A Reviewer's Notebook - 1974/12

If this country is to be saved, it will be saved outside of Washington, D.C., by people who have absorbed the sort of wisdom provided by Leonard Read in his beautifully bound The Free Man’s Almanac (Foundation for Economic Education, $5).

This book, which provides a more or less epigrammatic quotation for each day of the year without reference to the zodiac (Mr. Read is concerned not with the stars, but with ourselves), is far less heterogeneous in its substance than it is in its styles. The variation in styles gives a pleasing modulation; the concentration in basic content, on the other hand, provides a formidable educational wallop.

To begin with the negative —the inability of the political arm to solve our problems — the theme is sounded by a couple of political theorists who had plenty of practical grounding in public affairs (Thomas Jefferson, Woodrow Wilson), by historians (Clarence Carson is an example), and by economists (Murray Rothbard and others).

Jefferson and Wilson did not always practice what they preached, but what they preached was good. So ignore the fact that Wilson, as a wartime President, once spoke about "force, force to the uttermost, force without stint or limit" (My quotation is from memory), and concentrate on Leonard Read’s exact quotation from Wilson as a political theorist: "The history of liberty is a history of the limitation of governmental power, not the increase of it. When we resist, therefore, the concentration of power, we are resisting the processes of death, because concentration of power is what always precedes the destruction of human liberties… Government, in its last analysis, is organized force."

Why does the "organized force" of government lead to the stagnation that is the forerunner of death? Clarence Carson says it forthrightly:

"Government is not capable, by nature, of being productive or constructive… it acts to restrain and restrict…" Murray Rothbard and David A. Stignani put it more whimsically. Rothbard notes that no private firm would dream of trying to solve a "shortage" by telling people to buy less. It is "only government that ‘solves’ its traffic problems… by forcing trucks… off the road… the ‘ideal’ solution to traffic congestion is to outlaw all vehicles!" Stignani, leaving a department store just before Christmas, noted the salesgirl’s reaction to the crowd ("Our best day yet," she said). But the postman, depositing a heavy mail at Stignani’s home, remarked that it was "the worst day we’ve ever had!"

The Self-Starting Individual

Turning to positive entries, and beginning with the self-starting individual, Mr. Read prints Alexis de Tocqueville on the "greatness and genius of America." The genius was not, in Tocqueville’s day, to be found in fertile fields and boundless forests, nor even in schools or the "matchless Constitution." Not until he had gone to the churches of America did Tocqueville understand that “America is great because America is good." (Query: what would he find in the churches today, where the preoccupation of many a pastor is with the "social," not the personal gospel?)

Mr. Read finds plenty of modern Tocquevilles around. Says Frank Chodorov: "There cannot be a `good’ society until there are `good’ men." Says Cardinal Gibbons: "Reform must come from within, not from without. You cannot legislate virtue."

The morality on which Tocqueville, Chodorov and Cardinal Gibbons have been all agreed is grounded in the grain of the universe as it applies to human society. William Graham Sumner sometimes talked against "natural rights," but, fundamentally, he believed in natural law, from which natural rights must be deduced. Said Sumner, about the accumulation of property: "… the development of character, or of any other good whatever, is impossible without property. The invectives against capital in the hands of those who have it, are double faced, and when turned about are nothing but demands for capital in the hands of those who have it not, in order that they may do with it what those who have it are now doing with it." (Doesn’t this amount to a recognition of the "natural right" to capital?)

The Origin of Rights

Clarence Carson is clearer than Sumner on the origin of "rights." "If government can create rights," he says, "it can withhold and destroy rights." Shortsighted or stupid people can, of course, give up their rights to organized force. Edmund Burke, quoted by Leonard Read, tells us how this happens. "Men," wrote Burke, "are qualified for civil liberty in exact proportion to their disposition to put moral chains upon their own appetites… it is ordained in the eternal constitution of things, that men of intemperate minds cannot be free. Their passions forge their fetters."

The government that is "organized force" takes over by insensible degrees as men let their greed master their better impulses. John Adams, a greatly neglected source of political wisdom, said that "to expect self-denial from men, when they have a majority in their favor and consequently power to gratify themselves, is to disbelieve all history and universal experience."

Once a majority has turned to government to satisfy its desires, we are on our way to the condition noted by Herbert Spencer: "The more numerous public instrumentalities become, the more is there generated in citizens the notion that everything is to be done for them, and nothing by them. Every generation is made less familiar with the attainment of desired ends by individual actions or private agencies; until, eventually, governmental agencies come to be thought of as the only available agencies."

So, if you want to strike a blow for freedom, stop asking Washington for protection of all sorts. The protection may help you for the moment — but, multiplied over thousands of individuals, it will most assuredly "forge your fetters."

Trust Freedom

Freedom alone is to be trusted to serve the individual. Montesquieu said it long ago: "Countries are well cultivated, not as they are fertile, but as they are free." Ludwig von Mises, speaking for free production, wrote that "the very principle of capitalist entrepreneurship is to provide for the common man. In his capacity as consumer the common man is the sovereign whose buying or abstention from buying decides the fate of entrepreneurial activities. There is in the market economy no other means of acquiring and preserving wealth than by supplying the masses in the best and cheapest way with all the goods they ask for."

Paul Poirot, expanding on Mises, remarks on the extra-market value of a market place kept free from compulsion. "The free market," he says, "and not its displacement by governmental controls, is the only route to the kind of personal security which makes for harmonious social relationships."

President Ford believes in WIN buttons. But it is Leonard Read who knows that you don’t "win" by sloganeering; you need the sort of wisdom that he has assembled for all the days of the year in The Free Man’s Almanac.

COMPETITION AND ENTREPRENEURSHIP by Israel M. Kirzner (Chicago: University of Chicago Press, 1973) 246 pages, $7.95

Reviewed by Henry Hazlitt

This is a first-rate contribution to the theory of competition and entrepreneurship.

Professor Kirzner is a former student of the late Ludwig von Mises. He tells us in his Preface that his book can be viewed as a critique of contemporary price theory from an "Austrian" perspective, and he modestly declares: "Above all I owe whatever understanding I have of the market process to almost two decades of study under L. Mises, whose ideas as expounded in a lifetime’s work are only beginning to be properly appreciated."

This does not mean that Kirzner’s own work lacks originality. On the contrary, by applying his "Austrian" concepts and analysis very thoroughly and patiently to the immense body of literature on price theory that has appeared in England and America over the last generation, he has not only succeeded in exposing its central fallacies but has arrived at penetrating insights and advances in market theory.

His first attack is on the "orthodox" theory of market equilibrium. (By "orthodox" he means the bulk of the technical economic literature of the last few decades. This may be confusing to older readers brought up to regard classical or neo-classical economics as orthodox. But he is right in his implication that this recent price theory, which began as heterodoxy, has itself become a new orthodoxy.)

The central error of this new orthodoxy is that it regards market "equilibrium" as a situation that tends to be arrived at automatically, because every person in the market must recognize and do what is to his own advantage. Kirzner points out that this "mechanical" theory of decision-making unconsciously assumes a world of perfect knowledge and prediction. In such a world there would be no need or scope for the entrepreneur.

As defined by Kirzner, the entrepreneur is the decision-maker who is alert to hitherto unnoticed opportunities. His function is to increase productivity by providing consumers with types of goods with which they have not previously been provided, or goods of a better quality or at a cheaper cost. Contrary to the theory of Joseph Schumpeter, the entrepreneur’s actions move the economy closer toward equilibrium rather than away from it. The reward for his alertness is profits.

The Market Process

The error of the current "market equilibrium" doctrine, Kirzner emphasizes again and again, is that it overlooks or takes for granted the process that moves the market toward equilibrium.

Kirzner goes on to analyze current theories of competition and monopoly. He politely points out the fallacies both in the conceptions of "perfect competition" and of "monopolistic competition." Both arise from regarding competition as a "situation" rather than as a process. Both are equilibrium theories. "The theory of monopolistic competition was on balance a decidedly unfortunate episode in the history of modern thought."

One insight of Kirzner’s helps beget others. In a chapter on Selling Costs, Quality and Competition he points out that so-called "selling costs" are an essential part of production costs, and cannot be legitimately separated from them in economic theory. In the final analysis, all costs are "selling costs."

Pushing this still further, he shows that advertising is not only an inseparable part of selling costs, but on net balance a service to the consumer. It makes him aware of a buying opportunity, at the same time as it is an essential part of the process which spurs the individual producer to try to turn out a better product than his competitors.

A chief function of competition and entrepreneurship, as Kirzner sees it, is to bring a closer and closer coordination in the decisions of buyers and sellers through which both secure an advantage. It is "the heady scent of profits" that promotes alertness to hitherto undiscovered opportunities for reducing costs or developing new or better products.

Among other things, Kirzner makes a devastating attack on the criticism by socialists and others that competition is "wasteful." During the competitive process through which the market approaches equilibrium, he points out, there is imperfection of knowledge. But it is the market process itself that steadily moves toward eliminating previous ignorance.

From the point of view of an omniscient observer, the market would indeed display waste and misallocation at every stage. We in the 1970′s, for example, can look back with amused condescension on the 1920′s, when a thousand inventions and discoveries known today had not been made. We can see that any number of resources were not then being put to the best uses now known for them. But it was the competitive process that led to these discoveries. Even the best economists (not to speak of engineers or other technicians) of the 1920′s did not then recognize these "wastes" and "inefficiency." Surely the efficiency of the competitive process is entitled to be judged, as Kirzner puts it, "not on the degree of conformity to the ideal allocation as seen from the perspective of omniscience, but on the degree to which currently known information is being optimally deployed." In a similar way, critics often declare that it is obviously wasteful for someone to put up a new competing factory to make widgets when the first could produce all that are needed. But we cannot know until after the competing production starts which of the two factories, the old or the new, is truly "wasteful."

I have a few minor criticisms. Professor Kirzner believes that the function of the "entrepreneur" can be completely separated from the function of the "capitalist." The "pure entrepreneur," he tells us (p. 40), can be "a decision-maker who starts out without any means whatsoever" (his italics). And again (p. 99), "purely entrepreneurial activity involves no element of resource ownership."

This is questionable. The entrepreneur-producer is by definition a man who takes risks, and with his own capital. If he is taking risks simply with other people’s capital he is merely a hired manager. True, he may borrow his capital from others; but if his project fails he must pay back, and he must have previous capital of his own to do that. The entrepreneur, in short, must be a capitalist plus. He is a capitalist willing to take unusual risks. Kirzner seems to me sometimes to reserve the term "entrepreneur" merely for the successful entrepreneur.

Again, Kirzner identifies the distinguishing feature of the entrepreneur as alertness (which he frequently italicizes). He is the one who perceives an opportunity. (Kirzner also usually italicizes "perceives.")

But two qualifications should be made. It is not enough that the entrepreneur be "alert" and that he "perceive" an opportunity; he must act on his alertness and perception. No doubt Kirzner means to imply this, but does not always make it sufficiently explicit. By omitting this link he tends to overstress the entrepreneur’s alertness and perception while under-emphasizing his courage in taking risks.

This brings us to the second qualification. It is not always true that the entrepreneur perceives an opportunity. He thinks he perceives it. He perceives an apparent opportunity. In fact, he is betting on an assumed future condition. What he acts on may not be a perception but a guess. As Kirzner himself concedes at one place (p. 86), the entrepreneur’s action "must to some extent constitute a gamble."

The point is important, particularly in view of Kirzner’s criticism of Frank H. Knight’s emphasis on uncertainty and his view of pure profit as a residual. Kirzner replies that "every entrepreneurial decision taken envisages only profits…. Treating profits as a residual fails to disclose that from the point of view of the prospective entrepreneur the profit opportunity is, with all its uncertainty, there."

But this is precisely the question. Is it there? Every entrepreneur is pitting his own guess or "perception" against the composite guess or perception of all the rest. As Knight saw, they cannot all be right.

Yet Kirzner seems to me to be justified in his criticism of Knight, though for a different reason than he himself explicitly gives. Net pure profit, as Knight pointed out, may come to only half the entrepreneurs: those who follow the pioneers too late may suffer comparative losses. But pure profits are, after all, essentially a by-product of increased efficiency — in reducing the cost of a product, improving its quality, or inventing or exploiting a completely new product. It is this increased efficiency or productivity that individual entrepreneurs strive for in order to increase their profits. The successful pioneers do reap increased profits; their followers and imitators may not. Yet, regardless of what it finally does or does not do to increase overall profits, the whole process immensely benefits all of us as consumers, as the history of the last two centuries so dramatically demonstrates. Profit-seeking may not always lead to profits, but it does lead to progress.

Some of my criticisms may apply more to oversights in Dr. Kirzner’s exposition than to defects in his theories. In making them I hope I do not draw attention from the great positive contribution he has made in explaining point by point the shortcomings of both the "orthodox" Anglo-American and Schumpeterian theories of price, competition and entrepreneurship as compared with the "Austrian" or "Misesian." Kirzner has succeeded in pushing the implications of the latter analysis to new insights.

It is only on the last two pages of his book that he offers any "normative" advice on what economic policy should be, but his brief and quiet warning is a very necessary one at this time: "A social policy which arbitrarily confiscates from entrepreneurs the profitably secure positions their entrepreneurial alertness has achieved cannot fail to discourage such alertness in the future."