 Okay well let's begin our afternoon session and I'd like to start off today by doing a little something different so I've decided to give a pop quiz. Put all your notes and books away and get out a blank sheet of paper. I'm only kidding but it was worth it was worth doing that just to see the fear in some people's eyes. Are you serious? Okay well we're moving on now as we're in the middle of the week to some slightly more advanced topics and today this afternoon we'll examine the theory of profit and loss and the theory of the entrepreneur. One thing to notice it's significant that we are using the that we have titled this lecture profit loss and the entrepreneur. There's a great deal of economic theory and a great deal of literature on profit but much less on loss and as we'll explain shortly profit and loss are inextricably linked and there can be no theory of profit without a theory of loss as we'll see. Also as you may be aware entrepreneurship has become a very popular field of study not only in business schools but also in other university and other departments and colleges and universities. One of the fastest growing specialty areas in economics, finance, management and also in the humanities and social sciences. However a lot of the literature on entrepreneurship as we'll see in contemporary academic discourse is not very closely tied to the economic theory of entrepreneurship which we'll go over today and we'll talk about that relationship a little bit more. But I want to begin by reminding you of a little bit of economic methodology a little bit about the approach and strategies that we use in doing economic analysis. We've emphasized throughout the week that our presentation here follows what we describe as causal realistic or causal realist analysis. Causal in the sense that we're studying purposeful human action and explaining economic phenomena in terms of the Aristotelian notion of cause and effect. And also that our analysis is realist in that we're not trying to explain hypothetical imaginary situations but actual real-world situations. Nonetheless in causal realist analysis we do make room for in particular situations what we call imaginary constructs. What Mises called imaginary constructs. What you might describe simply as sort of theoretical abstract theoretical models. We might imagine a situation that we know is deliberately unrealistic. A situation that either could in principle obtain but is very unlikely to obtain in the real world or even more extreme a situation that could not even conceivably exist in the real world. It's somehow logically contradictory but yet in imagining a world like that it helps us to isolate in our thinking certain factors to separate one cause from another cause and helps us to understand the real world a little bit better. One of these important imaginary constructs is what Mises and Rothbard called the evenly rotating economy. Evenly rotating economy. And I think Joe will agree with me that perhaps not the best term for this particular imaginary construct but we haven't come up with a better term as of yet. What Mises has in mind in the evenly rotating economy is a hypothetical state of affairs in which there is what I might describe here as action like behavior. There are economic actors in this model and they engage in what appears to be action. So there's buying and selling. There's production and consumption. There are economic transactions. This activity unfolds through time. Okay so individual actors do have a notion of time. They do. There does exist a positive time preference. The only thing that's different about this world from the real world is the complete absence of any uncertainty about the future. So people act. They buy and sell but they know exactly what they will consume and produce in the future. When an entrepreneur engages in process of production he knows exactly what consumer demands will be in the future after production has taken place. So there's no possibility that an entrepreneur will lose money. If he knows that consumers will buy X, Y, Z in the future he would never engage in production unless he knew that he would be able to cover his costs with future revenues discounted by the rate of interest. Likewise, since there's no uncertainty all producers, all entrepreneurs know what future market conditions will be. So competition among entrepreneurs assures that no entrepreneur can purchase factors of production in the present at a price lower than their discounted marginal revenue product. So there's not no money left over for entrepreneurs to earn profit either. So there's no uncertainty in this world. What's the point of imagining a world like that? By the way it's internally inconsistent in the sense that the very notion of human action implies some kind of uncertainty about the future. Man acts in Mises terminology to eliminate some felt uneasiness. It's because he believes that the state of affairs will be more desirable in the future if he does act than if he doesn't act. But if future conditions were predetermined, if he knew exactly what those conditions would be, then he would have nothing to gain by acting. But nonetheless we presume that people do act or they engage in behavior that looks like action in the evenly rotating economy. Why do this? Why go through this exercise? Well there's a very important analytical purpose which we'll discuss in more detail in just a moment and that is to distinguish conceptually the economic concept of profit from the economic concept of interest. The reason we need to engage in some abstract reasoning to do so is because in the real world, for a real world entrepreneur, business person, profit and interest look very similar. They both constitute dollars in your pocket. So the business man or businesswoman goes home at the end of the day with some cash in his or her pocket. Well, is that profit? Is it interest? It could contain an element of both and there's an important conceptual distinction between profit and interest that can only be understood using this kind of abstract reasoning. We cannot understand it simply by observing. So we want to disentangle profit and interest at a theoretical level and in doing so, we will be able to uncover or isolate the function of entrepreneurship or the entrepreneur in the economy. So that's sort of our mission for this afternoon. Let's talk a little bit about the entrepreneur and the entrepreneurial function. Entrepreneurship and causal realist economic analysis is, as we've previously discussed, the deployment of resources in the present in anticipation of uncertain future receipts. So in the real world, outside the evenly rotating economy or ERE, the entrepreneur doesn't know with certainty what future consumer demands, for example, will be and there is an element of uncertainty in making investments today that may or may not pay off at some point in the future. Now, describing the entrepreneurial function in these terms immediately brings to mind some key points, highlights some key points. First is that entrepreneurship is inextricably linked with the ownership of property. Notice we describe entrepreneurship as the deployment of resources. Resources that the entrepreneur already owns, let's say, or resources that the entrepreneur has to purchase. So the entrepreneur has to spend some money to hire factors of production before production can take place. Production is not an instantaneous affair. It takes place through the passage of time and one cannot be an entrepreneur without some resources to invest. So an important sense in entrepreneurship is a way of thinking about investment under conditions of uncertainty. We'll come back to that point just a little bit later. Also, this notion of entrepreneurship does not necessarily imply some of the attributes or characteristics that are often associated with sort of the real world entrepreneur, with Steve Jobs or Bill Gates or Henry Ford, right? People, for example, who have great imaginations, who are extremely creative, who are alert to opportunities for gain, who have personal charisma, can exercise leadership, and so on. The entrepreneur in economic theory, as an individual, may possess those attributes, but there aren't necessary characteristics of entrepreneurship. What is economic profit or economic loss? It's the residual that accrues to the business owner, the entrepreneur who deploys these factors of production after the factors of production have been paid. This is a very simple business person's notion of profit, right? Revenues minus costs, but notice there's an element of time and uncertainty. Revenues and costs are not realized at the same time. Costs must be expended in advance of revenues being received, okay? So whatever's left over after all the factors have been paid, discounted appropriately by the rate of interest constitutes the entrepreneur's profit. If revenues exceed costs, if the discounted value of revenues exceeds costs, or it's an economic loss, if revenues are not sufficient to cover costs. Notice that, as I said before, in the ERE, in this hypothetical construct in the absence of uncertainty, all factors of production would be paid their discounted marginal revenue products, and there would be no profit or loss, okay? There would still be interest, though. Owners of factors of production could still earn an interest return for exchanging present consumption for future consumption, but there would be no residual for profit. Okay, so profit and loss can only exist under conditions of uncertainty, okay? I have to just briefly mention that the economist's notion of profit, the idea of profit and economic theory does not always translate in a perfectly unambiguous one-to-one relationship with the various notions of profit we find in the accounting profession, okay? So there are different specific accounting measures that can be used to get a sense of net earnings or net income, and exactly what things are included and what things are not included, how it's depreciation handled. Is it better, more useful to think of profit as a quantity, the level of profit, or is it more useful to think of it as a ratio, so net income divided by the total amount of capital invested and so on? What point is all of these accounting measures, or accounting measures such as these can be proxies for economic profit, but economic profit doesn't just appear as an item on the income statement, okay? We have to use a little bit of judgment in inferring what actual profits are in dollar terms, and we have to use our discretion as to what accounting measure we use that we think is the best proxy for economic profit, okay? Now, what do I mean by uncertainty? I've said that in the ERE there's no uncertainty in the real world there is, profit and loss only exist under conditions of uncertainty. What does that mean? Well, probably the most, the best known definition of uncertainty among economists comes from a famous formulation by Frank Knight, a Chicago economist from early 20th century, who was one of the first economists to, in my judgment correctly, correctly explained the theory of profit and distinguished profit from interest, although some of Knight's other contributions are less congenial, his theory of competition, his theory of capital, for example, but I think Knight was correct on the theory of profit, and Knight famously distinguished between what he called risk and what he called uncertainty, okay? So risk describes situations where the outcome of action is unknown, but the range of possible outcomes and probabilities with which each outcome will obtain are known, okay? You know, a roulette wheel for example, okay? You don't know exactly what number will come up on the roulette wheel, but I know all of the numbers that could come up, and if it's a fair, you know, a fair game where there's no cheating, I know the probability that any particular number will come up based on the design of the, how many slots there are in the wheel and so on, okay? When I roll a dot, when I roll a die, I don't know what the number will be, but I know that it will be either, it'll be between one and six, and each of those outcomes occurs with probability one sixth, okay? Uncertainty by contrast, first situations where not only do we not know what specific outcome will obtain, but we don't even know the range of possible outcomes or the probabilities with which each outcome will obtain, okay? So risk applies only to very strictly limited situations, okay? And one way that people have often thought of this is in terms of insurance, right? If a particular outcome can be insured against, for example, I don't know if I'm going to have a car accident this afternoon, right? But people in the insurance business who study car accidents can make a pretty good prediction about the probability that an accident of a particular type will obtain under particular driving conditions in a particular geographic area given the characteristics of the driver and so on, right? They can quote me an insurance rate because they know throughout my lifetime approximately how many accidents I will have and so on, and the more details they know about me and my car and the places where I drive, the more precisely they can come up with an estimate, okay? So I can insure myself against auto accidents against my house burning down and so on, right? But there's a more fundamental kind of uncertainty for which you cannot purchase any insurance, okay? You know, say I'm, let's see, who is the most valuable player in the NBA this year? Who won the MVP award? I'm sorry? It was Newitzky. Okay, European guy. Oh, I'm shocked. So, you know, it's supposed that, you know, Novitsky wants to be the MVP every year. You know, he can't go to all state or state farm and take out an insurance policy that will pay him a certain amount of money if Steve Nash is the MVP next year, or LeBron James or whoever. Okay, so there simply isn't the kind of information available that would allow us to make a prediction about the probability that one guy or another guy will be the MVP of the NBA. Okay, the way Mises described this distinction, and actually here, our Mises, Ludwig von Mises, was drawing on some ideas from his younger brother, Richard von Mises, who was a statistician at Harvard University of well-known scholar and probability theory. The Mises distinction is between what Mises calls class probability and what he calls case probability. Okay, so class probability refers to situations where an event can usefully be aggregated or can be considered an element of a set of relatively homogeneous events, a homogeneous class of events, right like an automobile accident. I mean, every automobile accident is unique in a sense, but automobile accidents share very many common features. Okay, as opposed to cases, situations of what he called case probability, where the event itself is unique. Okay, there is no homogeneous class of events into which certain activities can be can be placed. Okay, so we don't have comparable, we don't have information necessary to come up with an expected value in in quantitative terms. Okay, so my point in this digression is that what we're talking about in the theory of profit is not conditions of probabilistic risk. We're not saying that the entrepreneur knows with certainty that his profit will either be $100,000 or $150,000 or $200,000 with probabilities one third, one third and one third, but he doesn't know exactly what his profit will be. We're not talking about a situation like that. Talking about a situation where he has no information with which to construct a mathematical probability distribution over his future, what his future earnings will be. It doesn't mean that the entrepreneur acts blindly, right? He does have a sense. He does have to make some kind of a forecaster estimate of what future market conditions will be. But that estimate, the process by which he arrives at that estimate cannot be modeled by the analyst, you know, use it in a mathematical formulation. Okay, we can't formally model this decision process. Indeed, what Knight described as judgment, Knight used the word judgment to describe situations in which individuals form estimates of what future conditions will be without the aid of some kind of formal decision model. Okay, so to exercise judgment is to make these, to have these expectations or to make these forecasts without a formal decision model, which you can simply plug in numbers and crank out unexpected value. Okay, well, what are some common misconceptions about profit? What are some things that profit isn't? Profit is not. Well, as we've, as we've just seen, profit is not interest, even though both profit and interest are monetary returns to the business owner. Okay, the person who owns capital and deploys that capital in the production process is foregoing some present consumption in anticipation of being able to consume more in the future, and thus is earning a return for foregoing that consumption. Okay, so interest is determined strictly by people's time preferences, the extent to which agents prefer present consumption over future. So owners of capital goods are using resources in longer production processes. They're deferring consumption, and as a result of which earning a return for that foregone consumption. Profit, by contrast, is a return or a reward for the successful bearing of uncertainty. And you can think of loss as the penalty for unsuccessfully bearing uncertainty. Okay, so profit is not the same thing as interest. Profit is not the same thing as accounting income, right? Because accounting income can include profit, interest, and as I mentioned in the morning lecture, the entrepreneur's implicit wage. Okay, so economic profit would only be that part of accounting income that subtracts the entrepreneur's opportunity wage, what he could earn in his next best opportunity, and subtracts the interest payments that accrue to the business owner for the use of his capital. Okay, the part that is determined strictly by uncertainty bearing is the part that is profit. Okay. And again, as I'm trying to emphasize, we're thinking of profit here as a functional category, not a line item. Okay, although there are line items that we can use to try to approximate in dollar terms what the actual economic profit will be. There are other common misconceptions in the history of economic thought. Marks describe profit as sort of almost like sort of an automatic return to capital. Anyone who owns capital automatically gets some profit that accrues to it. This is sort of naturally, right? And in fact, you see this expressed still in some of the contemporary textbooks. Some of the textbooks, if they're not careful, will say, well, rent is the return to land and wages are the return to labor and profit is the return to capital. That's incorrect. I mean, if you think about it, it's not that can't be correct because things aren't sort of measured in the right units. Right? It's like wages are dollars per hour or dollars per month, a monetary payment per unit of time. Right? Well, the return to capital goods should also be dollars per unit of time. Right? So if I use a machine in production, then I pay the owner of that machine a rental price, so many dollars per hour for the right to use that machine. I mean, it can't be profit. It's not a dollar amount or a percentage. It's a rate per unit of time. Okay? So profit can't be the return to capital. Okay? And even more so, it can't be some sort of automatic natural return to capital that you get simply by owning capital. Right? I mean, you know, Joe showed a couple of days ago the pictures of destroyed cities. Remember, he had to play the game bombing or rent control? I mean, the idea that capital automatically generates some kind of return is utterly refuted by the existence of abandoned factories. Okay? There are plenty of capital goods out there that are just trash, basically. Right? That have little value over some minimal salvage value, let's say. Right? If capital goods automatically intrinsically generated some kind of return just by the nature of their existence, well, we wouldn't have any idle factories. We wouldn't have any, you know, old forklifts and digging machines stuck out in junkyards. Right? They would be deployed in some use, earning their profit. But of course, profit only obtains when resources are deployed by entrepreneurs in ways that satisfy future consumer wants. Okay? Moreover, profit is not simply a markup over production costs. Right? There's a popular misconception that, you know, business people, you know, you want to be in the business of building houses, so it costs a certain amount to build a house and then you just add 5%. And that's your selling price. Well, I mean, right? We know from the theory of subjective value that the producer cannot arbitrarily set a selling price and receive that selling price on the market. Right? It depends on the valuations of consumers, the degree to which they value the good or service being offered relative to the value of their cash balances. Right? And moreover, the costs of production for the construction firm, the housing firm are not just sort of exogenously given. Right? They depend on how much construction firms are willing to pay for the services of construction workers and so on. Right? So this idea of profit as a markup is contradicted by the theory of imputation that we studied this morning of how factors of production are valued and priced in the first place. Okay? Something else to notice, it's sort of implicit in our discussion so far, but it's worth bringing out more explicitly that in a modern complex economy, entrepreneurship is very, is closely linked to the notion of resource heterogeneity that land, labor and capital goods are not homogeneous, that they can be combined in different ways. Right? I mean, just as there's, you know, there's more than one way to skin a cat. There's more than one way to produce bottles of bottled water. They're alternative technologies that could be employed. There are different production methods. There's labor intensive hand production. Somebody individually fills each bottle with a, out of a jug. There are more automated capital intensive methods of production. Right? With robots and machines. Right? So there's some substitutability of capital and labor. Well, which method of production is the most cost effective means of producing bottled water? What leads to the highest profits for the entrepreneur? Well, that isn't given, that information is not given by nature. Right? The task of the entrepreneur is to discover the appropriate, or to figure out the appropriate combinations of resources that yield the highest economic value. And there's a nice quote from the Austrian economist Ludwig Lachman, who studied, was a colleague of Hayek's at the London School of Economics in the 1930s and wrote a very useful book called Capital and its Structure published in 1956, where he expresses the problem, I think, quite nicely. Lachman says, we're living in a world of unexpected change, a world of uncertainty, in other words, nighty and uncertainty. Hence, capital combinations will be ever changing, will be dissolved and reformed. In this activity, in this activity, we find the real function of the entrepreneur. Okay, so the entrepreneur's function in a modern economy is to experiment with different combinations of factors of production to find those that produce the greatest amount of economic value and hence profit for the entrepreneur. Okay, we'll get into this a little bit more in the discussion of socialism and economic calculation, which is tomorrow. We won't discuss this in the theory of socialism and economic calculation, so strike that from the record. By the way, notice that given that resources are heterogeneous, we can't do this exercise in any way outside of a monetary economy, right, because we need a common accounting unit and so the entrepreneur can't sort of add up apples and oranges, so to speak, but can only calculate the difference between revenues and costs in monetary terms. Okay, so we're assuming a monetary economy. Why are profits and loss is important? What is the significance of the profit system, the profit motive? Is it a good thing or a bad thing that entrepreneurs are motivated to increase their profits? Should profits be condemned? I think you can already anticipate what the answer to that question will be from this crowd, but we can think a little bit more systematically about the functions that the profit and loss system provide. And you know, here the classic reference is the article that you have in your reading list by Mises called Profit and Loss that is reproduced in his collection, Planning for Freedom, and if you haven't had a chance to read it yet, I certainly encourage you to do so. So one of the functions of profits and losses are providing feedback to entrepreneurs in their short term and their long term planning. Right, so the entrepreneur, you know, I think that I want to go into the business of selling bottled water. I know that it costs me this much to produce bottled water and I hope that I can sell them when production run is completed for so many dollars per unit and I'll earn a nice economic profit. Once I go into production and then I put my product on the market for sale, I get some information about whether my forecast was accurate. Okay, hopefully I got it right or revenues exceed my expectations. If not, if revenues fall short of expectations, I end up with a loss, I have a sense of whether my actions created value or not. Okay, in the absence of profit and loss, it's extremely difficult for the manager, the person who assembles resources, to know whether resources were assembled correctly or not. Okay, think of this kind of example. You hear often calls for government agencies to sort of reinvent themselves and to be more like private businesses. Some of you may be old enough to remember in the early 90s, Al Gore, Vice President Gore had a, or wasn't Vice President yet, I'm sort of a program he called reinventing government. This is before he got on the global warming shtick. And it was all about how to make government agencies be more efficient, act more like, like, like businesses. Well, problem here is, okay, suppose you're running a government agency. Suppose you're running the internal revenue service. Okay, what does, again, assume for the sake of argument that the internal revenue service performs a legitimate function. Okay, this is imaginary construct here. You know, it's supposed to take in audit tax returns and collect money and so on. You know, how do the managers of the internal revenue service know whether they're doing their jobs well or not? Right, so like a private business person, they have to make some investment decisions. They have to hire labor. They have to rent facilities. They have to purchase capital goods. You know, the 20-year-old computers that they have. Should they upgrade their computer system or not? Should they continue using the sort of obsolete technology that they supposedly have? Or should they invest in newer, faster scanning machines? Should they go to more electronic filing? Should they encourage electronic filing and discourage people from paper filing for greater economic efficiency? Well, on what basis does the manager, the director of the IRS make such a decision, make such a determination? Right, a private entrepreneur can say, well, if I use this, you know, older labor intensive technology, it will cost me this much. If I use the more capital-intensive technology, it will cost me this much. What will my profit, what will my revenues be under each of those two scenarios? And I can estimate my profit, which will be the most profitable production technology. I make my decision, I deploy resources, and then I get feedback once I sell my output as to whether my anticipations were correct. Well, what if you don't have output that you sell? Government agencies don't sell their output on the market. They don't have a profit. They don't have a bottom line, so to speak. So they have no way of knowing for sure whether the decisions that they've made have been appropriate and satisfying consumer wants or not. I remember reading an article in the Wall Street Journal about reforming the Los Angeles Police Department. This was shortly after the Rodney King riots, which took place in what year I've forgotten now. Okay, early 90s. So there were calls to, you know, calls to engage as a major reform of the police department. I remember reading an article in the Wall Street Journal about a bunch of management consultants and efficiency experts who were brought in to try to suggest reforms to the LAPD to make it more responsive to the end customer, to make it more efficient, more productive and so on, lower costs. And it was perfectly clear that once these experts came in, it was extremely difficult for them to design mechanisms to bring about these efficiency enhancements because there was no market feedback for whether the whether the changes are any good or not. When we think about in a private firm, right, a manager employs a subordinate and can give that subordinate some discretion over making particular decisions and then make an assessment of whether that subordinate's actions are how they're contributing to the bottom line. Are they increasing profits or decreasing profits? If they're increasing profits, I'm going to encourage those actions. I'm going to keep that person, promote that person and so on. Otherwise, I'm going to discourage those actions or fire the person. Okay, you know, take a, you know, a city beat cop, okay, a patrolman, police patrolman. How do you know whether that patrolman's actions are contributing to overall performance of the police agency? Well, the private entrepreneur has a measure of overall performance, profit. The police department doesn't. Suppose you wanted to provide performance incentives for police officers. You want to give them a bonus for doing things that contribute to the overall mission of the agency. Well, what would your performance measure be? Maybe you could, you know, pay police on a per-arrest basis. That might set up some undesirable, maybe some undesirable incentive effects, right? Well, I mean, the policeman's job is a very complicated one with multiple dimensions to it. How do you assess which ones are more or less important? And the point is in the absence of market feedback, which government agencies lack, right, there are no, the kind of signals, the kind of feedback that's available to the entrepreneur are simply not available. Okay, so government officials, even if completely well-meaning, even if performing services that you might think are necessary and essential services, can never be economically efficient in the sense that a private entrepreneur's activities can be. The classic reference here is Mises' short book bureaucracy, published in 1944, which has not received the attention that it really deserves, I think, even among Austrian economists. Moreover, besides this sort of day-to-day or planning period by planning period feedback process, there's also a more general feedback process for who's a good entrepreneur, right? So an entrepreneur whose forecasts of future market conditions, whose judgments about the future are consistently poor, is not going to be an entrepreneur for long, will run out of resources, will not be able to acquire any additional resources and will eventually do something else, will not be an entrepreneur, will be engaged in work for a wage or whatever, whereas those who are consistently good at the act of making entrepreneurial judgments, their activities will be successful, their business will flourish and they'll continue to engage in entrepreneurial activity. Again, you don't have this with government agents. And you've all read plenty about this. Nobody was fired after 9-11, people at NORAD and all these outfits that received billions of dollars for radar control and to shoot down enemy planes and so on. I mean, whatever mistakes were made and there were plenty of them, no one has held accountable, right? He said, well, wait a minute, but in a democracy, aren't government officials held accountable by the ballot box? Well, there's an extent to which that's true, but there's certainly some accountability in principle, but it's a much weaker form of accountability than the profit and loss system. In fact, you might sometimes hear people say, well, markets are like democracies. People vote with their dollars, so the market is sort of like a big democracy. Well, I mean, there's an element of truth there, but it would be more accurate to say that voting in a democratic political system is kind of a crude approximation of the market. The market is the much more pure form of democracy if you want to use that term, right? Why? For example, because competition among consumers and producers in markets is not winner-take all. In other words, if I prefer to drive a Ford and Salerno prefers to drive a Chevrolet, it isn't the case that we bid in the market place with our willingness to pay with our dollars, and then whoever wins that car, everybody has to drive that car. I mean, he can drive a Chevrolet and I can drive a Ford, right? Consumers can satisfy a variety of preferences, unlike in political markets where you vote for a representative or president and everybody is stuck with the person who gets the highest number of votes, whether you want to be governed by that person or not. So we don't have this kind of selection process in the absence of markets. So just as profit and loss in a market system provides this feedback, you can think of it as a mechanism for placing productive resources, productive assets, land, labor, and capital in the hands of those who can best use them. Those who can best use those resources for the satisfaction of consumer wads. Another important clarification is that you sometimes read, even in the economics literature, about concepts like a normal rate of profit. So some firms are earning excessive profits because they're earning more than the normal rate of profit. Certainly in accrued statistical sense, we could calculate what was the average accounting profit of firms in the computer industry over a 10-year period and we could say, oh, well, you know, this one firm had accounting profits that were two standard deviations above the mean. If we want to call that excessive, okay, fine. But there's no fundamental intrinsic economic notion of excessive profits because there's no sort of thing as normal profits. All profits are the result of uncertainty. No firm can assure itself some particular baseline level of profit simply by existing, okay. No firms are guaranteed earning any profits in the absence of monopoly, which we'll be talking about tomorrow, right, but under market competition. There's no such thing as normal profit so there can't be any notion of excessive profit. There's simply profits and losses, okay. Again, those who hold the view that profit is some kind of automatic return to capital or that firms or entrepreneurs can guarantee themselves a normal rate of profit simply by engaging in some default activities have a very hard time explaining why so many firms go bust, okay. Why so many firms go bankrupt, why so many firms earn losses. So whenever you're thinking about profit or reading about profit, ask yourself, right, test what you're reading. If someone is offering you an account of profit or a theory of profit that doesn't simultaneously explain loss by the same mechanism, you should be suspicious that that's an inadequate or misleading or fallacious notion of profit, okay. Even some Austrian economists might try to pull that one on you. Okay, let's distinguish a little bit more carefully between the entrepreneurial function and the managerial function. Okay, both entrepreneurs and managers exercise a kind of judgment over the deployment of resources, okay. Notice that in the definition of entrepreneurship that we've offered here, entrepreneurship is inextricably linked with resource ownership, right. So the owner of capital goods performs the entrepreneurial function. Yet as we all know, owners of capital goods frequently hire agents to manage those goods for them, okay. So I may own my own business of producing this bottled water, but unless it's a very small operation where I can do everything myself, I have to hire some assistants, right. Not only laborers, sort of wage laborers, but I might hire some people that we would call managers, white collar employees who will supervise and govern other employees who will make decisions about operations and purchasing and sales and marketing and so on, right. Well, if I'm the owner of the assets, I own the land, the factory, the capital goods and so on that are used in this production process, then I am exercising the entrepreneurial function, even if I choose to delegate much of the day to day decision management to hired subordinates, okay. And terminology that I like to use, I like to think of two different kinds of judgment, what I call original judgment or true judgment or pure judgment, if you like, is that that is exercised by resource owners in their judgments or decisions about how their resources should be deployed. Okay, so owners of productive assets cannot, there's no way they can avoid exercising judgment, right. Merely allowing your resources to lay idle is making decisions about how those assets will be used. So asset ownership implies original or pure primary judgment, if you like. Okay, but resource owners can delegate decision authority to subordinates who exercise what we might call derived judgment. Okay, so if I hire Joe Salerno to manage my bottled water plant, I'm not at the plant every day making operational decisions, but I hire him and ask him to do that for me, right. So he exercises a kind of judgment, but because he doesn't own the resources himself, unless I make him my partner or give him equity shares, assuming he's just a salaried employee. Okay, all of the judgment that he exercises is exercised on my behalf. It's kind of a derived or a delegated or a secondary kind of judgment. And I like to use the term for someone like that, describe that person as a proxy entrepreneur. So not a real entrepreneur because not a property owner, but someone who acts, sort of takes entrepreneurship like actions on the part of the true entrepreneur, the actual entrepreneur. So if you like, you can think of the entrepreneur's task in operating an organization that employs multiple people and managing this derived judgment, assigning derived judgment to the appropriate people, specifying what decision rights they have, evaluating their performance, making adjustments to the degree of delegation and so on. Okay. A few comments about this. Some people find this notion, some people have trouble with the link between entrepreneurship and ownership. Partly I think that has, partly I think it's a semantic issue because the way the term entrepreneur is used in popular literature, and I'm going to come back to this in a moment in more detail, often when people say entrepreneur, they mean a young person who starts a new business. Okay. Someone who's old and who has owned a business for years is not an entrepreneur. Entrepreneurship only applies to startup somehow. Well, that certainly isn't correct in the concept of, in the economic sense of entrepreneurship. You can be old, young, new, you can be new in the business. You can have been in the business for 50 years and still be acting entrepreneurially if you're making judgments about the future if you're bearing uncertainty. Okay. The other problem that people have is they think of ownership, they have a stereotypical model of an absentee owner. Well, here's some wealthy person. You know, Peter Klein is some rich guy and he inherited some money from his, you know, uncle and he owns a bunch of factories, but he doesn't go near the factories. He lets Joe Salerno run the factories for him. I mean, how can you say that Klein is an entrepreneur? He doesn't do anything but sit around all day or better yet, he's a playboy. Right? All he does is go to ski resorts and hang out with supermodels and this sort of thing. I mean, how can he be an entrepreneur? Well, again, it may be the case that Joe Salerno is exercising most of the delegated judgment on a day-to-day basis. He's acting as a very strong and influential proxy entrepreneur. But the point is, if I own the business, I hired him and I can fire him. I choose who will manage my assets on my behalf. And though I may very well say to Joe, look, I trust you. You figure out how to do it. I'm going to be off and I'll be in Monte Carlo at the casino. But I mean, I reserve the right to show up in my factory that I own and say, hey, Salerno, I don't like how you did this or that. The fact that I choose not to intervene on a regular basis doesn't preclude me from intervening if I wanted to. And the key point is, the fact that Joe is not the owner means that he doesn't behave in exactly the same way that he would if he were the owner. Even if de facto, he has lots of discretion. He knows that I can take his discretion away if I want to. I can terminate his employment if I want to. So he doesn't manage the assets the same way he would if he actually owned them. Because there's a critical distinction between being an owner and a non-owner. A non-owner can exercise a kind of judgment, a kind of derived judgment, can be a proxy entrepreneur. But only an owner can exercise original judgment and be an entrepreneur in the true sense. As I mentioned, many different concepts of the entrepreneur and the entrepreneurial function in the literature, both academic and non-academic. In the economics literature, the entrepreneurial function has been described in ways that differ somewhat from the way that I've just laid it out. A very famous formulation from Joseph Schumpeter, first in his book on the Theory of Economic Development, published in 1911, Schumpeter described the entrepreneur as a kind of innovator, that entrepreneurship is the act of introducing new goods and services, new production technologies, new combinations of resources that no one had previously thought of. Well, innovation is clearly an important aspect of economic performance. There's no doubt about it. But the function of the innovator is distinct from the function of the entrepreneur as laid out in causal realist analysis. It is a little bit of an aside on Schumpeter. My interpretation of Schumpeter is as follows. Schumpeter, of course, was trained in the Austrian tradition. He was a student of Bumbavirk, Bumbavirk's favorite student. And Schumpeter was extremely brilliant, was very learned. There's actually a new biography of Schumpeter by the business historian Thomas McCraw that's getting a lot of attention now. I haven't read it yet. Schumpeter's an extremely interesting character in the history of economic thought. But Schumpeter, though he was of Viennese descent and was trained in the milieu of the Austrian school around the same time as Mises, was a contemporary of Mises. Schumpeter was not really fully an adherent of the Austrian subjectivist causal realist program. Schumpeter was much more attracted to the mathematical system of general equilibrium theories of Landvorach. So Schumpeter was really a Valrasian with a little bit of an Austrian influence. And if you know anything about the Valrasian model, the Valrasian general equilibrium model, it's a purely static kind of conception of the economy. And Schumpeter, who had real world business experience in banking, although he's not very successful as a banker, he realized that he was living in a period of tremendous economic growth and tremendous technological and organizational innovation. Yet Schumpeter was committed to the Valrasian static model of general equilibrium and he realized that there was no way to incorporate economic growth, innovation and change in the Valrasian model. So what he did is he he theorized that well, there must be some exogenous shock to the system that brings the economy from one Valrasian general equilibrium to another. Okay, so the economy is just sort of sitting there in general equilibrium, then all of a sudden as sort of a deus ex machina, right, the inventor, the innovator, as a lone genius, Thomas Edison, Steve Jobs, comes up with some new idea, introduces it into the market, the old equilibrium is disturbed and then gradually the economy reaches a new long run general equilibrium. So entrepreneurship is the faculty that moves us from one long run equilibrium to the next. Okay, there's an important sense in which entrepreneurship for Schumpeter was kind of a residual category. It's sort of that which explains innovation because you can't explain innovation within a purely Valrasian framework. Okay, another concept of the entrepreneur that is not as well known is one developed in a series of papers by Nobel Laureate economist, T.W. Schultz at the University of Chicago, where he conceived entrepreneurship as not so much as innovation but as the response to innovation. So Schultz described entrepreneurship as a kind of adaptation. So ordinary people, consumers, small producers, Schultz was very interested in economic development and transformation from agriculture to manufacturing. So he imagined a rural agricultural society in which technological innovation is introduced. Hybrid seeds or improved farm implements or whatever. And he was interested in how ordinary farmers responded, which ones would adopt the new technology first, what would happen to the existing distribution of firms and incomes and so on when this new innovation is introduced into the system. So Schultz, like Schumpeter, took the innovation itself as exogenous. But Schultz, unlike Schumpeter, thought that the key mechanism was how people respond to the innovation, how ordinary people respond. Probably the concept of entrepreneurship that is best known in the Austrian literature is the notion of alertness or discovery that comes out of Israel and Kersner's many writings on entrepreneurship. And Kersner has placed great emphasis on an imaginary construct or an analytical fiction of what he calls the pure entrepreneur. What is the pure entrepreneur in Kersner's writings? Well, the entrepreneur is sort of a fictional agent who does not invest resources but rather is alert to profit opportunities that exist exogenously in the economy. So imagine a situation in which the economy is not in equilibrium. So there are some factors of production that are being offered for sale at prices below their DMRPs. But not everyone is sort of aware of this. So some agents in the economy have a special faculty, a special ability to perceive these kind of gaps. Gosh, if I buy these factors of production now at this price, I can resell the output later and earn some money. There's a profit opportunity that others have overlooked. You can think of the simplest case as being one of arbitrage even in the absence of production. Apples are selling for a dollar of bushel in Auburn and they're selling for $1.50, a bushel over in Opelika down the road. Well, I can go to Auburn and I can buy a whole bunch at a dollar. I can pay a little more than a dollar. I can pay a dollar one cent, truck them over to Opelika, sell them for $1.49, and make a lot of money even once I've paid the transportation shipping costs. Here's an analogy that describes the Christianarian system pretty well, I think. Some of you may have heard the joke about the economist and the $20 bill on the sidewalk. Have you heard that one? So the two Chicago economists are walking down the street and one of them stops and bends down to pick something up and his friend says, what are you doing? He says, well, there's a $20 bill right there. I'm going to get it. And his colleague says, no, there's not. It's not a $20 bill on the sidewalk. And the first guy says, what do you mean? It's right there. His colleague says, look, if there were a $20 bill on the sidewalk, somebody would have picked it up. The first guy says, yeah, I guess you're right. And he keeps on walking. So in the Chicago world, if we're always in perfectly competitive general equilibrium, there are never any $20 bills on the sidewalk. In other words, there are no profit opportunities that have not already been exploited. There is something to that. I mean, if you ever go to the big shopping mall around Christmastime, you don't even bother to drive by the front door and look for a parking space there, because you know there's not going to be one, right? Because if there were a parking space, somebody would have immediately grabbed it. So you just go park in the back, at least I do. Right. Kershner says, the Kershner's perspective would say, wait a minute. That's not quite right. In Kershner's model, there are $20 bills on the sidewalk. But not everybody can see them, right? Some people walk down the street, eyes front, and they never bother to look down, right? And there are other people, not who are actively searching for $20 bills, but who, because they have better peripheral vision or they just happen to glance down and, hey, there's a $20 bill that nobody else saw, and they grab it, and they pocket, they put it in their pocket. That, according to Kershner, is where profit comes from, the seizing or exploitation of an opportunity for gain that other people have missed. OK. Well, there are some problems with this account of entrepreneurial profit, OK? The first is that there's no deployment of resources involved, right? In Kershner's fiction of the pure entrepreneur, there's no uncertainty associated with the venture. And the entrepreneur does not have to own any capital, does not have to spend any resources to get the $20. All he has to do is bend down and pick it up. So entrepreneurial opportunities are exploited costlessly in the Kershner model, OK? Problem with that is, well, how do you explain entrepreneurial loss? How do you lose money if making money is seizing an opportunity that exists out there? OK. I mean, if you think about it, even in the most stylized sort of arbitrage transaction, even my story about the apples, in reality, there's a little bit of uncertainty there. Unless I can literally simultaneously buy and sell the apples, right? I buy the apples at $1 in Auburn and I truck them over to Opelika and, oops, the price fell. Now they're only selling for $0.50 in Opelika and I've lost money, right? So it's not clear to what extent we can imagine profit opportunities sort of existing waiting to be seized because we never know if a profit opportunity is really an opportunity or not and may turn out to be a loss by the time it's exploited, right? In the Knightian model, the two guys are walking down the street or you're walking down the street, you look down and you see something that might be a $20 bill but you're not exactly sure. You see a little shade of green kind of buried under the dirt. There may be a $20 bill there. There might not be. The only way to find out is to go and buy a shovel, okay? You have to buy a shovel and you use it and you dig and if you were right and there's a $20 bill there and the shovel costs less than $20, you have earned an entrepreneurial profit. If you're wrong, it's just a blade of grass. It's not money at all or it's only a $1 bill and you spent $10 on a shovel, you just earned a $9 loss, okay? So Kirschner's model, unlike the model we've been describing here, does not incorporate uncertainty. It's not a model of uncertainty, profit as the response, as the result of bearing uncertainty. Now in Kirschner's defense, I think Kirschner has largely been misunderstood and misread particularly in the entrepreneurship, applied entrepreneurship literature and that is in the sense that Kirschner is really not trying to explain entrepreneurship at all. Rather, he is using the concept of entrepreneurship as he defines it, the fiction of the pure entrepreneur as a means of explaining the convergence to equilibrium. The key question for Kirschner is how do we know that markets that are not in equilibrium, not in long-run equilibrium, how do we know that they converge to some kind of long-run equilibrium state? Okay, so Kirschner accepts that we have sort of very short-term equilibrium prices, the ones that we've modeled here, what Mises calls the prices that emerge and what Mises calls the plain state of rest. So Kirschner acknowledges that these plain state of rest prices exist as kind of equilibrium prices. But he says those prices aren't all that interesting or important. The only prices that are interesting are important for being able to make any statements about the efficiency of resource allocation are the kind of long-run equilibrium prices. What Mises calls the final state of rest prices. And Kirschner points out quite correctly that in the Volrasian system and even in the Neoclassical-Marshallian system, there is no explicit mechanism for guaranteeing that these plain state of rest short-term equilibrium prices converge to their long-term final state of rest values. And so Kirschner introduces the fiction of the pure entrepreneur as a means of explaining the tendency of these prices to converge. Because when outside the final state of rest, there are profit opportunities out there. So if we assume that someone is out there seizing them or there's an incentive for people to recognize and seize them and thus bring the market towards a sort of long-run equilibrium state. There's some controversy on this point but the way I read Mises and Rothbard, this question of convergence from the plain state of rest to the final state of rest is not a terribly important question. So they don't accept the need for this mechanism to explain the convergence. They don't think this convergence actually happens in the real world. Okay, but the point of the story is that Kirschner is not trying to explain profit per se or to model the entrepreneur per se but he simply invokes this concept as an instrument for explaining market clearing, okay? So it's quite different from the kind of entrepreneurship that we're describing today. Unfortunately, as it turns out, possibly because Kirschner's stuff is interesting to read and his stuff has gotten considerable attention in the applied literature in business schools and entrepreneurship. Many of them have read Kirschner's work particularly his 1973 book, Competition and Entrepreneurship. I would say they've read it in a somewhat shallow way and said, aha, this guy's talking about the thing we're interested in. Yeah, we think that entrepreneurs are alert to opportunities so we'll set up this whole applied research program and what they call opportunity identification or opportunity recognition. So there are whole research programs and courses and seminars devoted to teaching people how to recognize opportunities. What are the psychological characteristics of those who are good at being alert to profit opportunities? Can we train people to be more Kirschnerian in this sense? Well, I think Kirschner quite rightly would reject that entire analysis as misguided that Kirschner's not trying to provide a positive theory of who identifies opportunities and how they do it but rather invoking, as I said, this alertness as a purely instrumental construct. Okay, even worse than these alternative functional accounts of entrepreneurship, if you read the literature carefully, both the practitioner applied literature and the academic literature, you find that many people don't conceive of entrepreneurship as a function at all but rather as something else, for example, as an occupational category. So the vast swaths of the entrepreneurship literature, the term entrepreneur, entrepreneurship is an occupational category. An entrepreneur is a person who is self-employed. Okay, so if you own your own small business, you're an entrepreneur, otherwise you're not. So there's very little attention to sort of the entrepreneurial function of bearing uncertainty and so on but rather looking at the choice to start your own business versus work for another company. So this really comes out of the labor economics literature and occupational choice, right? There's a sort of long literature in labor economics about why do people choose this profession versus that profession, empirical work, trying to run regressions on the probability that someone will enter this vocation or that vocation as a function of age, income, education, family background, demographic characteristics and so on. And so there's a big strand of empirical literature trying to predict who will become a self-employed business person and who will go and work for IBM as a function of various characteristics. Okay, well that's quite different from the entrepreneurial function that we've been discussing. There's another strand of literature that thinks of entrepreneurship in kind of a structural sense. The unit of analysis here is not the individual and not an economic function but rather a kind of firm or a particular industry structure. So when you hear someone say that one firm is an entrepreneurial firm and this other firm is not an entrepreneurial firm or they say this society is more entrepreneurial than that society. They have in mind what I call a structural notion of entrepreneurship. Apple is a very entrepreneurial company and IBM isn't, you'd hear people say. Well what does that mean in terms of entrepreneurship as uncertainty bearing? It doesn't really mean anything. I mean both firms are engaged in entrepreneurial acts. What people mean here is a small firm. Entrepreneurial firm is a small firm or a new firm. A big firm and an old firm is not entrepreneurial. Now I mean again that's sort of an arbitrary distinction in terms of the theory of entrepreneurship. I mean he has big literature in industrial organization on the evolution of firm and industry structure from more entrepreneurial to less entrepreneurial firms, how many startups are in this country versus that country. I mean it's interesting applied work but it really doesn't have anything to do with entrepreneurship per se, okay? So this is my point here is that the occupational and structural concepts are not closely linked to the functional notions of entrepreneurship that we've been discussing. Okay, we'll stop in just a minute here. There's some interesting implications of the theory of entrepreneurship for the theory of the firm, theory of the business firm, theory of economic organization, right? Well what exactly, what is a firm anyway? Well if you take a typical course in intermediate microeconomic theory, the firm is described as a production process or modeled mathematically with a production function. Y is equal to F of X1, X2, X3 and so on. So there are a series of inputs that are stuck into this production process and output comes out the other end, okay? So a lot of the technical literature on scale and scope economies and different factor input combinations and so on is really, it's not so much a theory of the business firm where we think of the firm as ownership of assets but rather a theory of the plant or the production process. In some of the management literature, there's a very interesting work on what is sometimes called the knowledge-based or capabilities approach to the firm. It has a sort of Hayekian flavor that has attracted some Austrian economists. It's notion that well the firm is best understood as kind of a stock of knowledge, shared beliefs, routines, capacities that are not manifest intangible property but rather exist as a kind of tacit knowledge and Hayek sense of tacit. Well, I mean, clearly there is tacit knowledge within teams of people in firms. Firms do have capabilities in a sense but I think a more correct approach to the firm is to think of the firm in property rights terms. Okay, that what we call a firm is a stock of assets, alienable assets that are owned by one or more entrepreneurs. Okay, a sole entrepreneur or a team of entrepreneurs is in a partnership or a joint stock company. Okay, so the difference between IBM and Apple is that IBM owns some machines and equipment and land and buildings and some trade secrets and so on and Apple owns other ones. Okay, so that's the distinction between the two firms is they're physically distinct in terms of ownership relations. Right now, of course, firms can jointly own, just as entrepreneurs can pool their resources and jointly own assets. Firms can engage in partnerships and joint ventures and so on that involves some shared ownership but ownership is still the key. Right, so the firm is defined as the entrepreneur or a group of entrepreneurs plus the alienable assets that the entrepreneur owns or that the entrepreneurs own. Ownership, as I mentioned previously when I was discussing Joe Salerno as my hired manager, right, ownership conveys a kind of authority. Okay, some of you may have heard the somewhat obscure Greek terms favored by Hayek in one of his articles called Taxis and Cosmos, Taxis and Cosmos and he's trying to distinguish between two kinds of social institutions but what Hayek calls Taxis is an organization that is deliberately designed sort of from the top down, okay, is set up deliberately by a specific individual or group of individuals to achieve a particular defined purpose as opposed to a cosmos which is sort of a broader kind of institution or set of institutions that emerges organically from the bottom up step by step without any sort of deliberate overall design, okay. Great story about Murray Rothbard used to tell that Hayek came to New York to deliver a lecture when he was writing this article Taxis and Cosmos and Murray Rothbard's wife, Joey, saw an announcement or a mailing or something. She says, look, look, Hayek's giving a lecture on Taxis. You know, the yellow ones, that's what people in New York understand. But no, Hayek meant Taxis. Menger used the terms organizations and organisms, isn't that it? No, that's not right. Organizations and institutions. No, there's a different, right, organizations and orders. Yeah, so I just wrote something about this yesterday and I've already forgotten it. I've got early Alzheimer's. Right, so Menger used the term organizations to the, as what Hayek calls a Taxis and the term order as in the phrase many of you have heard, spontaneous order to describe a cosmos. Okay, what's my point? My point is that the firm is a Taxis or an organization. In other words, there's a critical teleological distinction between the firm and the market, between organizations and markets, okay? That, yes, I mean, clearly there is sort of some element of experimentation and change and trial and error and unintended consequences within a firm, but a firm is a deliberately designed institution with specific owners, property owners. Whereas markets and the common law and language and culture are not organizations in that same sense. There are no residual claimants who have specific property claims over them, right? And what I mean is it's misleading to think of the firm as not having some kind of authority, right? The firm is really associated with authority. Owners of assets have authority over how those assets will be used. There is hierarchy in a firm. Now it's very popular nowadays, especially in the so-called new economy or the knowledge economy, to talk about the flattening hierarchy. Firm's becoming more decentralized and sort of hierarchy is an old outdated 1950s era concept when people went to work wearing, you know, suits and buttoned down shirts and ties. Now it's casual laid back, decentralized. There's more delegation, less hierarchy. I mean, certainly there are different approaches in management and subordinates can be delegated more or fewer decision rights, but the fact of ownership conveys a kind of authority that cannot be fully delegated, okay? On this notion of the production function view of the firm, well clearly that isn't an explanation of what firms are and what activities firms undertake, because a firm, a single firm can own many different production processes, each of which has its own production function, okay? Or a group of firms can jointly operate and manage a particular production process through a joint venture or a franchising arrangement or whatever, okay? So the production function approach doesn't tell us much about the firm, though it may tell us something useful about the production process itself, okay? I'm gonna stop there, because it's 319 and let's see if we have any other questions. Anybody besides Dan have a quick, no, I'm kidding. Dan, please. Yeah, Schultzian. Authority is important in bringing about their own personal satisfaction of your preferences, but I don't necessarily see how there's any connection between that process and market clearing or a general market process. So when Kersner positions entrepreneurship as being that link through alertness that you need the essential characteristics of alertness to draw a link between individuals just bringing about their own better state of affairs in comparison to market clearing systematically, what's the causal realism of your description with entrepreneurship having this ownership function and then bringing about? Okay, the question, if I understand the question correctly, is as I've described Kersner, right? His analysis of alertness is an attempt to explain a kind of market process, a kind of market clearing, how under the, call it in the Knightian approach to entrepreneurship that's being described here, what connection does that have to some kind of systematic process of market clearing? And if it doesn't have such connection, how can it be called causal realist? Is that a fair summary of your question? Okay, well, first of all, I mean, you correctly repeated some of what I said, right? That, sorry, that sounds a little harsh. No, you're correct. And I tried to emphasize that point that Kersner's theory is a theory of the market process, not a theory of the entrepreneurial act, whereas what's being described here is not a theory of the market process in that sense. Because the question is, under the theory of profit in Mises' profit and loss, where is the mechanism that explains the convergence from the plain state of rest to the final state of rest? And the answer is, it isn't there. And in causal realist analysis, there is no attempt to explain the tendency of markets to go from the plain state of rest to the final state of rest, because in Mises, that convergence never happens. That is not a process that takes place in the real world. That all real world prices are plain state of rest prices, or momentary equilibrium prices in Manger's term. There aren't, the final state of rest never obtains. So there's no need for a mechanism to explain a process by which we converge from the PSR to the FSR. In Mises, the only kind of process that's important in that sense is the selection process that we describe for entrepreneurs. The process of providing profit and loss feedback to select the bad entrepreneurs from the good entrepreneurs is the only market process in a sense that's needed. I think for some insight into this, because it's a somewhat subtle issue, look at Kirchner's article in the Cato Journal in 99, which is an explicit response to some of Joe's papers. I'm gonna ask Joe to comment on this in just a second. And Kirchner essentially says, he says, well, Salerno is right to point out that for Mises, only the plain state of rest obtains in the real world. And that Mises does not explain how or why final state of rest prices would obtain. And that that's a flaw in Mises' exposition. Kirchner says, well, he says, it's right that Mises, Kirchner says the only reason that the plain state of rest is economically significant is because Mises builds his theory of consumer sovereignty on it. Kirchner recognizes that Mises' account of consumer sovereignty is based on Mises' belief about the significance of the prices that obtain in ordinary market transactions. But Kirchner says, other than that, those prices aren't particularly important. We can't offer a systematic defense of the market economy unless we can also explain how these plain state of rest prices get tend toward their final state of rest positions. To me, that's contradictory, right? Because if you can use these everyday prices to explain consumer sovereignty, why would you need to, why do you need to posit an additional mechanism that leads us to a state of affairs that is, again, an imaginary construct, a hypothetical construct? Joe, do you wanna add a comment to that since you've done some of the key writing in this area? Just to say, plain, you've reduced in a mile four or five years from now, I don't care what the final state of rest is, there are many, many chains that are going to intervene between when he starts that plan and when the plan comes to fruition five years from now. All that he's interested in is what will be the state of supply and demand be five years from now when that car reaches the dealer? There's no movement towards any plain, any, any, plain state of rest or plainly overview. The market process is what happens in real time, in calendar time, over those five years. He may be right, he may be wrong, he may have anticipated the future state of price wrongly or correctly. If he's wrong, his capital diminishing, eventually, if he doesn't change, his expectations continue to be incorrect, he'll go out of business. But other entrepreneurs, at the same time, will be earning profits and will be expanding. So there is no, why do we need to focus on this mechanism that drives the economy after one change and or, of course, the number of gaps between prices. Everything else stops and then people pick up these $20 bills and then everything is coordinated. That's not the way it happens in the real world. The only reason why we need a plain state of rest notion is just to show undergraduates and others that as we, if there's a change, then in fact, production will adjust over time. Final, yeah, final state of rest in that pit. So there is this, what Mises calls final state of rest analysis, it's kind of analogous to comparative statics in standard undergraduate economics. And it does help us to understand some causal relationships, but it isn't needed as some sort of overall theory of the market process, of the effectiveness of resource allocation of the market and so on. So I guess the short answer to your question is that in the view that's being expounded here, Kershner is trying to propose a solution to a problem that isn't really a problem. Problem that isn't a problem that we have to worry about. I refer you to the voluminous writings of Joseph Solerno on this particular topic. Yes. As you were listing the characteristics of your entrepreneur, thought of another player and it seemed another name and it seemed to trip over and over and over again. That is venture capitalist. What is the difference between a venture capitalist as conventionally understood and what you say? After all, the venture capitalist is alert. He is the ownership of the most dangling capital. A venture capitalist is an extremely important kind of entrepreneur. Well, so the reason, you're saying kind of entrepreneur, for the general category of venture capitalists Sure. I mean, someone who invests in publicly traded equities is also an entrepreneur, right? If by venture capitalist we mean someone who makes private equity investments, makes investments in ventures that are not publicly traded, then that would be another type and an angel investor, if you distinguish that from a venture capitalist, would be another kind of entrepreneur. So anyone who holds an equity interest in a sense is acting entrepreneurly. So a venture capitalist is one real world manifestation of the entrepreneurial function. But there are other people who also perform a similar function who are not venture capitalists. But surely not any holder pre-shared in mind for some. Yeah. I'm not an entrepreneur at mind. Yeah, I would say you are. I am. Yeah, let me explain. I mean, this is kind of a, I don't wanna say a trivial case, but technically speaking, you are an entrepreneur because you do own assets that are put, that are put at risk, okay? Now, in a practical sense, you're an entrepreneur in such a teeny tiny sense, it's such a small part of your overall portfolio of activities that it really doesn't have any practical economic significance. Just as we could say, imagine I was talking to you about Paris Hilton, suppose that just for fun, or as part of some reality show or something, they have a TV show where they make Paris Hilton be a waitress for one hour per month and they film it for fun. And for that one hour she really is, they're paying her, they pay her $5 for doing that and she gets tips or whatever. I mean, technically speaking, for one hour a month, Paris Hilton is a wage earner, okay? Do her activities have a very economically significant effect, a practically significant effect on the labor market? No. Would we describe her? Oh yeah, Paris Hilton, she's that famous waitress. No. I mean, but again, technically speaking, she would be a laborer in a little teeny tiny sense, just as you with your three shares of General Motors. I mean, you are technically speaking an entrepreneur, you're just not a very important one. No offence, I mean, neither am I. And neither are most of us. I'm not offended, I'm just waiting for you. I think that's the pre-sharing that makes about me. That's right out of the blue. It's a very, it's a very old kind of sort of investment. But you're distinct, right, the distinction is between a general notion of entrepreneurship and what you're thinking of, you're thinking of specific psychological attributes, the drive for success, the creative impulse, the desire to leave the world in a different state in which you found it, fine, that's all great, but it isn't necessary to possess those characteristics to act entrepreneurially in the sense of bearing uncertainty in the world outside the evenly rotating economy. Again, if we were interested in doing applied work on entrepreneurs in history, I wouldn't spend a lot of time studying guys who own three shares of General Motors. Okay, but I mean, technically they're entrepreneurs, but they're just not very interesting ones. Yes? Well, for the comment, there's a question. How many shares would you have to own to be an entrepreneur? Well, I wouldn't count it that way. I would say somebody who is interested, primarily in startups, who is not so much psychologically different as you were trying to define it, but economically different, he's on the wave that's moving forward, the wave of innovation. Here's Schumpeter's element coming into it. He's alert, here's Kersner's element coming into it. He isn't just plucking down his money to buy three shares in a very well-established company whose greatest time with growth was 25 years ago. But look, you're raising a semantic point. This is not a substantive point, it's a semantic point, by which I don't mean to say it's a bad point, right? But you're saying you want to use the word entrepreneur to describe something else. That's fine. As it turns out, however, in my defense, if you look at the history of the word entrepreneur as it first appeared in the French, in Richard Cantillon, really the notion of entrepreneurship as judgmental decision-making under uncertainty is historically the more accurate term. It's only recently that the word entrepreneur has come to be associated with startups and systemic innovation and creativity and the kinds of things that you're describing. Again, it's just a semantic issue. And maybe, Joe and I have talked about this before, maybe it would be in our interest, purely for expositional purposes, to find a different word, not to use the word entrepreneur. It's just like the word liberal. We classical liberals or libertarians realize we've lost the word liberal to the left. Maybe the word entrepreneur is too difficult to get that word back. But again, it's just a semantic point, it's not a theoretical point. Okay, thank you very much. Thank you.