution missed the central feature of entrepreneurship--namely, alertness to new opportunities to make a profit. I disagree. Indeed, Bauer and Yamey (1957: 106) identified the same aspect of entrepreneurship that Kirzner would later stress--"hitherto unsuspected opportunities for profitable economic activity." Even though Kirzner (2005: 465) referred to the Bauer-Yamey book as a "classic" in development economics, he failed to fully recognize the pioneering contributions...