 All right, well, good morning, everybody. It's a real pleasure to be here with you. It's actually a real pleasure to be anywhere other than home right now. I normally participate in a number of conferences and seminars over the summer and in the fall. And pretty much all of them have been canceled. Even events as late as October, November have already been preemptively canceled. It's really only the Mises Institute that's still running as normal, although, of course, speaking to a room full of Austrian economists, normal is not exactly the word that comes to mind. But it's my pleasure to speak to you this morning about entrepreneurship. And probably, you've heard a lot about famous entrepreneurs, and you've heard a lot of discussion about entrepreneurship maybe in your classes, but certainly in the news and on TV and from politicians and so forth. Certainly a hot topic in our contemporary society. Whether we're talking about small business owners and the role that small business plays in communities or maybe even in fostering economic growth more broadly, whether we're talking specifically about high tech, we're all much more cognizant of technological change and technological achievement than maybe we were when I was a kid or when my parents or grandparents were young. Certainly, we had technological change over many, many decades and even centuries. But it wasn't quite as salient in our public discourse and our imagination as it is today. Maybe we're talking about developing countries and how economic growth comes from the bottom up rather than the top down. Maybe we're talking about visionary leaders or slightly crazy people who are good at seeking favors from politicians to get what they want. Nonetheless, you probably have not studied a lot about entrepreneurship in your core economics courses. Maybe it's mentioned from time to time, but entrepreneurship is not really a core topic in the undergraduate or graduate economics curriculum. You know, it's kind of a esoteric side topic. It's sort of a cool and fun thing that is in the news and lots of people are interested in it, but you wouldn't get it in your first year courses or maybe even in any of your courses as an economic student at a regular university. So why do we at Mises University have a lecture on entrepreneurship on Monday morning? If I count correctly, not including last night, this is lecture three, right? So this has got to be like the third most important thing. Obviously, I'm the most important speaker, but the third most important topic on the curriculum, why do Austrians give entrepreneurship a more central role in their theorizing about markets, about the economy, you know, compared to other economists? Actually, if you just look at Mises human action, just flip to the index, you see that there are many, many entries for entrepreneurs and entrepreneurship. You know, we talk a lot about epistemology and other fancy things, but epistemology gets far fewer index entries, right? Than a topic like entrepreneurship. By the way, look at equilibrium. Equilibrium just ekes out a few page references, but entrepreneurship is all over the place in human action. So that should be a clue right away that in the Misesian understanding of the market, the entrepreneur is not a peripheral side player, right? Entrepreneurship is not an applied topic for day five of a week-long seminar. It's right there at the heart and center of Mises' understanding of a market economy. And this is actually quite clear from the text itself. Mises says, this is human action. It is impossible to eliminate the entrepreneur from the picture of a market economy. It's impossible to eliminate the entrepreneur from the picture of a market economy. You cannot look at a market economy without seeing the entrepreneur if you're looking at it correctly. Mises goes on, the various complementary factors of production cannot come together spontaneously. They need to be combined by the purpose of efforts of men, people, aimed at certain ends, and motivated by the urge to improve their state of satisfaction. In eliminating the entrepreneur, one eliminates the driving force of the whole market system. The entrepreneur is the driving force of the whole market system. What the heck is he talking about? Okay, well, there's a clue right here in the middle. The various complementary factors of production cannot come together spontaneously. Right, you might have heard of Austrians think of markets as spontaneous, spontaneous organizing systems. I mean, yeah, there's, in a sense, but Mises is pointing out that production, right, the transformation of inputs into outputs does not happen automatically or spontaneously outside of human agency, right? I mean, all the, you know, the magical device that you hold in your pocket. Think of what is inside it, metal and plastic and glass and silicon and a lot of human labor went into this. The design, the production, the assembly, of course, the marketing, the distribution and so forth, the software that runs this machine, you know, those things just didn't magically spring up from the ground and join themselves into a mobile device, right? Somebody had to have the idea to do this. Somebody had to create a company or companies to bring this to fruition. People had to go out and purchase factors of production and combine them and try to sell them. And of course, you know, we see the winners but many attempts to create devices like this fail. Okay, so it's these actors, these human actors who are going around creating goods and services and offering them to us, the consumers for sale. Those are the persons who are driving the market process forward. Those are what Mises calls entrepreneurs, okay? So notice that entrepreneurship here is a very general feature of the market economy. It pervades our understanding of the market. It drives the whole market system. It's not just about a segment of the economy. It's not just about startup companies. But then once a company is established, there's no role for entrepreneurship in that company. It's not just about high tech firms. It's not just about small business or self-employment. No, it's a much more general feature of the market system. So you probably know something already about the Austrian analysis of production. This in fact is one of the great innovations of the Austrian school from the late 19th and early 20th centuries. It's a part of the Austrian tradition that has not been fully incorporated into mainstream economic analysis, right? I mean, the whole idea of production in an Austrian view is tied up with this relationship between inputs and outputs. Or if you want to generalize between means and ends, right, I have an end of wanting to communicate with another person. Actually, this is the old fashioned way you do it. This is the modern way that you guys do it, right? Or you send a TikTok to somebody or a Snapchat or whatever. I have some goal in mind, right? But I need to employ scarce means to accomplish that goal. So for me as a consumer, I've gotta obtain a device and have a data plan and so forth. But before I can even do that, entrepreneurs have got to create the infrastructure and create the technology and create the products and services that will allow people to satisfy their ends, right? For me as a consumer, you know, my end is the satisfaction that I obtain from doing whatever I wanna do with the device. For the entrepreneur, the end is financial or other kinds of rewards, right? The entrepreneur is trying to produce a good or service that other people will want and be willing to pay for, okay? But we can also understand the entrepreneur thinking in terms of means and ends, right? Well, you know, nature doesn't give us iPhones and Android devices and so forth. Nature gives us certain kinds of raw materials and we have the availability of human labor and so forth, right? So-called originary factors of production have to then be transformed into machines and, you know, processed materials and other kinds of intermediate goods that entrepreneurs can then assemble into final goods, okay? The challenge is, in contrast to the view one typically finds in a mainstream microeconomics text, this process is not simple. It's not straightforward. It's not obvious. There are lots and lots and lots of different ways you can combine these originary factors into intermediate goods and lots of ways you can combine the intermediate goods into final goods. There's an almost infinite array of possible factor combinations that can be used to produce particular outputs, let alone the fact that we've got to decide what outputs to produce, right? So this doesn't happen automatically and it's not a trivial process. It's a difficult and challenging and complicated process and the Austrian theory of capital is designed to conceptualize and refine and make sense of this complex production process. Karl Manger sort of hinted at provided the foundations for the Austrian theory of capital which were later elaborated in much more detail by people like Manger's successor, Bumbaverk. Also, of course, by Ludwig von Mises and to a large extent in Murray Rothbard's man economy and state. And maybe you've read Roger Garrison's books and writings that provide a very lucid exposition. Maybe you've probably seen the famous triangle diagram that originally comes from Hayek that explains the structure of production through time. That's actually one of the innovations of the Austrian theory or I should say a distinctive feature of the Austrian theory that's mainly been lost in contemporary treatments is the idea that production does take time. Now you go from the left side of the triangle to the right Hayek had it from top to bottom but it's the same idea, right? Production is not instantaneous which means that goods and services that are being produced and sold today are the result of many, many decisions and actions that were taken when? In the past, right? When the future was not yet known when future conditions had not yet materialized. The Austrians were famous in their day and even today for developing the so-called theory of imputation which was described by Karl Manger. The idea that the value of the materials that go into producing a good and service is determined by the value of that final good or service to consumers, right? The reason that the silicon and the glass and the metal and the plastic and the code and other things that go into these devices have command prices on factor markets is because the things they can be used to produce command our price and have value on the final goods market and the Austrians developed a means for imputing, figuring out how much of the final value is imputed to various intermediate goods. And I'll talk about that in just a moment the concept of the marginal product of an input or the marginal revenue product of an input on the market but notice also that because production takes time production is also fraught with uncertainty, right? When these decisions in the past are made in anticipation of being able to produce goods and services in the future which can be sold to consumers those goods and services don't exist and the prices that they can command on the market are not yet known for sure, right? It's not that the decision maker in the past is completely ignorant. The decision maker can make educated guesses about what is likely to happen in the future but that's different from knowing for sure about something that's already happened, right? So, you know, when I'm buying if I'm an entrepreneur I'm buying factors in the factor market the marginal product of that factor the marginal revenue product of that factor those things are not known with certainty at that point they're just sort of estimated or anticipated because they're not realized until the future when my thing actually sells. You know, maybe nobody will want my thing it won't command any, any won't have value to consumers I won't be able to make any money from selling this thing so the actual monetary value of the factors that I bought is like almost, you know, zero or maybe very low. I don't know that when I'm buying factors, okay? So, it works like this what we call the discounted marginal revenue product of a factor or a service an input into production, right? Is the amount of money revenue that can be attributed or imputed to one unit of that factor discounted by the interest rate or the social rate of time preference. Okay, so holding constant the use of other factors if I add one more, you know, gram of silicon how much of a faster device or better device does that produce and how much more money can I make from selling that device compared to a less fancy device one that doesn't have that extra gram of silicon, right? So how much more of a device do I get from using one more unit of the factor times the price at which I can sell that unit that device, right? Tells me how much extra money I'm gonna get from hiring one more unit purchasing one more unit of that input, right? That's the marginal revenue product. I have to discount it because if production takes time, right? And people have positive time preference or I've got to pay now to buy the factors but I only get the money in the future and so I might discount that by depending on time preference, okay? But the point is this discounted marginal revenue product tells me the maximum that an entrepreneur would be willing to pay for one more unit of that factor. I go out into the silicon market I don't know, I suppose there's a market down the street you know, wholesale, there's a warehouse there's a bunch of silicon in there, right? How much am I willing to pay for one more gram of that silicon? Well, I think how much more stuff can I make with that one gram of silicon or how much better stuff and how much more money will I get from selling that? That's the most I'd be willing to pay for that additional unit of the input because then I'll, you know if I can purchase that unit of an input for less than the additional revenue I'll get from selling the thing that I can make with that additional unit of input I'll have some money left over to put in my pocket, right? I don't wanna pay more than the discounted marginal revenue product because that's gonna reduce my total net receipts, right? Then I'm paying out more then I'm eventually gonna get back from employing one more unit of that factor. Now you can imagine, you know if there's a situation where you have lots of entrepreneurs bidding against each other for the services of these factors of production and everybody knows what these factors of production will eventually be worth in terms of their discounted marginal revenue product then it's not likely to be the case that I can get factors on the cheap, right? I mean the price of those units of Silicon is gonna be bid up to what they eventually will be worth to entrepreneurs from selling the devices in the market, okay? So that's why, you know we say that in sort of an equilibrium state the prices of factors of production are determined by their discounted marginal revenue products that's the Austrian notion of imputation and there are certain technical exceptions depending on, you know factors have to be used in precise combinations rather than where you can vary them and so forth. What does that have to do with entrepreneurship? Well again, imagine a kind of equilibrium state like what Mises and Rothbard called the evenly rotating economy. That's a kind of imaginary situation, an imaginary construct Mises would call it in which, you know, we have human action people are out there doing stuff and they're consuming and producing exchanging and so forth but there's perfect knowledge about future conditions. So their definition of the evenly rotating economy was a world in which there is no uncertainty about the future. So when I and my fellow entrepreneurs are out there trying to get Silicon, right? Everybody knows exactly how much consumers in the future will be willing to pay for mobile devices that use that Silicon. In case there's no doubt whatsoever about what the actual discounted marginal revenue product of Silicon or glass or plastic or metal or human labor, coding labor or whatever will be worth. Everybody knows what those units of inputs will be worth. What would that world look like? What would be sort of the flow of funds or the distribution of income as they call it in a world like that? Well every owner of a factor, somebody who owns Silicon or each of us owning our own labor would be paid for the use of our inputs, an amount exactly equal to the discounted marginal revenue product of that input for each unit that we offer on the market. Okay, so workers get wages that are determined by their DMRPs and owners of factories get payments for the use of their capital and so forth according to DMRP and landowners get paid rents on their land equal to DMRP and so forth. What if I'm an owner of a firm? What if I'm an owner of an enterprise? Well, there might be a little residual leftover when I look at all my receipts and then I pay all my inputs. There's a little residual leftover. For me, it's kind of my wage, my implicit wage for being the owner of the firm rather than working for somebody else. So I get a little return on my labor. Okay. If I'm also the owner of the property, some of that return, some of that net return is an interest payment for my willingness to let somebody, to have my property be used for production. This is Bombavarick's great insight against Marx, right? Marx said, well, workers don't get paid the full value of the output their labor produces. Bombavarick said, well, yeah, that's because production takes time. So the capitalist is paying today for goods and services that can only be produced and sold tomorrow, right? So when I pay a dollar today for somebody to produce a dollar's worth of output next year, that dollar next year is only worth 90 cents. Okay, so I'm not gonna pay a dollar to the worker. I'm only gonna pay 90 cents. I'm gonna discount the upfront payment if I only get the return to me in the future just because of time preference. But the point is after that, once all the workers and capital owners and landowners have been paid their DMRPs, after all business owners have gotten paid their implicit wages, right? After anyone who has lent out resources to be used in advance gets paid their interest return, there's nothing left over, right? There's no residual because everybody knows exactly what factors of production are worth once the goods and services are produced. In a world of no uncertainty, the only returns in the economy are payments to factors of production and interest payments. Okay, you think of the implicit wage as kind of a wage. There's nothing left over. But wait, we just said in reality when I'm out there in the silicon market trying to buy these holograms of silicon, I have an educated guess about what my product will be worth, but I don't know for sure. I might be wrong. I might think, oh, I've got the coolest new gadget ever. Everybody will want one and be willing to pay a thousand bucks for my iPhone 12 plus XRG, whatever. In reality, it might be people say, you know, my iPhone 11 is good enough. I don't really need that upgrade. And maybe I overestimate how much people will be willing to pay, how many people will be willing to buy and so forth. And then I mistakenly overpay for silicon. So that means I paid so many dollars for silicon, I produced the stuff, I sold it. The revenues that I received are less, even controlling for discounting, than what I laid out. So what happened to me? I earned a loss. I lost money. Or maybe I'm very clever and shrewd. I'm the only one who correctly anticipated that consumers would be willing to pay some huge amount of money for this new gadget. Other entrepreneurs didn't, they didn't see that, they didn't believe that. And so the price of silicon was not actually bid up to what its DMRP would later be revealed to be. And so I was able to get it for less than the DMRP. Then what do I have to put in my pocket at the end of the day? Profit. In other words, outside the evenly rotating economy. Entrepreneurs are competing for the use of factors based on their knowledge and their beliefs and their bargaining skill and their shrewdness and other characteristics, right? In other words, they have knowledge and beliefs about the present technological capabilities. Is it really possible from an engineering perspective to build this thing out of silicon and glass and plastic and metal and code and so forth? What are the productive capabilities of my factory and is enough silicon available? And will the appropriate computer code be, will there be somebody who can write it and so forth? I could be wrong about that, right? And I also have knowledge and beliefs about the future. What consumers will be willing to buy. But also, what government regulators will do, how my fellow entrepreneurs will react when I introduce my new gadget to the market? Will they try to match it or will they back off or whatever, right? So I have a lot of uncertainty about what future market conditions will be. So the result of the fact that we're outside the evenly rotating economy, that we're in a world in which uncertainty is present rather than absent, means that we will have profits and losses, right? Some entrepreneurs will have revenues that are in excess of their costs and have money left over to put in their pockets. Other entrepreneurs will find that their revenues fall short of their costs, even accounting for discounting and implicit wages and so forth. And they'll earn losses. I mean, that's the world that we observe. You know, companies like Apple and Samsung are very profitable because in part, they were better than other companies at anticipating the goods and services that consumers would be willing to pay and how much people would be willing to pay and so forth. And that's why Blackberry and Nokia, which were the dominant mobile handset providers in what, the 1990s and early 2000s, maybe ancient history, right? They're gone. I mean, these products are not in the market anymore. Even though at the time, companies like Nokia and Blackberry, they totally dominated the mobile handset market in the consumer goods, consumer side for Nokia and the business side for Blackberry. But you get this idea, you hear it from critics of the market, Marxist types, whatever. Wow, these big companies, you know, they're just so powerful. They can do whatever they want. They can ram their products down the consumer's throat. They can underpay their workers and we've got to do something. We've got to break them up. We've got to regulate them. We've got to control them. What happened to these guys, right? I mean, history is littered with the remains of these big dominant companies that were incorrect in their forward-looking assessments of what market conditions would be. And they failed. They went bankrupt. They earned losses while other firms earned profits. The point is you cannot explain profit and loss without reference to uncertainty. Uncertainty is the source of profit and loss in a market economy, okay? Notice this is totally different from neoclassical production theory, what you get in your intro or intermediate microcourses with the production function or isoquants and isocost curves and so forth. That's a completely different way of thinking about production. There's no passage of time. There's no uncertainty. There's no heterogeneity of inputs with lots of different complex, possible combinations of inputs. It's kind of a, it's really, and I say this deliberately, it's a trivial problem. These models solve kind of toy problems. I mean, you might say, oh, but the calculus is hard. Yeah, I mean, it might be. But essentially, given all possible outputs, given a set of inputs and possible input combinations for a known set of outputs, optimize for most efficient use of factors and so forth. I mean, again, if we knew all the inputs that were available, if we knew all the ways that inputs could be combined, if we knew what the outputs would be and we knew the prices the outputs would command on the market, well, now we're not doing entrepreneurship anymore. We're just solving math puzzles for fun, okay? And there's a whole series of kind of, technical problems. Oh, sorry, my slide's messed up. Yeah, everything's given there's no passage of time. There's no uncertainty. There's, Rothbard pointed out, it's kind of a circular explanation for factor prices and it's really looking at the wrong problem. This is kind of the problem of the factory manager, okay? There's a great line in a human action where Mises is talking about socialism and he's criticizing some economists who responded to his critique of the impossibility of economic calculation under socialism by saying, well, under socialism, you could just instruct the managers of the state-owned factories to equate marginal revenue and marginal cost just like the managers of capitalist factories do. What would be the difference? Why wouldn't it work just as well? And Mises points out it's a great characteristically Misesian line. He says, these critics, they see the economic problem from the perspective of the subaltern clerk. Okay, a subaltern clerk is like a low-level manager, shop room, director or whatever. Okay, yeah, you create all this stuff. You create a factory and you design products and services and you have plans for what to do and stick me in the middle of the factory and tell me to move the workers around for maximum efficiency. Okay, yeah, I could do that. That is not the problem that a market economy solves, a market economy has to solve the problem of why is there even a factory there? What is the factory producing and why is it producing that thing? And why are you producing it using these inputs and not some other inputs? Where did the resources come from? Where did the capital come from to put this factory here? What happens if it's not doing a good job? Does it get dissolved and reformed somewhere else? In other words, yeah, under socialism you could have factories that produce stuff. What you don't have under socialism is entrepreneurship. Okay, you don't have entrepreneurs making decisions about what to produce and how to produce it, responding and earning profits or suffering losses as a result of their decisions, okay? So in a very broad sense, we can conceptualize the entrepreneurial function. We can conceptualize entrepreneurship as a bearing uncertainty, making decisions, taking actions to produce stuff in the face of uncertainty. Mises says it this way, the term entrepreneur as used by economic theory means acting man exclusively seen from the aspect of the uncertainty inherent in every action. Okay, action under uncertainty, that is how we conceptualize entrepreneurship from Mises. There's important distinction. We don't have time to get into it this morning, but you might wanna look at what Mises and other Austrian economists mean by uncertainty. Mises follows the conceptual distinction that was first outlined actually by his younger brother, a statistician or probability theorist named Richard von Mises, distinguishing what they call case probability from class probability. You could use Frank Knight's risk uncertainty distinction if you like. I call that entrepreneurship in the broad sense because all of us as we go about our day are bearing some uncertainty. We don't know for sure if the actions we take will bring about the results that we want. So we might also think about, it might be useful to think about entrepreneurship in a slightly narrower kind of commercial sense. Commercial entrepreneurship is those, this is the act of buying and selling factors combining factors of production and so forth in pursuit of a specific monetary gain, trying to achieve a money profit and avoid monetary loss. The German economist Ludwig Lachmann, who spent most of his career in South Africa before coming to the US, puts it very nicely in his book on capital. He says, we are living in a world of unexpected change, unexpected change, i.e. uncertainty. Hence capital combinations will be ever changing, will be dissolved and reformed. In this activity we find the real function of the entrepreneur. So the real function of the commercial entrepreneur is this constant combining and recombining of productive capital resources in pursuit of money profit and desiring to avoid money loss. Okay, that's the real function of the entrepreneur. That's what Mises means when he calls the entrepreneur the driving force of the market. The entrepreneur's primary tool is economic calculation and Professor Salerno has a lecture tomorrow, I believe, on socialism and calculation where he'll go into that in more detail. The thing to keep in mind is that calculation or the calculation problem is not merely an issue related to socialism. The concept of economic calculation was developed by Mises in his analysis of socialism but it's a much more general phenomenon, okay, which applies to all kinds of economic systems. So in a lot of my own work on entrepreneurship I've used the term judgment to characterize how the entrepreneur makes these decisions or really what is the essence of the decision making that the entrepreneur does. If you like, you could define judgment as something like decision making under uncertainty in the absence of some kind of a formal logical model or mathematical decision rule where you're just calculating, putting numbers into a formula and it tells you what to do. Here's how Mises puts it. The real entrepreneur is a speculator, a man eager to utilize his opinion about the future structure of the market for business operations promising profits. This specific, anticipative understanding of the conditions of the uncertain future defies any rules and systematization. It can be neither taught nor learned. The entrepreneur sees the past and the present as other people do, but he judges the future in a different way. Okay, so the entrepreneur is anticipating future market conditions, right? Without kind of a model that can be trans, that can be passed on to somebody else. Without a formal model that you can read about in a book and then just go and implement, right? It involves intuition or call it gut instinct or what the Germans call for staying kind of a deep understanding of the world, a deep understanding of market conditions. How do you get it? Well, you get it through experience. Some of it may be inborn. It may be manifest in different ways as we'll see. But one thing that's particularly important here is enabled to exercise judgment in the Misesian sense. You have to have some ownership stake in the project at hand. Because just being a hired consultant who gets paid either an hourly wage or gets paid if the venture is successful, that's not being an entrepreneur in the Misesian sense. You've got to have skin in the game to exercise entrepreneurial judgment. So there's a close connection between judgment and ownership in the Misesian understanding. I've actually been thinking about this a lot. I'm working on a paper with several co-authors that I hope will be published sometime later this year where we develop a concept we call ownership competence. And it's another way of thinking about when are entrepreneurs successful at exercising judgment? When are they unsuccessful at exercising judgment under uncertainty? One of the problems with the word judgment in English is that you can use it in a strictly formal sense the act of judging to be engaged in judging is to exercise judgment. You could judge the results of a contest or you can judge future market conditions. That's what the entrepreneur does. But we also use the word judgment in English as a synonym for wisdom or prudence. Notice we think of judgment as being like a positive like somebody who's good at judging has good judgment, okay? Whereas Mises is using the term judgment in the strictly neutral sense of the act of judging. So it leaves open the question why are some people good at judging and other people are not so good at judging the future? Okay, in other words, to put it differently why are some resource owners quite good at arranging the factors of production they own and control in ways that generate profits whereas other owners are not as successful in doing so. We could actually maybe dimensionalize this notion of competence, the skill with which ownership or the skill with which judgment is exercised into different aspects. And in this paper I'm working on we distinguish between what we call matching competence, governance competence and timing competence. So matching competence is knowing what's stuff, what are you good at, right? I mean, in which industries, for which technologies, in which markets, for which kinds of factors do I tend to be skilled in figuring out future market conditions and putting that knowledge to use? Governance competence is okay, given a project that I'm involved in am I good at extracting value from those resources? Am I good at coming up with the right combinations and of course doing all the other things associated with ownership, hiring people and monitoring employees and so forth. Timing competence is about getting it right on the market. How do I know when to buy, when to sell, when to set up a firm or dissolve a firm or introduce a product or withdraw a product or revise a product or whatever. And there might be some people who are particularly good say at matching competence and governance competence but not especially good at timing competence and we spin out some of these implications. Where does it ultimately come from? I don't know. There's some research evidence that the ability to exercise ownership competence, to be competent at owning or to be good at exercising this intuitive decision making, it may be correlated with some other kind of capabilities. An article that I just saw the other day, not yet published in a cognitive science journal suggests that there are certain tests you can give people that measure cognitive capacity, which are good at predicting the extent to which they rely on intuitive thinking rather than sort of calculative thinking. And so it may be that there are things we can identify that make particular people good at doing this. Also note that while ownership can be exercised in groups so you can have a partnership of entrepreneurs, right? Or even a corporation as a partnership of many owner entrepreneurs, many capitalist entrepreneurs. It's probably the case that groups that are relatively homogeneous in terms of their interests are better at exercising judgment than very heterogeneous groups. There's important work by a law professor at Yale named Henry Hansman on the governance of cooperatives and corporations and proprietorships and partnerships and so forth where he makes this argument that homogeneity of interest among the ownership group is the primary determinant of the competence of that ownership group. I actually think, and I've done some work on this myself, this has some pretty strong implications for so-called stakeholder theories of the firm. Well, it shouldn't be the shareholders who get to make all the decisions, say these theories, it should be, workers should get to be part of the governance of the firm or maybe suppliers or people who live in the community the firm should take into account the interests of a broad set of stakeholders rather than just the shareholders. I think the ownership competence perspective suggests that very heterogeneous stakeholder groups may be low in ownership competence and that may actually be a good reason to restrict decision-making to equity owners or shareholders rather than a broader set of stakeholders. Now I wanna just add a little footnote here because some of you may have, if you've done a lot of reading in the Austrian tradition, you may have also heard the idea, you might have heard the notion that entrepreneurship is closely connected to discovery, that entrepreneurs are people who discover the future better than other people. There's a famous article by Hayek called Competition as a Discovery Procedure. I'll talk about this a little bit also tomorrow in my lecture on competition. Hayek says competition is important primarily as a discovery procedure whereby entrepreneurs constantly search for unexploited opportunities that can also be taken advantage of by others. So entrepreneurs are those who discover these profit opportunities before other people discover and are able to exploit them. And this notion has been picked up in a number of very influential works by the Austrian economist Israel Kirchner who describes entrepreneurship as alertness to changing buying and selling possibilities or alertness to new information and potentially worthwhile goals hitherto unnoticed as well as toward unnoticed, potentially valuable available resources. The entrepreneur notices a price discrepancy before others do. So in this version, this understanding, the entrepreneur's role is to be alert to or to discover or to notice things more quickly than other people. Not to sort of create and build but rather to notice stuff that's already there before other people notice. I mean, there are a number of problems with this way of conceptualizing entrepreneurship. I mean, the first and most obvious is that the way I read Mises and other Austrians, entrepreneurs don't discover things, they create things. They're making things that otherwise wouldn't exist not merely being the first to notice things that would exist anyway. In other words, the notion of discovery or noticing is kind of sort of backward looking rather than forward looking. And I think the forward looking, entrepreneurs are trying to judge the future, not look for things that already exist in the present. Even the whole notion of opportunity is really just metaphorical, right? It's not that Steve Jobs and his colleagues at Apple discovered the iPhone before somebody else came along and discovered it. No, I mean, there never would have been an iPhone if it were not for the actions undertaken by specific entrepreneurs. There really isn't an, there aren't profit opportunities sitting around waiting to be noticed, right? Rather, entrepreneurs are creating products and services under uncertainty in anticipation of future profits and hoping to avoid losses and sometimes they're successful and sometimes they aren't. Which leads to the problem of profit and loss. I mean, if entrepreneurship is noticing or discovering profit opportunities before other people, then how do you ever lose money? How do you explain Nokia or BlackBerry, right? If entrepreneurship is discovery, the worst that can happen to you is you fail to discover an opportunity that somebody else comes along and discovers. But then you're just like, you break even, you're just, it's neutral. How do you ever lose money? How do you explain accounting losses in a discovery approach to entrepreneurship? I don't think you really can. And also, as I've explained already, I think under uncertainty, you really need, you really need a concept of ownership that entrepreneurs have to own capital to be able to participate in the entrepreneurial process. Now, let me just elaborate on that last point before we wrap it up. Some people have defended the discovery view by saying, well, yeah, in reality, entrepreneurs are also capitalists. In reality, you have what Mises and Rothbard call the capitalist entrepreneur as an important agent in the economy. But theoretically, abstractly, we could imagine a pure entrepreneur who does not make stuff and build things and own factories, but just sort of floats around and discovers things. And they often quote, they point to this one particular passage from Mises in Human Action, page 254. Let us try, this Mises says, let us try to think the imaginary construction, the imaginary construction of a pure entrepreneur to its ultimate logical consequences. This entrepreneur does not own any capital. The capital required for his entrepreneurial activities is lent to him by the capitalists, specialized money lenders, in the form of money loans. If he succeeds, if the entrepreneur succeeds, this pure entrepreneur, the net profit is his. If he fails, the loss must fall on the capitalists, sorry, who have lent HAVE, who have lent him the funds. So this is what Kursner and his colleagues call the pure entrepreneur in Mises' system, and they go on to elaborate a theory of entrepreneurship based on this notion of the pure entrepreneur. However, if you go to page 254 of Human Action and you keep reading a couple of sentences later, you find the following, the same page. Mises says, such an entrepreneur would in fact be an employee of the capitalists who speculates on their account and takes 100% share in the net profits without being concerned about the losses. In other words, what Mises momentarily for like 10 seconds calls the pure entrepreneur is really kind of a consultant. It's like somebody you hire, hey, go out there and look at the landscape and see if you can see something that I should be doing that I'm not currently doing. If I take your advice and make money, I'm gonna pay you, you're on a contingency fee. I'll pay you if I can make money off your idea, otherwise I won't pay you. That person is not really performing the entrepreneurial function. The entrepreneurial function is being performed by the capitalist entrepreneur who makes the decision to hire this consultant or not or some other consultant. The person who makes the decision whether to follow the consultant's advice or not or maybe get rid of this consultant and not use a consultant at all or get another consultant, that's the entrepreneurial function. Okay, so Mises momentarily thinks about could you imagine a pure entrepreneur doing this and he says, no, that really wouldn't be an entrepreneur. A capitalist is always also virtually an entrepreneur and speculator. I think what it means by virtually is under uncertainty you cannot be an entrepreneur without also being a capitalist. You cannot also be a capitalist without being an entrepreneur. If you don't believe me, watch the famous scene in Fargo, the Coen Brothers movie Fargo, where Jerry the protagonist goes to try to get a loan from his rich father-in-law Wade and then they argue about the conditions of the deal. Just Google, it's my deal Wade, it's my deal here Wade on YouTube. Watch that scene and you will see the difference between a capitalist entrepreneur and a speculator. Sorry, a hired consultant who speculates. So to wrap up, the fact that there's so much interest among the mainstream in entrepreneurship kind of provides a nice opportunity for Austrians. There's been a lot of growth in entrepreneurship research and education in the mainstream university setting and most entrepreneurship scholars are pretty sympathetic to Austrian economics or at least not hostile to it as you might find in economics departments. And so I think there's fertile ground for research in Austrian economics that is framed as research in entrepreneurship. Something for you guys to think about. Even if you don't identify as an entrepreneurship specialist, you might be able to do your analysis of capital production, interest, labor, market equilibrium, whatever in terms of entrepreneurship. So the mainstream literature still struggles with what entrepreneurship is. Is it self-employment or new venture formation? I think this notion, the general notion of entrepreneurship as uncertainty bearing in a world of complexity and so forth is a good way to solve that problem. There's a lot of research on why some entrepreneurial firms perform better. How does entrepreneurship link to overall economic growth? What should be public policy towards entrepreneurship? I think an Austrian take on entrepreneurship provides a lot of valuable insight on all of those questions. Thank you.