 Our next lecture is going to be given by Dr. Peter Klein. Dr. Klein is a professor of economics at the University of Missouri. And his lecture this afternoon is on uncertainty and the entrepreneur. Peter? Well, it's really great to be here with you guys today as the almost the last session of the first day. And I see that most of you have survived. This is a great time of year for me. I enjoyed Professor Hoppe's trip down memory lane in his opening lecture last night. I attended my first Mises University summer conference in 1988 before some of you were born. And here's the remarkable thing. I've attended every single one since. I have not missed one since 1988. The first few as a student and then since 1994 as a faculty member. And, you know, hearing these ideas over and over again from slightly different perspectives, having some time to ruminate on it between conferences. I think I'm finally starting to get it. It took a while to kind of sink in, but this whole human action thing. I don't quite get that, but the rest of it, I think I'm starting to figure out. So don't be troubled if you don't absorb every single nugget of wisdom this week. There's a lot of material being thrown at you very quickly and a lot of it requires some thought and some reflection. And think of this as the starting point for a long intellectual journey and don't a journey that will be fruitful. And you've also made a lot of you'll be making friends and building relationships this week that hopefully will last you for a very long time. I know that I still am very close to people that I met at my very first Mises Institute conference. My subject for today is uncertainty and entrepreneurship. This is somewhat of an unusual topic to have in the core in the first day core of an economics conference. Mainstream economics does not handle uncertainty or entrepreneurship very well. Uncertainty is sometimes not discussed at all. It's typically confused with probabilistic risk, a distinction that I'll emphasize in a few moments. And entrepreneurship is almost entirely absent from mainstream introductory and even intermediate level texts and economics. The entrepreneurship specialist William Baumol once described the entrepreneur echoing Shakespeare's Hamlet as the specter which haunts economic models. Just as Hamlet's father, the ghost of Hamlet's father haunts his mansion, haunts his castle in Denmark. Mainstream economics doesn't quite know what to do with the entrepreneur. There's a general recognition that things like uncertainty and innovation and entrepreneurship must be important somehow. Certainly business people think these things are important. There's a lot of discussion of them in the popular press. We think calling someone an entrepreneur is usually meant as a compliment. But mainstream economists don't quite know how to handle the concepts of uncertainty and entrepreneurship. The Austrian school is an exception to this. Since the very beginnings of the Austrian school in Europe and Spain in the 16th and 17th centuries and in France in the 18th century, and of course in Austria in the 1870s with Karl Manger's principles, the Austrians have taken entrepreneurship and uncertainty very seriously and built these concepts right into the very core of their analysis of basic economic phenomena. Just to remind you of some things you've learned about already today and things you read about in anticipation of coming here, right? Austrians following Mises conceived economics as the study of or the science of human action. Well, what is action as we learned this morning? So the fundamentals of action. Well, Manger in his principles emphasized economic behavior as the employment of means to achieve desired ends. So the concepts of means and ends are fundamental to the analysis of economic behavior, right? Unlike physical objects mentioned by Professor Hoppe last night, human beings do not behave in a sort of random fashion. They're not buffeted about by the winds or the subject of material forces, but rather they have goals, plans, purposes. They use reason and they employ these resources to achieve particular objectives. When human agents, when human actors employ means, they don't know for sure that the desired ends will come about. Right, the very notion of means and ends suggests in the real world that there's some uncertainty about whether the means will in fact achieve the desired end. Why? Because human action taking place in real time, human action takes place in time, in real time. So means are employed now in anticipation of ends that will be achieved in the future. Maybe only a few seconds in the future, maybe days or weeks or years in the future, but there's some lapse of time between when the means are employed and when the ends are or are not achieved. Right, so given that we don't know exactly what will happen after that amount of time has elapsed, we cannot be certain that the means we employ will achieve the ends that we desire. Right, because of the passage of time, there's an element of uncertainty in all human action. At least that's the way Mises conceived it. Mises argued that the very idea of action implies some uncertainty, or rather it implies a belief on the part of the actor that the means employed can affect the future. Right, the future is not predetermined in the sense that my choice to act one way or another my action or non-action, I believe, can affect the outcome. It can affect the future. If I thought the future would be the same no matter what I did, I would have no reason to act. Again, this is Mises' argument for how the very concept of action implies some element of uncertainty about the results of that action. When the means we employ do bring about the ends we desired, we characterize our action as successful. Right, but human action can also be unsuccessful. We can think of any number of examples, right, where you wanted to go out and have a good time, so you checked the movie listings and you picked a movie based on, you know, you had a good score on Rotten Tomatoes and you went to the movie and you hated it. Okay, so no, we wouldn't say that there's some sort of inefficiency here. Right, you made a choice to attend the movies based on your knowledge and expectations of the satisfaction you would get from seeing the movie, but it turned out that it's stunk. You disagree with the reviewers or the movie wasn't for you or for whatever reason you didn't like it. Okay, you say, darn, I wish I hadn't done that, I wish I had done something else. Or it's the best movie you've seen ever, it's best period movie period ever, as they say today, and you decide that your means were well employed and your action was successful. Right, we'll talk in a few moments about how these concepts are manifest in a market setting where success and failure can be measured in terms of profits and losses in the monetary unit. Okay, but even before we get to, even in the absence of a monetary economy, we can think of a general notion of successful action and unsuccessful action. Unsuccessful being action that does not bring about in the mind of the actor the ends that were desired. As Mises says in Human Action, the term entrepreneur as used by economic theory means acting man exclusively seen from the aspect of the uncertainty inherent in every action. In other words, all action contains a measure of entrepreneurship. Now what does Mises mean by uncertainty in this concept, in this context? What is uncertainty and is uncertainty the same as risk? Well, some of you may be familiar with Frank Knight's famous 1921 book, Risk, Uncertainty and Profit, in which Knight articulated a particular way of thinking about the difference between risk and uncertainty. Knight defined risk in the following way. A situation is risky when we don't know exactly what's going to happen as a result of our action. We don't know exactly what is going to take place tomorrow, but we can name the set of possible outcomes and we can assign some probability weights to each one, rolling a pair of dice, for example. Or to keep it simple, think of a single die. Assume that it's a fair unweighted die. When I roll the die, I don't know exactly what number is going to come up, but if it's a standard die, I know there are six possible outcomes. And each one, the probability of any one number coming up is one sixth. So I can compute the expected value of a particular number, the likelihood of a particular number coming up. If I'm at the casino and I get a certain payoff depending on what number comes up, I can calculate an expected value of participating in that gambling event. Sometimes this notion, this kind of uncertainty is called insurable risk. So Knight argued that when outcomes are unknown but the problem is well-defined, such that we know what could happen and how likely any particular thing is to happen, it's possible to write insurance contracts in which people pool their risks. We'll talk about that in just a moment. Uncertainty, according to Knight, is a situation where we describe the situation where we don't know what's going to happen in the future and we don't even know the set of things that could possibly happen. We cannot even enumerate the list of all possible outcomes. I was reading an article not too long ago about the tsunami in Japan and as some of you may recall, there was a lot of concern about the nuclear reactors in Japan and whether they had been adequately protected against this kind of catastrophic event. New York Times had a long piece on emergency preparedness at these reactor sites and they interviewed one of the engineers who had designed one particular reactor. It's called Fukushima, I think is the name of the town. Fukushima is the name of the reactor. Who had worked on this reactor and the safety protocols in the 1990s and he was trying to explain how they really weren't prepared for this kind of event. They weren't prepared for a tsunami as devastating as the one that occurred. He said, we can only work on precedent and there was no precedent. When I headed the plant, the thought of a tsunami never crossed my mind. So it isn't the case that these safety engineers were thinking, okay, well, here are all the things that could happen. Sunny day, everything's fine, little bit of rain, no big deal. Strong winds, okay, we got to have thick walls. A little bit of an earthquake, that could be a tsunami. Well, then the whole thing's going to be wiped out. We better build a big wall or we better do X, Y, Z. But we think tsunami is only probability point two. So we can rationally calculate how much we should spend on materials, safety equipment, and so on. The engineer is saying, look, we kind of work by the seat of our pants. We go by experience. There's never been a tsunami like this before. It simply never entered our minds to plan for this kind of event. So the kind of notion of decision making under quote unquote uncertainty that you get in mainstream microeconomics texts, where this simply means the decision maker chooses an action and the outcome is either X1 or X2. X1 has probability point four and X2 has probability point six. And the actor can simply do an expected value calculation and the whole sort of logic of utility maximization or whatever goes all the way through. That kind of analysis simply cannot accommodate a case like this one. Indeed, in the real world, with real human actors interacting with each other, there are many situations where we simply cannot articulate the probabilities and the possible outcomes that might obtain in the future. Now, Mises, while not exactly using the language of night in his distinction between risk and uncertainty, also elaborated this distinction in a slightly different way. Now, Mises was here building on the work of his younger brother, Richard von Mises, who was also a very distinguished scholar and academic in the field of probability theory. Richard von Mises was a very successful mathematician and statistician in Germany and emigrated to the US where he became a full professor of mathematics at Harvard. And Richard von Mises, among other contributions, is known for distinguishing between what he called class probability and case probability. And I want to argue that these are essentially similar to night's distinction between risk and uncertainty. What the Mises brothers described as class probability is a situation in which we have an event that can be conceived as a member of a homogeneous class of similar events. So, again, think about throwing the die. My rolling the die today is an element of the class of people throwing the dice, right? And one way to think about the idea that, you know, the probability that a six will come up is one sixth. How do we know this? Well, one way to think about this is you can imagine an experiment, right, where you repeatedly throw a die. You throw a die. We could roll the dice, so to speak. We could roll the dice over and over and over again and we could actually count how many times each number comes up. And if we did this enough times, in the limit, as the number of trials approaches infinity, the number of the percent of throws that come up with a six will approach one sixth. So, probability for Richard von Mises is defined as the limit value of the frequency with which that outcome occurs in a set of repeated trials. Now, exactly how do we define a class? Well, you can imagine an element of subjectivity here. Again, think about insurance. So, what is the likelihood that my house will burn down in a fire tonight in Missouri? I hope that doesn't happen. Do we know this for sure? No. But insurance industry entrepreneurs, by studying the history of house fires and by collecting data on different kinds of houses and different neighborhoods and weather conditions and so on, can say, well, of the houses of certain size built out of certain materials and certain neighborhoods with certain features, certain kinds of air conditioning and heating systems and so on, the likelihood that any one house will catch on fire is about whatever, is P. We can't say whether a particular house will catch on fire tonight, but we know something about the class of which that house is a member. So we can write insurance contracts only in cases where we can pool these events into some sort of class where each member of the class shares important characteristics. Other situations by contrast are those in which each event is a unique case where there are no important similarities among the cases such that they can be assembled into a class of similar events. And Richard von Mises called this case probability. So, you know, will my business be successful? Will you learn anything at Mises University this week? Well, I mean, a lot of students have attended Mises University over the last 25 years, but each person is different. Each addition of Mises University is different. Your circumstances are very heterogeneous. You might say that your interaction with your fellow students and with the professors and with the texts and so on is in a sense unique. It's as unique as you are. We can't aggregate you into a class of all students who have attended Mises University, right? So you can't, I think it's very unlikely that you could purchase an insurance contract that says if I don't like Mises U, I get some money back. Okay? So, situations in which events are members of unique classes where each event is a unique case and not part of a class. In those situations, we cannot apply probabilistic reasoning. We can't apply percentages, p-values, and calculate expected values. Rather, human actors rely on something else, what Austrians have typically called understanding. So the entrepreneur has a kind of understanding of what might happen in the future. The entrepreneur has some conjectures, some beliefs about whether his business will be successful, about what consumer demands will be, about what rivals in the marketplace might be doing, anything else that might affect the profitability of a particular venture. But the entrepreneur cannot apply probability calculus to that computation. Rather, the entrepreneur relies on a kind of intuition, what Mises calls a specific, anticipative understanding of the future that cannot be written down as a formula. If you think about it, if entrepreneurial success could be described by a formula or a decision tree for those of you who have studied decision theory under so-called uncertainty, well, then we could all do it. Right? If there were a recipe that we could all follow that would generate entrepreneurial profit with known and measurable risks, well, then anybody could do it. Anybody could be an entrepreneur. But that isn't the nature of entrepreneurship. That isn't the nature of human action under uncertainty. Why does this matter? Well, the entrepreneur is an economic agent who specializes in dealing with uncertainty. The entrepreneur specializes in dealing with uncertainty. Let me explain this first in the most general way and then talk more specifically about the capitalist entrepreneur in a market setting. So what is entrepreneurship in the most general sense? Well, we've already talked in the lectures today about land and labor and capital, for example, in Professor Herbriner's last lecture. Well, if we think of these different participants in the market process exercising particular functions and receiving particular returns, we might classify the factors of production something like this, right? Laborers are those who perform labor services in exchange for payments that we call wages, dollars per hour, you could be paid in apples or whatever. Owners of land allow their land to be used for productive purposes or for consumption in exchange for payments that we call rents. Owners of capital make their capital available to entrepreneurs, to borrowers, in exchange for interest payments. What is it that entrepreneurs do? Well, entrepreneurs bear uncertainty and receive profits and losses. So entrepreneurship is an economic function in the same way that labor is an economic function, in the same way that land and capital are resources or factors of production. Exercising a particular economic function, likewise the entrepreneur, exercises the particular economic function of bearing uncertainty. As we already mentioned, right? Every time you make a decision, every time you act, every time you use scarce means to achieve desired ends, you're anticipating or you're hoping to achieve particular goals and you measure success or failure according to whether or not you satisfy your objectives. Now, in a non-monetary context, like going to the movies, as I explained before, you may measure gains and losses in a purely subjective way, call it psychic profit and loss, something that can't really be measured, something you can't put a number on. Your friend says, well, how much did you enjoy the movie? You're going to say, eight. It's like, well, it was good. It was not so good, whatever. You could make up a scale, right? But that wouldn't actually mean anything. It's like when you go to the doctor, I don't know if this is true, those of you outside the U.S., but when you go to the doctor in the U.S., they often say, well, how bad does it hurt? And then recognizing the absurdity of that question, these little feeling scales with little faces, you've seen that. Ten is a really happy smiley face, and one is a little smiley face in agony. And you're supposed to say, oh, I feel about a six right now. I always thought this was completely ridiculous. But I don't know if I'm a six or a five or what. So in cases like that, we don't have numbers to attach to our profits and losses. But in a monetary economy, in what Mises would call a catalactic setting, the entrepreneur can measure profits and losses in terms, you know, in money, right? So many dollars are gained or lost. I'll come back to that point in just a moment. But notice an important implication of the view that profit and loss are returns that go to the entrepreneur for bearing uncertainty. There's no such notion as sort of a natural rate of profit. Profit is not a rate of return on investment. So in mainstream micro theory, you often hear people talk about sort of the standard rate of profit or the normal rate of profit in an industry or in an economy. And, you know, they worry if a particular firm is earning supranormal profits. I mean, the notion of normal profits doesn't make any sense in this context, right? I mean, every action, whether it's done by a consumer or whether it's done in the market by a capitalist entrepreneur, will generate some profit or some loss. Could exactly break even. Generate zero profit, right? But the outcome of every entrepreneurial venture will be different. And some will be very successful. Some will be very unsuccessful. They're heterogeneous events that can't be lumped together in some way to say what's sort of a normal rate of profit. So the whole notion of sort of excess profits doesn't make a lot of sense here. You hear politicians say, well, you know, I think a fair rate of return is 5%, and any company that earns more than 5% profit rate should be subject to an excess profits tax. Sometimes they call it a windfall profits tax. I mean, that's just completely arbitrary political posturing. There's no economic science that would be behind a policy like that. Now, entrepreneurs in acting employ resources, right? We all employ resources when we act. Now, these resources could be the things we normally think. I mean, tools, a capitalist entrepreneur has a factory and some machines and so on that are employed to produce lower order goods, et cetera. But even in the absence of tools, I mean, your time as a resource, your own body as a resource, right? It's like, you know, the old expression about being no such thing as a free lunch, right? I mean, there's no such thing as a free lecture, even though you guys didn't have to pay tuition to come here to Mises U, even ignoring travel expense and so on. Being here is not free, right? Sitting in this lecture listening to me now is not free because there's an opportunity cost, right? You couldn't be using your time and your body to achieve some other objective that you would value even more highly than the knowledge you would get from listening to me. As hard as that may be to imagine. And at the end of the lecture, you'll make a determination about whether you think this room was a wise move, right? So we can certainly think of profit and loss in that sense, purely in an opportunity cost sense. Notice this is a very old notion of entrepreneurship that goes back at least to Richard Cantillon or Cantillon for the French pronunciation, who authored the first systematic treatise in economic theory in the 1730s, it was published in 1755, and is usually considered a forerunner or a predecessor to the Austrian school. He said the following, entrepreneurs work for uncertain wages so to speak and all others for certain wages until they have them. The general who has a salary, the courtier who has a pension and the domestic who has wages are in the latter class, meaning not entrepreneurs, but rather those who work for certain wages. They work on a fixed payment, right? Others are entrepreneurs, whether they established themselves with capital to carry on their enterprise or entrepreneurs of their own work without any capital, in other words, with just their time and their body, and they may be considered as living subject to uncertainty. Even beggars and robbers are entrepreneurs of this class. In other words, according to Cantillon, anyone whose economic return is determined by a contract, anyone who receives a fixed payment is not acting as an entrepreneur. Well, anyone whose payment is uncertain in the sense of uncertainty that we've been talking about is an entrepreneur, okay? All of us are entrepreneurs in a general sense in some aspects of our lives. Every time you get out of bed and choose to walk across the street or whatever, you're bearing some uncertainty, right? So you're acting entrepreneurially in that sense, but we wouldn't describe you if you're a student or a stay-at-home parent or something like that. We wouldn't describe you as a professional entrepreneur, meaning someone who specializes in bearing particular kinds of uncertainty to get particular kinds of rewards, monetary rewards. So all of us are entrepreneurial in a broad sense, but it is useful to distinguish between this sort of general sense of entrepreneurship and a narrower, more catalactic notion of entrepreneurship. So think of this kind of entrepreneurship as capitalist entrepreneurship. Let's think about the relationship between the capitalist and the entrepreneur. In a market economy, under uncertainty, right capital owners not only bear interest, which is the result of time preference, making funds available in advance for earlier consumption rather than later consumption, but they also earn profit or loss due to uncertainty. In other words, any actor who owns and controls capital goods, capital resources, must make decisions about how these capital goods will be deployed, how they will be used, and these will generate particular economic returns, right? So the business firm can be conceived as sort of the intersection of the capitalist function and the entrepreneur function. So the business firm is the arena in which the capitalist entrepreneur operates. And I think one can easily build a theory of the firm, well, not easily, one can fruitfully build a theory of the firm by integrating, incorporating the capitalist and entrepreneur functions, and to prove it, I will show you this wonderful book. This just goes to show that it can be done, that any bozo can do it, and you can get a book like this. What does Austrian economics say about this integration of the capitalist and the entrepreneur function? Well, the resources that are employed by capitalists are heterogeneous, right? This was emphasized by Professor Herbner in the last lecture, that there are different degrees of specificity and substitutability among capital resources, right? So resources are not identical, and there may be millions, even billions of these resources available in an advanced economy such as ours. The production process takes time. So what is it that entrepreneurs do in a capitalist economy? Well, they assemble these heterogeneous productive resources, these higher order goods or factors of production, and they combine them in various ways to try to generate economic profit, to try to generate revenues in excess of their expenditures on these resources. How do entrepreneurs know what to do? How do they know what resources to acquire, what resource bundles to put together, what consumer goods to produce, whether they're doing it, whether they should do it or not? What's the right way to do it? Well, they perform what Mises called economic calculation, namely comparing the outcome of action, the money revenues that are generated from selling consumer goods in the future against the expenditures from purchasing the capital goods, that must be assembled and used to produce these consumer goods today. Herbner was using the example of the New York Yankees and Derrick Jeter. So the owners of the Yankees are trying to generate revenues in excess of their costs. They try to estimate what's the marginal value of having Derrick Jeter on the team. In other words, how much is it worth to add this particular resource, the labor of Derrick Jeter, to the bundle of other resources we already have, the other players, the equipment, Yankee Stadium, the brand name and so on, how much more revenue will we generate when we add this particular marginal unit of labor when we add Derrick Jeter to our resource bundle? Well, we estimate, we don't know this for sure, but we anticipate that we will generate X additional dollars in revenue from adding Derrick Jeter to the mix or keeping Derrick Jeter in the mix, and that determines the maximum that we're willing to pay for Derrick Jeter's services, adjusted for time preference, for discounting, depending on interest rates. Entrepreneurs are comparing anticipated future receipts against current expenditures for factors, and they can only do this in a monetary setting where they can compare outputs and inputs in a common unit, namely using money. So in a non-monetary setting within the family or Robinson Crusoe and his friend on a deserted island or in a very primitive pre-monetary society, there is kind of a loose and general kind of entrepreneurship in the same sense that you're an entrepreneur when you go to the movies and you're acting as an entrepreneur when you decide to come to this lecture and so on. There is a sort of a loose and general notion of entrepreneurship in those kinds of settings, but in the absence of money, there's no way to perform economic calculation to measure profits and losses in numbers the way the entrepreneur can do in a market setting under catalactic competition. So are the owners of the Yankees right? Are they paying too much for Derek Jeter? Are they getting him, you know, is it a steal to get him however many millions it is? Well, I mean, nobody knows this for certain ahead of time, right, but there is competition among entrepreneurs for the services of unique and substitutable factors of production, right? I mean, baseball, it's easy to see that there are other teams that might also like to have Derek Jeter on their roster. There's competition among owners. They bid against each other for the services of these factors. And of course, not only do entrepreneurs compete with each other in factor markets, they also compete with each other in the markets for consumer goods, right? Attracting people to go to their games and to buy their merchandise and to trying to get advertising revenue from TV broadcasts and so on. So there is competition among entrepreneurs which tends to select for skill, for entrepreneurial skill. Some entrepreneurs are better at anticipating future conditions. Some entrepreneurs have a clearer, a sharper, a better understanding of future market conditions than others. And Austrian economics, as we'll see during the week, offers a lot of unique insights into the nature of competition that are particularly useful for thinking about the theory of the firm. Now, it's worth mentioning a specific kind of entrepreneur that Mises also discusses in Human Action, what Mises calls the promoter, what we might call the entrepreneur promoter. So remember, we've already established that the general function of entrepreneurship is to bear uncertainty and to reap profit or loss. So entrepreneurship is about the deploying scarce means in anticipation of uncertain future rewards. However, in everyday discourse, we often use the term entrepreneur in a different way. And this was true even in the 1940s, as Mises noted. He says, this is quoting from Human Action. Mises says, economics also calls entrepreneurs those who are especially eager, those who are especially eager to profit from adjusting production to the expected changes and conditions. Those who have more initiative, more venturesomeness and a quicker eye than the crowd, the pushing and promoting pioneers of economic improvement. So when we think about those actors, those decision makers who make the market economy go, who introduce all the new products and services that we enjoy, the titans of industry who are responsible for moving the market, we don't necessarily think of the entrepreneur in this general abstract notion of uncertainty bearing, right? So let's put it another way. When you made the decision to come to sit in this lecture relative to something else you could have done, you were acting as an entrepreneur, investing your scarce resources, your time and your body in anticipation of gaining knowledge, which you may or may not gain. So you're acting as an entrepreneur, but I hate to break it to you, but your entrepreneurial action just really isn't that important, okay? You're not very important for the market. For the economy as a whole, your decision to attend or not to attend this lecture doesn't really amount to a whole lot. I'm sorry, I hate to break that to you. I mean, it may have a huge impact on your life going forward and the lives of others don't get me wrong. But in terms of, you know, what the stock market is not likely reacting very much to your decision to attend Mises University or not, or to attend this lecture or not. But there are other entrepreneurs like this guy, for example, right? People like Steve Jobs and Sergey Brin and Richard Branson, and we can name these sort of important charismatic movers and shakers, right, important business people whose actions do move the market, who are sort of quantitatively more important to the capitalist economy than you or me, okay? And Mises notes that the term entrepreneur is often used to describe people like that. When we use the word entrepreneur in everyday discourse, when journalists and politicians use the word entrepreneur, they typically don't mean this abstract notion of uncertainty bearing. They mean Steve Jobs, right? They mean people who are clever, who have initiative, particularly adept at anticipating things and so on. Mises says, you know, it's too bad the word entrepreneur is often used for them because that's a different thing than what I'm talking about. Mises says, why don't we use a different word? And he proposes the term promoter. That term hasn't really caught on in the mainstream literature, but it is useful to note that Mises recognizes that the abstract notion of entrepreneurship and the identification of specific people who are very important in the market economy, that those are distinct, those are different things, okay? Who are these promoters? Well, they own and invest capital, substantial quantities of capital. They're particularly alert to opportunities, perceived opportunities to make money in the market. They may be very creative, have strong leadership skills. But again, this is sort of a more loosely defined, historically contingent notion. It's not a praxeological construct, the notion of the promoter. It's sort of an applied, empirical, common sense notion, right? It's very important indeed, but this is distinct from the pure economic function of entrepreneurship. This naturally leads me to say a few words about how entrepreneurship is used in the mainstream literature and economics and management and the popular press and so on. When mainstream commentators talk about the entrepreneur or entrepreneurship, what they really have in mind is what you might call a phenomenon or an outcome, right? So entrepreneurship is being, an entrepreneur is a self-employed person or entrepreneurship is startups, right? Starting up a new business, that's being an entrepreneur. Maybe operating and managing a small business or introducing a new product is being an entrepreneur. Notice that while these activities may very well be entrepreneurial in Mises' sense, there's a difference between describing something as a phenomenon or an outcome and describing it as a function or attribute or characteristic of human behavior, right? In the Austrian perspective, entrepreneurship as uncertainty bearing, investing resources under conditions of uncertainty is a fundamental aspect of human behavior, fundamental aspect of economic behavior. It is manifest in starting a new business or introducing a new product, but not only in those phenomena. In other words, in sort of the mainstream literature, a small company, a new company might be described as entrepreneurial, but once it reaches a certain size, the founder is not an entrepreneur anymore, right? Microsoft is not entrepreneurial because it's a big company, an old company by tech standards, right? Or IBM or GE or whatever. They're not led by entrepreneurs and they're not manifestations of entrepreneurship according to the mainstream literature because they're big, mature companies. Likewise, a self-employed person is an entrepreneur, but if you work for somebody else, you're not an entrepreneur. Well, remember, in the Austrian view, entrepreneurship is not confined to a particular type of firm or a particular employment category, right? Uncertainty bearing and acting as an entrepreneur can be manifest in a variety of circumstances in small firms and big firms, in new firms and old firms. Self-employed people act as entrepreneurs, but employed people who own equity in their organizations, for example, are also uncertainty bearers. Their returns are also not fixed, stipulated by contract, so they act as entrepreneurs as well. In other words, the point is, if we conceive entrepreneurship as something like in the broadest sense acting under uncertainty, or in a narrower sense, this capitalist-entrepreneur sense of the deployment of heterogeneous capital resources in pursuit of money profit, right? That general function does not map one-to-one into particular types of firms or particular market settings or something like that, okay? As a consequence, by the way, it's not at all clear that Austrian entrepreneurship, Austrian-style entrepreneurship is something you can teach, even though you can go over to Barnes & Noble right now and find lots of entrepreneur-for-dummies type books, and you can go across the street to Auburn University or to your own home college university and probably find lots of entrepreneurship courses in the business school, but even maybe in other colleges in engineering and even in social sciences, liberal arts, there are courses in entrepreneurship, teaching people to be entrepreneurs. Now, typically what is done in those courses is small business management skills, accounting and marketing and so on for a small business, or how to write a business plan, how to give an elevator pitch to a venture capitalist. And those are all perfectly valid things to teach, and those are important business skills, management skills that are at least to some degree teachable, but I would argue those are not entrepreneurship, right? That's small business management or whatever it is, or business plan writing, okay? You cannot teach someone to have a, as Mises points it, you cannot teach this specific, anticipated understanding of the future in a classroom setting, okay? Now, if you read in the Austrian literature on entrepreneurship, you find some variety among Austrian writers and sort of fellow travelers of the Austrian school about exactly how the entrepreneurial function should be articulated, okay? So all of the Austrians agree that entrepreneurship is not small business management or startups or self-employment per se, that it's a generalized abstract function, but they have not all conceived it in exactly the same way. Israel Kursner is one of the most important Austrian writers in the field of entrepreneurship, defines entrepreneurship slightly differently from the way that Mises does. He focuses on entrepreneurship as alertness to opportunities, which is sort of, in a way, similar to what Mises calls the promoter, although Kursner's entrepreneur does not own any capital, is sort of the pure entrepreneurship and Kursner's formulation is uncertainty bearing in the absence of investment. It's a concept that I have some difficulties with and have written somewhat critically about, but it's been very influential in the Austrian literature. Likewise, Joseph Schumpeter, who's not really a member of the Austrian school but might be considered a fellow traveler, is sort of Austrian by birth, but more of a Volrasian neoclassical economist and some of you will get the joke of Schumpeter. Schumpeter was a very charismatic and brash, brilliant intellectual, extremely clever and witty and once remarked as a young man that, he said when he first arrived at Vienna, his goal was to become the best economist, best horseman and best lover in all of Vienna, but sadly he had achieved only two of three. If you like, some people have interpreted Schumpeter as giving kind of an Austrian addition to Volrasian general equilibrium theory, classify the entrepreneur as a force that disturbs existing equilibria, somewhat in contrast to Kersner, who conceives of the entrepreneur as an equilibrator who helps to bring markets towards Volrasian equilibrium. But I've argued in my own writings that Mies's view on the entrepreneur is actually quite close to Frank Knight's, articulated in Knight's 1921 book that I already mentioned. Knight uses the term judgment to describe what it is to characterize the entrepreneur's decision-making process, that when one has to make decisions under conditions of uncertainty, rather than probabilistic risk, one cannot use kind of a mechanical or mechanistic decision rule, plugging numbers into a probability equation to know what's the right thing to do. Rather one has to use a kind of understanding and Knight used the term judgment to describe this understanding that entrepreneurship is about the exercise of judgment as entrepreneurs deploy resources in anticipation of uncertain future returns. Mies's did not use the term judgment, but I've argued that Mies's concept of the entrepreneur has a very important similarities to Knight's notion of judgment. The point I'm making here is that whether one views the entrepreneurial function as alertness, as new product introduction or innovation, or as judgment, in all of these cases, entrepreneurship is conceived as an economic function, not as a specific individual, not as a specific type of firm, not as a specific job title. Okay, so it's not at all obvious how one would incorporate these general concepts of entrepreneurship into a kind of curriculum where you would teach people how to do it. It's not clear that you can teach people to be alert or teach people to be innovative or teach people to exercise judgment. More likely the contrary is true. Okay, so just click the slide by dropping it. So just a couple of remarks before we stop. I want to stop a minute or two early because Mark Thornton is glouring at me, number one, and also so we have enough time to get to the amphitheater for the picture. It is a lot of policymakers, sort of recognizing that the term entrepreneur, the term entrepreneurship, these terms have a certain cache. They're sort of trendy buzzwords nowadays and everyone wants to have an economy that's more entrepreneurial and policymakers want to encourage more entrepreneurship. If you ask them to articulate exactly what they think entrepreneurship is, they will not give you a very good answer. They don't know what it is, but they know it's good and they want more of it. So what can they do? Is there something they can do to promote it, to bring it about, to make a society more entrepreneurial? Well, I won't surprise you, at least I think it won't surprise you, to know that I'm somewhat skeptical of the ability of government through central planning or through other kinds of intervention to improve, to bring about more entrepreneurship or to target specific industries or people for entrepreneurship. In fact, the reverse is true, that government policy tends to hamper or hinder or distort the entrepreneurial process. One obvious example of this, of course, is credit expansion. And I think it's tomorrow when we get... I think Roger hasn't given his lecture yet. You'll get Roger Garrison tomorrow with a wonderful exposition of the Austrian theory of the business cycle. Some of you have been exposed to this theory before. And essentially it's a theory about entrepreneurial error that central bank credit expansion lowers the interest rate below its natural rate, leading to malinvestment, investment of resources in the wrong activities in lines of business that will not be profitable because there are not enough resources to sustain these projects or to bring them through to completion. Again, we'll have a lot more about that tomorrow and later in the week. But essentially the Austrian business cycle theory is a theory of entrepreneurs making the wrong investments, making investments that are not consistent with the pattern of consumption goods that is desired by consumers. So we talked a moment ago about entrepreneurs performing economic calculation using money prices in a highly inflationary environment where government is interfering with the money supply, where monetary policy is controlled by the state, where relative prices are noisy to use a modern jargon. Makes it much more difficult for entrepreneurs to calculate what are the right investments to make, what resources should be combined, what consumer goods should be produced, and so on. And it goes without saying, write that any attempt to interfere with the market's selection process by protecting particular classes of entrepreneurs from failure, bailouts and subsidies and so on simply hinder the market process of directing resources toward those entrepreneurs who can best use them to satisfy consumer wants. Never forget that when people talk about capitalism as a profit system, that's half true. Capitalism is a profit and loss system. And just as most of us here would argue that government should not interfere with profit seeking, should not tap or limit the returns that an entrepreneur can receive from successful investment. Likewise, you don't cap losses, right? That simply hinders this sort of selection process that we already described. More to the point, programs that are very popular in state and local governments, universities and so on, to target specific people in specific areas and so on for subsidies, special credits and special training programs and subsidized loans and so on. Theoretically, we wouldn't expect those programs to be successful. And there's a lot of empirical evidence suggesting that they're basically just rent seeking. That the returns to public investments in entrepreneurship subsidies are abysmally low. There's a recent book by Josh Lerner called Boulevard of Broken Dreams, which is about the failure of the SBIR program in the US, the Small Business Innovation Research, the Innovation Rewards Program, which tried to give subsidies and subsidized loans to people who applied for them on the grounds that they had great business plans or whatever. The best thing that government policy can do to promote entrepreneurship is to allow for market activity, right? Stable money, property rights, economic freedom and so on, that in an environment of sound money and secure property rights, in a sense, we get just the right amount of entrepreneurship. We don't get people engaged in entrepreneurial ventures who shouldn't be because they got a subsidized government loan. We don't get entrepreneurial ventures frustrated by regulation and antitrust and so on. We get whatever level of entrepreneurship and whatever types of entrepreneurship are consistent with consumer preferences, and that's exactly what we would want. Okay, so I'll stop there. Thank you very much.