The Economics of Errant Entrepreneurs; I. M. Kirzner

301 The Economics of Errant Entrepreneurs by Israel M. Kirzner A recent stimulating Freeman article by Jane S. Shaw (April, 1987) provoca tively drew attention to some of the benefits derived by society from entrepreneu rial daring and imagination-even when it turns out that these are expressed in ventures that lose money and eventually fall by the way side. Ms. Shaw cites a spiffy and charming new restaurant in Bozeman, Montana, serving gourmet seafood. She judged the venture to be "outlandishly extravagant and probably fool hardy, " and suspects that the opportunity she enjoys of contemplating blackened red snapper in a pleasurable setting may tum out to be ex pensive for the restaurateurs, but is grateful for the opportunity nonetheless. Ms. Shaw rec ognizes that no business can operate over the long run without making a profit. But, she con cludes, ' 'Bozeman's experience suggests that an endless succession of businesses can operate without profits - as long as there are romantic optimists to take up where the disillusioned leave off." Ms. Shaw sees this as an illustra tion of George Gilder's conception of entrepre neurs as "givers," as economic agents who "orient their lives to the service of others."

Ms. Shaw's piece got me thinking. Most dis cussions of entrepreneurial energy, daring, and vision see profitable entrepreneurial activity as largely responsible for capitalist success. Ms. Shaw is pointing out that unprofitable entrepre neurship offers social benefits, too. Should we, then, celebrate capitalism not only because it Dr. Kirzner is professor of economics at New York Univer sity. His latest book is Discovery and the Capitalist Pro cess. stimulates profitable entrepreneurship, but be cause it stimulates unprofitable entrepreneur ship as well? Should we indeed view entrepre neurs who lose money as unselfish benefactors of market societies? Does the "social" per spective suggest that young people should be encouraged to become independent entrepre neurs-even where we judge them likely to lose money-on the grounds that even erro neous entrepreneurs are socially beneficial?

A little thought will convince us, and I be lieve that Ms. Shaw would thoroughly agree, not to arrive at affirmative answers to these questions on the basis of Ms. Shaw's observa tions. There may be numerous benefits to so ciety that derive from entrepreneurial error but such benefits are likely to be far out weighed, in the judgment of most observers, by the harm caused by entrepreneurial errors. I shall later argue, in fact, that there is only one benefit to society arising out of unprofitable en trepreneurship that deserves to be treated as a fundamental advantage. All other benefits, while we may indeed be grateful for them, are likely to be enjoyed at the expense of more se rious disadvantages both to others and to our selves. A profitable entrepreneurial venture benefits society in a way central to the logic of capitalist success. If an entrepreneur hires productive ser vices for one million dollars and produces con sumer goods that are bought for two million dollars, this means that services that might oth erwise have produced goods judged to be worth not much more than one million have, in fact, produced goods that are much more valuable to market participants, as measured by money of302 THE FREEMAN. AUGUST 1987 fered. An unprofitable venture, on the other hand, has harmed society insofar as it is likely to mean that it has used valuable, scarce social resources to produce goods worth less than other goods that could have been alternatively produced.

As Ms. Shaw has pointed out to us, how ever, it should not be thought that no one in society has benefited from a losing entrepre neurial venture. Clearly those who voluntarily sold to and those who voluntarily bought from losing entrepreneurs, did well for themselves - as do all participants in voluntary exchange transactions. Moreover, Ms. Shaw seems to suggest, not only does one who dines in an ex cellent, but moneylosing, restaurant, gain from the venture, others do too. That is, we gather, because the parade of ever-changing opportunities offered by imaginative entrepre neurs undeterred by the losses of others, is it self a fascinating sight to watch, even if many of them, being unprofitable, are likely to disap pear after a brief moment in the sun. Despite all these benefits derived from un profitable entrepreneurial ventures, we must recognize that few thoughtful observers are likely to judge that, all in all, the members of society should be grateful for this outpouring of entrepreneurial errors. The truth is that each and every entrepreneurial error represents a tragic waste of resources. For every beneficiary of such error, there are likely to be many whose lives, in consequence of this error, are poorer and less fulfilled than was in fact necessary.

These victims of entrepreneurial error may never know that they are being harmed by these errors. In fact no one may ever know what al ternative products these unprofitable ventures have precluded. As Henry Hazlitt taught us, the true costs of waste are always unseen-yet are nonetheless real and poignant. The case for capitalism, for free entrepre neurial entry, does not and should not rest upon the possible residual benefits that some may de rive from unprofitable entrepreneurial ventures. The great economic virtue of capitalism lies in its ability to stimulate vigorous and imaginative entrepreneurs who create profitable enterprises. In this way resources come to be deployed use fully for purposes whose urgency or feasibility had hitherto been overlooked. The virtues of capitalism rest not on any supposed altruism evinced by entrepreneurs who lose money while catering to the tastes of a too-narrow group of consumers, but on the daring and judgment of entrepreneurs who see socially valuable opportunities before others do.

In fact, the one really valuable feature of un profitable entrepreneurial endeavor lies in its crucially important role in stimulating profit able entrepreneurship. Only in a society where entrepreneurs are free to make errors, can we expect an outpouring of entrepreneurship to lift its economy to new, hitherto unglimpsed, heights of prosperity. Only where potential en trepreneurs are free to follow the lure of profits as they see them, will there be the unleashing of entrepreneurial vision, daring, and judgment that creates profits in fact-and in so doing, creates new, more valuable ways of utilizing resources. To be sure, errant entrepreneurs suffer losses, and it is precisely because entrepreneurs with poor judgment are likely to think twice before jumping into dangerous waters, that such erroneous leaps are likely, to some extent, to be discouraged. Moreover, as Ludwig von Mises pointed out, it is likely to be those entre preneurs who in the past have exhibited sound market judgment, who will have accumulated the capital funds that are now able to be chan neled into new entrepreneurial ventures.

Hence, the central social gain from losing en trepreneurial ventures is derived not by indi viduals unusual enough to enjoy the output of these overoptimistic ventures, but by all members of society insofar as they stand to gain from superior entrepreneurial judgment a quality standard enforced by the severe disci pline imposed on errant entrepreneurs, and stimulated by the freedom of market partici pants to follow their dreams and hunches as they, and they alone, see fit. This freedom will, to be sure, always attract a stream of entrepreneurial fools and romantic optimists. But the incredible successes of capi talism do not depend on such follies; they de pend on the stimulus the system provides to farsighted, clear-visioned entrepreneurs who are, at all times, competing away resources from foolish ventures towards more judicious, more accurate, dreams and aspirations. 0 303 The Farm Problem and Governlllent Farlll Programs by E. C. Pasour, Jr.