Book Reviews

But Tocqueville, that prophetic French visitor of the early 19th century, sensed troubles to come. Democracy was fine, but there could be tyrannies of the majority. The Founding Fathers, in dividing the powers of government, had done their best. But community was not a matter of elections and parliaments. It was a matter of man's relation to the cosmos in which we all must live. Tocqueville worried about the strong drives of individualism and Statism which seemed to put inexorable pressure from two ends of the scale on the "intermediate" organizations. He saw the State stepping in to assume powers that should belong to groups of citizens. Unfortunately, citi zens can be passive. The State didn't have to be the wicked enemy of mankind that figures in the writ ings of Mencken and Albert Jay Nock. It didn't have to be vicious, as in Hitler's Reich or Stalin's gulags.It could aspire to be total in a nice way,with negligence taking over. But what of freedom?

Tocqueville thought we could be conned out of it. "Because of our single-minded concentration upon the individual as the sole unit of society,"Nis bet writes, "and upon the State as the sole source of legitimate power, we have tended to overlook the fact that freedom thrives in cultural diversity, in local and regional differentiation, in associative pluralism, and above all, in the diversification of power. "Basically," Nisbet continues, "all of these are reducible ... to the single massive problem of political government to the plurality of cultural associations which form the intermediate authori ties of society.... " Nisbet reworks this theme of diversification by quoting from·a score of people to make the same point. Bertrand Russell, Mon tesquieu, Lord Acton, Proudhon, Frank Tannen baum, David Lilienthal, Karl Mannheim, Lewis Mumford-all of them are lined up as proponents of setting unit against unit, power against power.

The grand enemy is Rousseau's General Will. Decentralization is the word that can link anar chists (Proudhon), engineers (Lilienthal), and old fashioned liberals together. William A. Schambra, in his introduction to the new edition of The Questfor Community,says that Nisbet's work "stands among the most important social critiques ever written." There is no denying that every page of the book has provocative sen tences. But the proliferation of quotations from so many other primary social critics gives Nisbet's 318 THE FREEMAN • AUGUST 1990 work the flavor of an anthology. Nisbet doesn't grant his readers the right to say, "Hey, you've made· the point sufficiently strong in your own words. Why drag in all the corroborative voices?" The justification for Nisbet's method is that it teaches. And Nisbet is first of all a teacher. Since he obviously hasn't found his "community" (he is still "questing"), he would be the last to claim the orig inality that Kant made the mark of the true creator.

Nisbet would probably be satisfied to be known as a good teacher of the values underlying the free society.He can leave the hyperbole to others. D DISCOVERY,CAPITALISM,AND DISTRIBUTIVEJUSTICE by Israel M. Kirzner BasilBlackwell,P.O. Box1655,Hagerstown,MD 21741 -1989 -179 pages. $29.95cloth Reviewedby CharlesW" Baird I n three earlier books (1973,1979,and 1985), Israel Kirzner developed his positive theory of market process which, he convincingly argued, is superior to neoclassical comparative statics as a framework for understanding how mar kets work in the real world. In the present book he employs the insights of his positive analysis to build a brilliant new theory of distributive justice, which he calls the "discovery theory of justice." Just about everyone these days agrees that cap italism (meaning an economic system based on private property and voluntary exchange) does a better job of creating wealth than any other known economic system. But far too many still allege that capitalism fails to distribute that wealth equitably.

Even the best known, and most respected, efforts to defend capitalist distributione.g., J. B. Clark's marginal productivity theory and Robert Nozick's entitlement theory-fail to convince the doubters. While Kirzner's arguments won't persuade all doubters, they are likely to reduce their ranks greatly. The book is organized into seven easy-to-read chapters. In the first, Kirzner introduces his theme and outlines his argument. In chapters 2 and 4, he develops the key concept of discovery and explains its role in ongoing market processes. More about this later. In chapter 3, Kirzner demonstrates that the dis covery principle was overlooked by economists J. B. Clark, F. B. Hawley, Frank Knight, and Joseph Schumpeter. Surprisingly, according to Kirzner, even Ludwig von Misesfailed to grasp the normative implications of discovery. Although Mises' economic analysis incorporated the discov ery principle, he defended capitalist distribution merely on utilitarian grounds. Philosopher John Rawls' view of economics is in the neoclassical tra dition of welfare economics. Market processes and discovery are completely foreign to him. Although Robert Nozick's entitlement theory is consistent with a market process view of economics, he fails to incorporate any discovery concepts.

In chapter 5, Kirzner makes the case that once the role of discovery is, fully understood, the well known finders-keepers rule is seen to be appli cable to the normative evaluation of capitalist dis tribution. In chapter 6, he defends thefinders keepersrule as a "widelysharedethicalintuition" and shows how it overcomes the weaknesses of Nozick's entitlement theory. Finally, in chapter 7 he points out some of the questions-e.g., the problem of rectification of past injustice-which the discovery principle is incapable of answering. My only substantive criticism of the book is that chapter 3 seems out of place. Chapters 2 and 4 nat urally go together. So far as I can see, chapter 3 could easily follow chapter 4 without any disad vantage. It makes better sense to search for discov ery in the work of others after discovery and its place in the market process have been fully expli cated.

That said, the argument of the book is com pelling. Briefly, and incompletely, it goes like this. There are two kinds of ignorance that every indi vidual must cope with in the real world-igno rance of which one is aware and ignorance of which one is unaware. The first involves things which we know we don't know. We remain igno rant of some things by design simply because we don't think it is worth the trouble to find out about them. This sort of ignorance can be dispelled by deliberate search for the missing knowledge. It is the kind of ignorance that neoclassical economists. address in the literature on information costs and search. The second kind of ignorance, what Kirzner calls "sheer ignorance," refers to things that we don't know that we don't know.We simply have no inkling that any knowledge is missing. In many cases of sheer ignorance we would place a high val ue on the missing knowledge if it ever came to our attention. We just fail to notice it or fail to see that it would be worthwhile to obtain. Sheer ignorance is dispelled by discovery. Discovery involves no deliberate deployment of resources in search; it comes spontaneously to those who are alert to new possibilities. A discoverer envisions a possible alternative state of affairs that he considers supe rior to the status quo. In other words, a discoverer is an entrepreneur who notices a hitherto unno ticed profit opportunity.

The next important distinction is between pure production and discovered production. In the for mer, a fully specified set of inputs is transformed into a fully specified output. This is the concept of production in neoclassical theory. Here it can be said that possession of the inputs guarantees pos session of the output. The set of all inputs that are necessary (in the engineering input-output sense) for the physical production of the output can be considered inchoate output. The output can be attributed solely to the contributions made by each of the necessary inputs to the final product. This, indeed, is the basis of J. B. Clark's marginal productivity theory of factor incomes. But in the real world things are not so simple. Given inputs aren't mechanically transformed into given outputs. Before any such physical transfor mation takes place someone has to envision the possibility that such production would be worth while. Someone has to discover the production possibility,assemble the necessary resources, and deploy the inputs. Desirable output goals and nec essary means to those goals are not "given" to any one. Discovery is the originative act upon which everything else depends.

Entrepreneurial alertness is fueled by the prospect of pure profit. Pure profit is defined as the difference between the price at which the out put is sold and the sum of the prices paid for all of the inputs necessary, in the engineering input output sense, for production. Entrepreneurship, therefore, is not a resource in the sense of neoclas sical production theory. The pure profit gained by a successfulentrepreneur cannot be defended as a Clarkian marginal productivity resource income. But entrepreneurship is necessary for produc tion in the sense that entrepreneurial discovery is the originative act upon which all production depends. In this sense it can be said that entre preneurship is responsible for the whole of the final product. A successful entrepreneur discovers a OTHER BOOKS 319 profit opportunity. Before the opportunity was dis covered it did not exist in any economicallysignifi cant sense. The discoverer can be said to have createdthe possibility,and it is a widely shared eth ical intuition that a person who brings something into existence has a just entitlement to it.

Moreover, entrepreneurial discovery amounts to creation ex nihilo. The entrepreneur does not deliberately deploy any resources in discovery. The entrepreneur simply notices that which hith erto has been overlooked by everyone. The entrepreneur finds the profit opportunity, and, if we subscribe to the widely shared ethical intuition called the "finders-keepers" rule, we must con clude that the entrepreneur has a just entitlement to the pure profit that results. Here I have a quibble. In chapter 2, Kirzner explains the difference between discovery and search. He writes, "One may, as a result of search ing, 'find' something valuable that one sought. But the verb 'to find' in this context, is not at all the same as the verb 'to discover.'" In chapter 5 he adopts "finders-keepers" as the name of the ethi cal principle upon which to base his discovery the ory of justice. This seems contradictory. Presum ably he uses "finders-keepers" because that is the common name attached to the idea. But precisely because the name is so common, some may dismiss the principle as trite. Perhaps a better name for the principle would be something like "creators-keep ers" or "originators-keepers."

Lest one think that the discovery principle applies only to a relatively few people called entrepreneurs and only to one sort of income called pure profit, Kirzner goes on to explain that every income received by every transactor in a capitalist economy includes a discovery compo nent. As Mises pointed out, and as Kirzner has often reminded us, although it is analyticallyuseful to separate the role of the entrepreneur from the role of resource owners and the role of consumers, everybody is an entrepreneur. A seller of labor is never in the position of merely having to choose from a well-defined and ranked set of alternatives. Neither is a capitalist, a landowner, or a consumer. Markets are never in neoclassical equilibrium. No one is ever sure what the available means and ends are. All decision making is done in the presence of at least some sheer ignorance. Better employment alternatives, better investment alternatives, better purchase opportunities, and better prices all must 320 THE FREEMAN • AUGUST 1990 be discovered.Doingthe bestyoucanfor yourself, no matter what that means to you, requires alert nessand entrepreneurialdiscovery.Discoveryand the finders-keepers rule are applicable to all incomes.

One of the highlightsof the book is Kirzner's discussion of supply and demand in chapter 4. Neoclassicalanalysisis centered on market-clear ing prices and quantities-where supply and demand intersect. But most markets are out of equilibriummostofthe time.Kirzner'sdescription of the role of discoveryin the actionsof all trans actorsin any market in disequilibriumis the most completeand mostconvincingI haveever seen.It should accompanyevery lecturer's discussionof the famousscissorsdiagram. AlthoughKirzner'sdiscoverytheoryof justiceis much more than a mere supplement to Nozick's entitlement theory,Kirzner deployshis theory to overcome two major objections that have been leveledagainstNozick'sarguments.Nozick'stheo ry includesjusticein originalacquisitionoftitlesto thingsand justicein transfer of such titles.Nozick usesLocke'slabor theoryof propertyto define his principleof justicein acquisition,and he baseshis principle of justice in transfer on voluntary exchange.The former has been challengedon the groundsofthe LockeanProviso,and the latter has been challengedon the basis that an exchangeis not trulyvoluntaryunlessall transactorsgive their informedconsent.

Accordingto Locke,one gets a just entitlement to an unownedgift of nature by being the first to mix his labor withthe gift of nature providingthat "there is enough,and as good left in commonfor others." In a world of scarcity,dissenterssay, the provisocan never be met. Thus private property titlesto whatareoriginallygiftsofnaturecannotbe justified.-Ironically,it is only in a world of scarcity that the institutionofprivatepropertyis significant. Nozicktries to escapethis problem by redefin ingthe provisoto require onlythat the acquisition of title not worsenthe conditionof others.Nozick claimsthat the wealth-creatingcharacteristicsof capitalismmakeit possibleto avoidworseningthe conditionofothers.ThusNozick,likeMises,relies on a utilitariandefenseof capitalistdistribution. Kirznerthinks,and I agree,that Nozick'smodi ficationof the LockeanProvisoisn't likelyto per suadedissenters. Moreimportant,Kirznerexplains that the principleof discoverymakesthe Lockean Provisoirrelevant.The act of mixinglabor with a hithertounownedgiftof nature has to be preceded by the originativeact of the discoverythat such an acquisitionwouldbe worthwhile.It cannotbe said that such an act of acquisitiondiminisheswhat is availableto others.Beforethe discovery,the acqui sitionwasn'tavailableto anyone.

Those who challengeNozick'sprincipleof jus tice in transfer do so on the groundsthat in many ostensiblyvoluntaryexchangesat least one party doesn't divulgeall he knowsto his exchangepart ners.Thussuchexchangepartners don't give their informedconsentto the exchange. For example, consider simple arbitrage. An entrepreneur noticesthat someoneiswillingto sell somethingat a pricethat is significantlylowerthan the price that someoneelseis willingto pay for it. The entrepreneur graspsthe opportunityby buy inglowfromthe firstpersonand selling~igh to the secondperson.The entrepreneur,however,could not do so if the over-eagerseller knew the price that the over-eagerbuyer was willingto pay. Nor couldthe entrepreneurdo soifthe over-eagerbuy er knew the price at which the over-eager seller was willingto sell. By withholdingsuch informa tion,the entrepreneur makesit impossiblefor the others to give their informedconsent.Hence, the dissenterssay, the entrepreneur's gain cannot be justified.

Here again, the principle of discovery over comesthe objection.The opportunityfor the low price sellerto sell directlyto the high-pricebuyer did not exist in any practical sense prior to the entrepreneur's discoveryof the price discrepancy. The buyerand the sellerdid not knowof eachoth er, and, moreover,they did not knowthat they did not knowofeachother.The possibilitysimplynev er occurredto them.The discoveryofthe possibil..; ity actually created it, and, in accordance with finders-keepers,the entrepreneuris entitledto the pure profit he created. Withthe collapseof Communism,the onlyseri ous obstacleto the eventualuniversaladoption of the privateproperty,voluntaryexchangeeconom ic systemis the continuedperceptionby manythat capitalistdistributionis unavoidablyunjust.Kirz ner'sbook is a majorcontributiontoward the cor rectionof that perception. D Dr. Baird is Professor of Economics at California State University at Hayward.