Lesson 5 of 8
Noticing
Kirzner's entrepreneur takes no risk and puts up no capital. The defining act is noticing an opportunity that was there all along.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Alertness is noticing something you were not looking for. Kirzner separates it sharply from deliberate search, which is an ordinary allocation of resources.
- The opportunity exists because somebody earlier was wrong. Discovery is error correction, and the profit is what the earlier error left lying about.
- The account has a well known weakness: if alertness cannot be summoned or economised on, the theory cannot say when it will appear, only that it sometimes does.
Ask who an entrepreneur is and the usual answers are someone who takes a risk, someone who puts up capital, or someone who founds a company. Kirzner's answer is none of those. It is the person who notices.
Search and discovery are not the same act
Deliberate search
- You know what you are looking for.
- You know roughly what looking will cost.
- You decide how much looking is worth.
- It is an ordinary allocation problem.
Entrepreneurial discovery
- You were not looking for it.
- You did not know it existed to be found.
- No cost of finding it was weighed in advance.
- It arrives as a surprise.
Only the right-hand column needs an explanation the standard theory does not already have.
Why the distinction is the whole point
Search fits the standard framework without strain. If a firm knows it can find a cheaper supplier by spending a week, it weighs the week against the expected saving and decides. Nothing new is needed to describe that.
Discovery does not fit, because the thing discovered was not in the set of options being weighed. In Kirzner's two-price example from the previous lesson, everyone involved is acting on the information they have, correctly. Nobody is failing to optimise. The change comes only when somebody sees both sides at once, and that seeing was not chosen.
He is explicit that until alertness is introduced there is no basis for expecting the situation to change at all. That is the strongest version of the claim and the most honest one.
The opportunity is somebody else's error
This is the part with practical content. The profit sitting in a price gap exists because somebody earlier got something wrong: sold too cheaply, bought without looking, planned for a demand that was not there.
So discovery is correction. It is not a reward for creating something out of nothing, and it is not compensation for bearing risk, which is a different matter with a different literature. It is the market noticing a mistake and removing it, and the noticer keeping the difference.
The weakness in the account
Stating it is not optional. If alertness is not a resource you can buy, hire, or decide to deploy, then the theory has no way of saying how much of it exists, when it shows up, or how fast. It can say a gap creates scope for discovery. It cannot say a gap will be discovered by any particular time.
That is a real limit and it is why the claim in the previous lesson had to be stated as a tendency rather than a result. It also connects directly to the last lesson of this course, where the limit is pressed much harder.
Check yourself
What distinguishes discovery from search in Kirzner's account?
- Discovery is faster
- In discovery you were not looking, and no cost of finding was weighed in advance
- Discovery requires capital
Show the answer
Answer: B.
Search is an ordinary allocation of resources toward a known objective. Discovery is noticing something that was not in the set of options being considered.Where does the profit in a discovered opportunity come from?
- Value created by the entrepreneur
- An earlier error by somebody else, which the discovery corrects
- Compensation for bearing risk
Show the answer
Answer: B.
The gap exists because somebody sold too cheaply or bought without looking. Bearing risk is a separate question with its own literature.What is the acknowledged weakness of an account built on alertness?
- It cannot describe large firms
- If alertness cannot be deployed on purpose, the theory cannot say when or how fast discovery happens
- It assumes perfect information
Show the answer
Answer: B.
Kirzner himself notes that without alertness nothing implies change. The corollary is that the theory gives scope for discovery rather than a schedule for it.Sources
- Kirzner, How Markets Work: Disequilibrium, Entrepreneurship and Discovery, Institute of Economic Affairs, Hobart Paper 133, 1997, on entrepreneurial alertness as the driving force, on the two-price disequilibrium, and on the claim that without alertness nothing implies any change.
- Kirzner, 'Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach', Journal of Economic Literature, volume 35, 1997, and Competition and Entrepreneurship, 1973, are the fuller statements of the same account. They are named here so a reader can find them and are not expounded in this lesson.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- The $100 and $112 are invented round figures carried over from the previous lesson. They describe no market.
- The 1973 book and the 1997 journal article were not read in the original for this lesson. Everything attributed to Kirzner above comes from the Hobart Paper.