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Skip to 0 minutes and 10 seconds In this lecture, we deal with entrepreneurship from the perspective of complexity and uncertainty. We discuss the views of three authors, Hayek, Kirzner, and Schumpeter. Recall how at the beginning of this course Hayek, the neo-Austrian economist, defined a social complex system. And let me remind you, social complex system is a system where you have a set of interacting human beings who respond to each other and to their environment. In a social complex system, it is impossible to centralize all information that’s used in the system at one central point or in one individual.

Skip to 0 minutes and 56 seconds Hayek analyzed the market economy as a social complex system. There’s no central coordinator in the market economy. It’s characterized, the market economy, by decentralized decision making, private property, and voluntary exchange. Interacting individuals bring about an order in a market economy. Emergence occurs. The market order is a competitive order.

Skip to 1 minute and 27 seconds The market order is a set of patterns that emerge, and let me tell you more generally what an order is. An order is the set of general outcomes, patterns, that emerge from the interaction of purposefully acting individuals on the basis of a set of rules in the broad sense. That means that not just rules, but also conventions, legal rules, ethics, and institutions in a broad sense. So a particular order is the market order, and is a set of patterns that emerge in a market systems. Key patterns in a market order are, first of all, the tendency to cost minimization; secondly, the tendency to constant growth of productivity and growth, and a tendency that no arbitrage opportunities remain unused.

Skip to 2 minutes and 29 seconds That is, that the law of one price holds. The law of one price states that the same good will have the same price at a certain point in time.

Skip to 2 minutes and 41 seconds There is a critical role for the entrepreneur in the emerging market patterns. He or she acts in his or her own self-interest. That is, he or she tries to make a profit in competition with others, and as said, the market order is a competitive order. How can you make a profit? Well, basically, you can make a profit by selling cheaper than your competitor– that is, having lower costs– or selling better products than your competitors.

Skip to 3 minutes and 18 seconds Kirzner, another author, another economist, another neo-Austrian economist, has thoroughly defined and analyzed the role of the entrepreneur in the market process. The entrepreneur is what he calls alert.

Skip to 3 minutes and 37 seconds The entrepreneur senses so-far unused opportunities for making a profit. Alertness is key in the market process.

Skip to 3 minutes and 47 seconds And after having spotted this opportunity, the entrepreneur acts on these opportunities.

Skip to 3 minutes and 55 seconds Entrepreneurs together so bring about the tendency for the law of one price to hold. Entrepreneurial activity explains how order emerges, without central coordination. It explains how it is possible to make use of all dispersed information and knowledge in society. Entrepreneurial activity explains the constant pressure on costs in a market economy. Being cheaper than your competitors is one way to win the competition.

Skip to 4 minutes and 34 seconds Entrepreneurship is a role, rather than a person. That means that everybody in some circumstances can and will play that role, but not everybody to the same extent. Let’s now move on to Schumpeter, again, a neo-Austrian economist. He has emphasized another part of the role of the entrepreneur. He focuses on the role of the entrepreneur in bringing about what he in German called [SPEAKING GERMAN], new combinations of the factors of production. This is what we nowadays would call innovation.

Skip to 5 minutes and 17 seconds Apart from being cheaper than competitors, being better, producing better products and services, is the other way of winning the competition and making a profit. This explains why there is a constant tendency in a market economy to innovate and introduce new products. Innovation can also involve introducing new, cheaper production processes.

Skip to 5 minutes and 43 seconds Schumpeter has introduced a term, “creative destruction,” for this pattern brought about by entrepreneurial activity. It changes the structure of the economy, creates new sectors, destroys old ones– the same for products. Nowadays, a similar term is often used, “disruptive innovation,” clearly based on this analysis of Schumpeter. It is important to recognize the difference between invention and innovation. The entrepreneurial role is not to invent new things, but to use them in such a way that they can be applied in the economic process profitably. In this lecture, we have discussed the views of Hayek, Kirzner, and Schumpeter on entrepreneurship against the background of complexity and uncertainty.

Entrepreneurship and the emergence of order and innovation

This lecture introduces the entrepreneur from the perspective of Austrian economists Hayek, Kirzner and Schumpeter.

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Decision Making in a Complex and Uncertain World

University of Groningen

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