The Equilibrating and Disequilibrating Effects of Entrepreneurship: Revisiting the Central Premises

• Date: 01 March 2016
• Author: Moren Lévesque,Mohammad Keyhani
• DOI: http://doi.org/10.1002/sej.1210
• Published date: 01 March 2016

THE EQUILIBRATING AND DISEQUILIBRATING

EFFECTS OF ENTREPRENEURSHIP: REVISITING

THE CENTRAL PREMISES

MOHAMMAD KEYHANI1* and MOREN LÉVESQUE2

1Haskayne School of Business, University of Calgary, Calgary, Alberta, Canada

2Schulich School of Business, York University, Toronto, Ontario, Canada

Research summary: We review existing theoretical propositions on the equilibrating and

disequilibrating effects of entrepreneurship in the market process. We then introduce a game

theoretical model of the market process and employ computer simulation to analyze it through

time. The formal analysis suggests that entrepreneurship as the creation of new opportunities

may not always be disequilibrating, and entrepreneurship as the discovery and exploitation of

existing opportunities may not always be equilibrating. We identify specific conditions that

produce counterexamples to the generic equilibration and disequilibration propositions pre-

viously considered to be the central premises of entrepreneurship research.

Managerial summary: Many entrepreneurs advance society by building businesses around

creative new ideas. Yet, other entrepreneurs start businesses by discovering opportunities to

profit without necessarily innovative ideas. In reality, most entrepreneurship involves both

creation and discovery. We run computer simulations of a small hypothetical economy to

analyze the impact of creation and discovery actions on the extent to which the economy

contains unexploited opportunities at any given time. Our results largely support previous

ideas on how entrepreneurs help clear the markets by discovering opportunities or how

innovations disrupt the market through creative destruction. Our resultsalso highlight ways in

which these ideas may be oversimplified and may have boundary conditions. Copyright © 2015

Strategic Management Society.

INTRODUCTION

What is the economic function of entrepreneurship?

This has been a central question in entrepreneurship

theory. In the rapidly changing technological envi-

ronment of our times, the word ‘entrepreneur’ often

conjures up images of hero-like figures who present

the world with technological marvels. They are often

strong forces of economic change that overhaul

existing industries or create entirely new ones. Light

bulbs, airplanes, automobiles, personal computers,

multi-touch phones, and micro-blogging are all

examples of their products that have impacted mil-

lions around the world and changed the way we live

forever. The academic literature usually refers to

their accomplishments as Schumpeterian ‘creative

destruction.’ But not all entrepreneurship is so dra-

matic. Many entrepreneurs jump on the bandwagon

of technological breakthroughs created by others or

simply start businesses based on already existing

tried-and-true technologies and routines. In fact,

many of the aforementioned disruptive technologies

would not have had their full impact if it were not for

the efforts of many of these more banal entrepre-

neurs. Mom-and-pop shops do not necessarily create

Keywords: market process; disequilibrium; Austrian econom-

ics; cooperative game theory; entrepreneurship; value capture

model

*Correspondence to: Mohammad Keyhani, Haskayne School

of Business, University of Calgary, 2500 University Dr NW,

Calgary, Alberta, Canada T2N 1N4. E-mail: mohammad

.keyhani@haskayne.ucalgary.ca

bs_bs_banner

Strategic Entrepreneurship Journal

Published online 5 November 2015 in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/sej.1210

Copyright © 2015 Strategic Management Society

Strat. Entrepreneurship J., : 65–88 (2016)10

something entirely new to the world, but neverthe-

less exploit opportunities they detect around them.

Their efforts are not necessarily disruptive, and they

can even be stabilizing.

The sheer variety and range of phenomena that

can fit under the label of entrepreneurship has been

problematic for researchers. What kind of entrepre-

neurship are we referring to, for example, when we

talk about the impact of entrepreneurship on the

market? When is entrepreneurship disruptive and

when is it stabilizing? Academics often refer to the

stability of the market as ‘equilibrium’ and, indeed,

there is a long lasting and ongoing debate in the

economics of entrepreneurship—particularly in the

Austrian school—on whether entrepreneurship is

equilibrating or disequilibrating (Kirzner, 1999;

Vaughn, 1992, 1994).

Resolution of the debate has not been forthcoming

among economists (Kirzner, 2009), and entrepre-

neurship scholars in the management disciplines

have shown little interest in attempting it. The con-

sensus position seems to be to accept both equilibra-

tion and disequilibration as natural coexisting effects

of entrepreneurship (Venkataraman, 1997; Zahra,

2008) and to think of them as associated with two

different ways of conceptualizing entrepreneurship:

creation of new opportunities versus discovery of

existing opportunities, respectively (Alvarez and

Barney, 2007; Chiles, Bluedorn, and Gupta, 2007). It

is taken for granted that creation of new opportuni-

ties has a Schumpeterian disequilibrating effect and

discovery of existing opportunities has a Kirznerian

equilibrating effect and that these processes form the

‘central premises’ of entrepreneurship research

(Venkataraman, 1997: 121).

We posit that after many years of taking them for

granted in entrepreneurship research, it is time to

take a closer look at these premises. Is creation

always disequilibrating and discovery always equili-

brating? If not, then under what conditions do these

propositions hold? In this article, we delve into the

matter more deeply by first taking stock of existing

theory through a concise review of existing positions

in the Austrian economics of entrepreneurship. For

entrepreneurship researchers, Austrian economics

represents a crucial improvement over the neoclas-

sical school because it relaxes the assumption of

static equilibrium. However, the more realistic

assumptions have come at the expense of formal

analyzability. Thus, the Austrian school has tradi-

tionally shown resistance to formal mathematical

modeling (Littlechild, 1986; Rothbard, 1962), even

though this insistence has lessened in recent years

(Benink and Bossaerts, 2001; Benink et al., 2010;

Fillieule, 2007; Fusari, 2005; Littlechild, 1979a,

1979b).

While the discursive approach of the Austrian

school continues to produce many insights, it is not

an ideal way to overcome the lack of conceptual

clarity, definitional disagreements, and theoretical

ambiguities that prevail in the entrepreneurship field

(Davidsson, 2012; Gartner, 1990; Lumpkin and

Dess, 1996; Shane and Venkataraman, 2000). Adner

et al. (2009) noted that such definitional ambiguities

arising from the imprecision of natural languages are

common in the social sciences, and they suggested

that formal approaches using more precise language,

such as mathematical modeling and simulation, can

make valuable contributions to the advancement of

research in these fields. Formal modeling is consid-

ered to have many methodological advantages such

as clarity, ease of comparability, transparency,

logical power, and consistency (Adner et al., 2009;

Kreps, 1990). Austrian economics presents us with a

framework consisting of a manageable number of

constructs, the interactions of which are not fully

understood, but the theory of the mechanisms under-

lying these interactions has been considerably elabo-

rated. Such conditions are ideal for the application of

simulation methods as a theory-building tool (Davis,

Eisenhardt, and Bingham, 2007).

Hence, the main contribution of this article is to

refine existing theoretical propositions on the equili-

brating and disequilibrating effects of entrepreneur-

ship by introducing a computational model of

entrepreneurship in the market process as described

by the Austrian schools. To facilitate cumulative

theory development, we build on a game theoretic

toolbox recently gaining traction in the strategic man-

agement field (Adegbesan, 2009; Brandenburger and

Stuart, 2007; Chatain and Zemsky, 2011; De

Fontenay and Gans, 2008; Lippman and Rumelt,

2003; MacDonald and Ryall, 2004), referred to by

Ryall (2013) as the valuecapture model. Although the

entrepreneurship and Austrian economics literatures

have largely remained unconnected to the literature

on the value capture model, Foss (2000: 53) refers to

this toolbox as ‘the best existing analytical vehicle to

choose to the extent that Austrians want to dress their

arguments in more formal garb.’ Webuild particularly

on the model recently outlined by Keyhani,

Lévesque, and Madhok (2015), which is the first to

bring the dynamics of the market process to the value

capture model.

M. Keyhani and M. Lévesque

Copyright © 2015 Strategic Management Society

DOI: 10.1002/sej

66

Strat. Entrepreneurship J., : 65–88 (2016)10