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Summary theory session 3
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Theory session 3SOURCE: SHANE
Technological change provides the basis for new entrepreneurial activities. For this opportunity
discovery and exploitation should take place. There have not been a lot of explanations on the
discovery of opportunities. Until now, neoclassical economics assumed that people will discover the
same opportunities given a technological change, uncorrelated with the attributes of the discoverers.
Austrian economics: different people will discover different opportunities in a given
technological change because they possess different prior knowledge. The discovery of
entrepreneurial opportunities depends, in part, on the distribution of information in society.
In this article it is demonstrated that: ( supports Austrian economics)
- any given technological change will generate a range of entrepreneurial opportunities that
are not obvious to all potential entrepreneurs
- entrepreneurs can and will discover these opportunities without searching for them
- any given entrepreneur will discover only those opportunities related to his or her prior
knowledge
Theories on discovering opportunities:
- Neoclassical equilibrium theories
Equilibrium theories assume that markets are composed of maximizing agents who
collectively decide about prices in markets. In an equilibrium framework, all opportunities
have been recognized and all transactions are perfectly coordinated. This does not allow
people to recognize opportunities that others do not see. Entrepreneurs are just individuals
who prefer to become entrepreneurs, mostly those individuals have a great taste for
uncertainty. So:
o Everyone can recognize all entrepreneurial opportunities
o Fundamental attributes of people, rather than information about opportunities,
determine who becomes an entrepreneur.
- Psychological theories
Entrepreneurship is a function of stable characteristics possessed by some people and not
others. According to this perspective, enduring human attributes—such as need for
achievement, willingness to bear risk, self-efficacy, internal locus of control, and tolerance
for ambiguity —lead some people and not others to choose entrepreneurship. Discovery
depends on differences between people and their willingness/ability to search for and
identify opportunities. For example, they argue that superior information processing ability,
search techniques, or scanning behaviour make some people more able or willing to discover
opportunities. So:
o Fundamental attributes of people, rather than information about opportunities,
determine who becomes an entrepreneur
o This process depends on people’s ability and willingness to take action.
- Austrian theories
Describes how a market can obtain an equilibrium from nonequilibrium initial conditions.
Argues that market consist of people who possess different information, this allows people
to see opportunities that others cannot see, even if they are not actively searching for
opportunities. Differences in information lead people to see different value in a given good or
service and offer different prices to obtain it. By buying or selling goods and services in
, response to the discovery of price misalignments, an individual can earn entrepreneurial
profits or incur entrepreneurial losses. This process of decision making about prices moves
an economy from disequilibrium to equilibrium. So:
o People cannot recognize all entrepreneurial opportunities
o Information about opportunities, rather than fundamental attributes of people,
determine who becomes an entrepreneur
o This process depends on factors other than people’s ability and willingness to take
action.
Differences between the models
- Is opportunity discovery mechanical?
Opportunity discovery is seen as mechanical in the neoclassical economics assumption.
Opportunities are obvious for everyone and entrepreneurs select between different
opportunities through a process of maximization. In Austrian economics discovery of
opportunity cannot be understood through ‘‘mechanical computation (berekeningen)’’. If
entrepreneurs cannot see more than one opportunity for technological changes,
entrepreneurs cannot select (let alone maximize) between different opportunities.
- Who becomes entrepreneur?
Unlike both neoclassical economics and psychology, Austrian economics provides an
explanation for the entrepreneurial process that does not depend on the identification of
people who are more likely than other people to become entrepreneurs. Because the
Austrians believe that the possession of information that is appropriate to a particular
opportunity leads to opportunity discovery, they do not believe that anyone is more likely
than anyone else to become an entrepreneur across all opportunities.
- Is opportunity exploitation endogenous to opportunity discovery?
Neoclassical economics and psychology assumed that the attributes of people who discover
opportunities are uncorrelated with the attributes of the opportunities that they discover.
Individual differences affect the way people exploit opportunities while ignoring the
attributes of the opportunities themselves. In Austrian economics human attributes are
correlated with the opportunities that people discover.
- Centralization or decentralization?
Neoclassical economists have argued that general purpose technologies should be exploited
by a single entrepreneur across different market applications because such centralization
minimizes duplication of effort and contracting costs, and increases economies of scale and
scope. However, if people do not discover the same entrepreneurial opportunities in a given
new technology, then decentralized commercial exploitation of general purpose technologies
is advantageous. Centralization of new technology development will lead to under
identification of opportunities because no central agent can identify all possible
entrepreneurial opportunities for a new technology.
Propositions Austrian framework:
- Proposition 1: all individuals are not equally likely to recognize a given entrepreneurial
opportunity.
Entrepreneurial opportunities are opportunities to bring into existence new goods, services,
raw materials, and organizing methods that allow outputs to be sold at more than their cost
of production. These opportunities exist because different people possess different
information. Incomplete information means that in any market transaction, people must
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