 It's my great pleasure to introduce the Marianne Rothbard Memorial Lecture sponsored by Elio Beltrao. The speaker, Per Byland, is Assistant Professor of Entrepreneurship and Records Johnston Professor of Free Enterprise in the School of Entrepreneurship at Oklahoma State University. He was previously the John E. Bohr Center Research Professor in the Department of Entrepreneurship in the Handcamer School of Business at Baylor University. He also is an Associated Scholar, I'm happy to say, of the Mises Institute. Professor Byland received a PhD in Applied Economics at the University of Missouri, where his dissertation advisor was Peter Klein, but he has gone on the flourish in any case. He received an MA in Political Science at Lund University in Sweden in both a master's and a bachelor's degree from Genkoping International Business School in Sweden. Professor Byland has published articles in several refereed journals, and he just informed me two days ago. He got an article accepted to a top journal in entrepreneurship, Unequality and Entrepreneurship in the Strategic Entrepreneurship Journal. He's also the author of two books, both published in 2016, The Problem of Production, The Theory of the Firm, and The Seen, the Unseen and the Unrealized, How Regulations Affect Our Everyday Lives from Lexington. He's an Associate Editor of the Journal of Entrepreneurship and Public Policy and the Editor of the Austrian Economics Book Series published by Agenda Publishing. This evening will be the topic, will be Economic Action Beyond the Extent of the Market. Professor Byland. Thank you so much, Joe, for inviting me and for organizing this conference. And thank you, Lou, for founding and running this magnificent institute for 35 years. This is awesome. So this is quite an honor to give the Marie Rothbard lecture. I'm definitely not qualified, but I looked through some of Rothbard's writings again, and I realized that this title actually sucks for my talk, because it doesn't speak Marie Rothbard in any sense, really, except that the content might, but the title does not. So if you look at Manny Kahneman's stage, for instance, it has a lot about production in there and I even have a book on the problem of production. So obviously there should be production in the title, and I completely missed that. So I should probably change it to production beyond the extent of the market, and I'll talk about a problem and a solution to production. So I'm going to tell an Austrian story, but I'm going to do that using not very Austrian thinkers in economics. I suppose one of them can sort of count as an Austrian. One of them definitely not. So I'm going to divide this into two phases. One is the problem, and the other is the solution. Well, kind of, yeah. So we'll see if you agree with me or if you want to throw tomatoes or something. We'll see what happens. So first the problem. And as you can tell, this is Adam Smith and David Ricardo, old time classical economics. One is supposedly the founder of economics as a science and so forth. The issue is the division of labor or specialization under the division of labor in the market economy. And this is something that Rothbard has written about too, and he was not a huge fan of Adam Smith, I might add. And I've come to think that the division of labor is actually very, very limited, has very limited applicability on how we understand the economy. Mises talked quite a bit about the division of labor and felt that the division of labor explains quite a bit. And I think it can, but it doesn't necessarily in the way that Adam Smith uses the term. So I'm going to go through a little bit about how Adam Smith uses it, what is wrong with it, and then attempt a solution to it using those fellows on the right, on the previous slide, Karl Marx and Joseph Schumpeter. So we start by looking at what is the division of labor. Well, Adam Smith talked about how it is the power of exchanging that makes us engage in the division of labor and specialize in different trades. So simply because we start trading with each other, we find our roles in the economy. And this also means that we can only divide as far as we can actually react on each other and trade with others. We cannot simply step outside of this marketplace and do something else on our own because then we're not part of the market, that sort of thing. So what this means is that when the market is very, very small, we do not have people who specialize into trades and professions. You don't have any reason whatsoever. That's the starting point for Adam Smith's discussion. He also noticed that this is not a uniform structure across the marketplace, but rather it depends on where you are in the marketplace. So in other words, some things can happen in a town where there's greater density of people, where there are more people close to you geographically speaking and economically speaking, whereas in the rural area in agriculture, say, there are fewer people, which means you cannot specialize as far. That's his discussion about this. Well, Smith assumes low-skilled workers. He assumes that workers are basically homogeneous and everything is manual labor. He doesn't say this explicitly, but that's what he means when he starts the wealth of nations talking about this. And the argument for specialization under divisional labor should apply if you add Ricardo's comparative advantage or the law of association, as Smith has called it as well, where people are a little bit different and we seek to do what we're better at. That makes probably a better story or a more intuitive story to this. So even if we are heterogeneous in what skills we have and what our abilities, we still, or rather that would be a stronger reason for us to specialize. Of course, this also means that there are greater frictions and we cannot simply substitute one worker for another if there are actually difference in their abilities. So the way he describes this or explains how the division of labor works is through talking about the pin factory. And a couple of speakers have already mentioned both the division of labor and the pin factory in previous sessions at this conference. But what he notes in his famous example is that, well, one pin maker, if he does all these operations himself, he can make one pin a day, maybe 10, but definitely not 20. But on the other hand, you have here at the bottom, if you have 10 people doing different operations and you shift the good when it's sort of semi-finished between them and they specialize, then 10 workers, still these homogeneous bunch of manual workers can produce up to 48,000 pins in a day. That's quite a bit of a change going from unskilled labor doing what then 10 people would do a maximum of maybe 200 to the same 10 people doing 48,000. That's more than a little bit of a change, right? This indicates the great power of specializing under the division of labor. But this example actually doesn't make any sense whatsoever. And I don't say this because, as some claim that this example was stolen by Adam Smith and they messed up the numbers and all this stuff. Even if we accept the numbers, this doesn't make any sense because the pin factory does not actually constitute a market. Pin factory is a factory. It's sort of obvious, right? So it doesn't have an invisible hand. It doesn't have people choosing different operations in this process. Rather what they do is they get employment and they are assigned certain tasks within this process that already exists, right? So it's not really a market phenomenon where people notice that, wait a minute, we're all making pins, that's fun. How about if we trade a little bit and we specialize? That's not how the pin factory happens, right? So there's something really weird going on here with this example. Still, that is how he explains it. And we also have the case that specialization in production is everywhere and it's gone really, really far, right? I don't think any of us, and I don't mean this because most of you are libertarians, but I don't think any of us would survive if they dropped us alone in the forest somewhere, right? We all depend on our specialized skills and on everybody else in society. So if we have this everywhere, where did it come from? So the question then is, of course, if we have specialized market production, which does not happen within the factory, where does it come from? So if you think of this process, let me see, this is pretty cool, right? I'm not Roger Garrison, but I'm getting there. So if you see this, let's go back, let's show it once more. So it took me a lot of time to actually make this work. So if we think of a production process then, we have intermediate goods throughout this process and different operations that we add to the inputs in each stage, and then we have a final good at the very end. So in this case, they're producing something very fantastic, which is a widget. And the input to this process is W, the first sixth of the output. And then in each step, and the steps are actually in between here, this is the input to the first sub-process, this is the output of the first sub-process. So this is just the good, the sort of changing hands. So it goes from W to WI to WID and so forth to the full widgets, right? Now if you turn this around, this is really cool, I think so. Okay, so if you turn this around, you can tell that the workers are in between each stage of this product, and you can see now that this is very much what Menge was talking about, right? Where you have production goods, or goods of higher order, and then you have consumers at the very end consuming the end product. Now, that was just one process, right? In the market it looks like this. There are plenty of processes in parallel happening at the same time, and they might be exactly the same, or they might be a little bit different, but it doesn't really matter for what I'm going to tell you right now. But you can see that these are the same stages. This is the exact same production process. We're creating a lot of widgets. The market is huge, and they're all just waiting to get their hands on these widgets. Now, the problem here is, it doesn't really matter whether we have redundancy, whether we have all these processes next to each other, or if we just have one. Because if it doesn't matter, then it doesn't really matter if we have the pin factory or the market. So that's the first question we need to answer. And one way of looking at this, okay, this process, how do we actually set the boundaries here? Well, that depends on the abilities and the skills of each of the workers. And with Adam Smith, that doesn't really matter all that much, because they're all unskilled and uninformed, and there are tomatons basically, as Mises would refer to them probably. But if they're not, if we use the Ricardian idea that we have a little bit different abilities, there would be some sort of tug-of-war between these workers. So these deliverables between each stage would change, or maybe not over time, but they would change in the beginning. And it would depend on who is the more efficient worker and where exactly do you stop and I begin. That sort of thing, right? There would also be uncertainty bearing, simply because we don't actually get any revenue until we sell the final product. So the whole process depends on its completion and the final sale. And that's when we get the revenue to cover all the costs throughout this process, right? So say in this case that the first worker, he gets his hands on $10 worth of, or 10 gold coins, I should say. It's a Rothbard lecture after all. Of inputs, he starts working on it. He sells to the next guy for 20. The next guy works on it, sells to 30 and so forth. But this means that all of them have all paid out $10 each out of their pockets before they actually get paid, right? But if they complete it, then that works. But they will all bear the uncertainty of engaging in this process if there is one, right? Which means they will also face the problem of incompleteness. If this guy fails or drops out or something like that, then nothing is going to happen. These guys are probably going to have to continue paying off their debt or whatever, but we're not going to get to the point where we have any revenue at all. So this guy is gone. That means we don't get the revenue, which means we also do not get the price tags for these steps. We actually don't get anything at all if we apply a calculation view, right? Other than that, it costs $10 with the ultimate input for this process. So even though these guys can produce the value of whatever is left here, the bid in this case, it's nothing. If we can go back, then it's worth $10 in this case because we could still sell it as a W, but it's probably screwed up and then it's not even worth $10. That's not a good business. That's failure, right? So there's this all or nothing problem within this process since they're all seriously interdependent. They all need to contribute their part or it all fails. So they all need to do whatever it is they contribute to this process so that the consumer gets what the consumer wants and actually pays for the product and then all of the workers get paid. Simple production process, really, but here we're really talking about in the market, right? It's decentralized, so these guys, they get together and they assume different roles in this production process. So what you can see, then, is that there are major problems if there is not redundancy. So what about that other picture where this happens in the market as Adam Smith actually talks about? Well, we have the same three issues. Let's look at them if we have production processes next to each other and we have all these people involved even though they are specialized to their stages. What happens? Well, in terms of the vertical tug-of-war, there's really an incentive to standardize across these processes because if you have a tug-of-war and you say you take over a little bit of the guy who sells the inputs to you, well, that means that what you do is no longer compatible with the other processes, which means your process is now, again, a unique process, which means you're subject to the same problems as in the previous case where there is only one, which seems like a pretty stupid thing to do. Because otherwise you can buy your inputs from all of these other producers of the previous stage. You can sell to all the producers of the next stage, whereas if you specialize differently, you bear all the cost of that movement. So the incentive is definitely for standardization, not differentiation. You need to do like everybody else or otherwise bear the cost of it and probably fail you. So what about uncertainty bearing? Well, since there are plenty of processes going on at the same time, we can see that there is demand for this unless we assume that we suddenly start 10 processes at the exact same time, which seems a little weird. We have already observed demand for these processes. So we know that some other processes produce the exact same good. Customers have acted to buy it and they were able and willing to pay a certain price for it. So we can sort of guess that we're going to get this type of revenue for this product. Whereas if we are the first ones, we are the only ones, we don't actually know this until we complete it and make the sale. So with observed demand, we're really less of a problem. We still need to do our parts, but we know that the end result will probably be able to sell. So what about incompleteness? Well, if we do this, use this same example again, if this guy drops out, this guy is in no big trouble anymore. This guy is also not in big trouble because this guy only buys inputs from any of these three or these two. Screw that guy who dropped out. It's his problem, right? If it was only this single process, they would all fail. Now they would have this little problem with they lose this production capability of this guy, but they're all the same in Adam Smith's world anyway. So they lose one sixth, since this is one of six guys on this stage, of the output. It might be the case that all of them lose one sixth of their revenue, but they're not all going to fail. There's quite a difference between losing some of your revenue and completely failing and standing there with costs, right? So what we have is price coordination trying to fix this problem, maybe producing incentives for others to enter as well. But even if this is a closed system with only these however many workers we have, they would still try to adjust as much as possible and they would all try to get as much money as possible out of it, which means it would adjust between these processes as well, since they are trading in standard intermediate goods. Then the question is where the hectic specialization and the division of labor in the market come from? Because obviously it can exist and it can emerge if we have all these parallel processes, especially if we have many, many, many of them at once. Then we don't have all these problems but starting the first one seems to be a huge problem. As we saw before, if there's only one process, then all of these who are engaged in this process face all these huge problems and these huge costs of actually entering in this type of production. So what do we do? Well, we could lobby government I suppose to enforce people to start producing widgets but that's not really the solution that Adam Smith was talking about I think or that he had in mind. So how do we solve this? Well, if we look at this Smithian system of production first of all he talks about how the division of labor generates a proportional productivity increase. I'm not sure how going from 200 to 48,000 is a proportional increase with the same number of workers but maybe you can solve that math problem for me. I'm an Austrian after all. But it's supposed to be a proportional increase in productivity. Just to show you that I'm not actually lying to you, he does talk about proportionality in the productive powers of a market under specialization under the division of labor. He also says that this is a gradual process and it's facilitated by population size which makes sense if you already have these production processes then add more people to all of these stages of course they can share the burden and so forth right? Not a huge problem. If we have redundancy in production whether or not it is a specialized process then we can talk between each other and we can say there you do that and I do that and we'll just trade and exchange the intermediate good in between us and then we sell it to the final consumer. Maybe we'll just don't bother with payment until we sell it and then we share the proceeds and whatnot. So we having a larger population means that we can split into different trades. And then of course he says that the division of labor is not the effect of any human wisdom but rather it's something that we just stumble upon I suppose and suddenly we're specialized or something like that I think Mises would definitely disagree with this saying that this is something we rationally would understand and that's why we engage in specialization. Sounds like I'm a farmer and you're a farmer and we go whoops we're specialized. It's rather the case that we go oh wait you're good at that I'm good at this let's let's share the burden and you do that and I do what I'm best at right? And of course it is a slow and gradual process it talks about how it goes very slowly and it should move faster if we have a population that increases in size very quickly so if we all have a billion children we should have a lot of specialization pretty soon and of course that has the proportional increase from 200 to 48,000 with each generation so I suppose that means have children. Okay so what it talks about is really how society goes through an automatic process of development from self sustainability where everybody does everything themselves to where we have this specialized economy as we see every day when we go to the grocery store and what not and we also have this passive adoption of the cost savings involved because that's what we're really talking about with production when we have those 10 workers producing pens and they can produce up to 200 and then they split the work and they produce 48,000 it's just a cost savings and his argument is that simply because we do not shift between different tasks we save time and we also learn those specialized tasks because we do them over and over and over again even if we do not have special skill or ability we're going to learn that after a while no matter what even if you're completely stupid I suppose you will get better at it and the more specialized you get these really really simple tasks can be automated using machinery so with more people then slowly and passively evolve into society with more specialized trades and we get better off with more prosperity and no one knows how that happens so what this means is that if redundancy is required as it seems to be the case as we said before then the division of labor must be limited by the extent of the market which is also what Adam Smith claims what is said about the great town for instance and in the great town you can have different services and different specializations not simply possible in a rural area because you do not have this mass of population in the same geographical small area Durkheim talks about this as well in his book which is much more recent where he talks about the density which is the ability to act and react upon each other economically so if I produce something and then I can sell it to you I can develop a demand for that and buy it from you and so forth and the closer we are economically speaking the more we can react on each other and the further we can reach economically simply because there are more people whom we can trade directly with now new production though as we talked about from the beginning with this single process with all these problems it doesn't have to be cost saving because cost saving compared to what if we're producing something new we're not saving costs in that production because it's the first time we're producing it there is no cost for this it's also not redundant it can't be unless we have a beneficent government say coordinating this on a national level forcing everybody into producing widgets which would be interesting to see I suppose okay and also that we have that incompleteness suggests a real problem in any production where there is a lack of this type of redundancy that we see in the market and the market works because of this redundancy that all of these people are producing similar things and we traded in these standardized goods that are part of the whole production apparatus but this also means that we cannot really adopt this new production passively where does it come from that we suddenly have a new round about production process that didn't exist before and it's workers spontaneously adopted positions in this production process and then we produce something beautiful at the very end well this doesn't just happen where does it come from so we do have a problem we in redundancy if we have plenty of people then we can take the tasks that are involved such as in pin making because obviously in pin making you need to do certain things you need to have the metal you need to pull it out and you need to cut it off and you need to sharpen one end and you need to put the head on the other end and everything that Adam Smith talks about all of these are already separate tasks that's not really a big problem and we can see those tasks we're already doing those tasks if I'm doing all of them and you're doing all of them you can say well why don't you do the first half of them or every task with an odd number in this series in this process we can do that but this also means that creating a new process is a sort of collective action problem because all of these workers in the new process need to get together and split these tasks in between them even if this is a type of production that already exists we want to establish it in a different way so you want to split up the tasks a little more in the pin factory then we need to get together first and talk about okay how do we actually split these operations between us it doesn't happen just by itself and incompleteness can be a problem as well now we can share the workload simply continue to doing exactly the same thing doing all these operations ourselves and all of us do it but that's exactly what Adam Smith talked about how 10 workers can produce up to 200 pins we don't get to the 48,000 because that means we're doing it differently and doing it differently means that we get this serial interdependence just like here in this process whether or not it's a completely new process or we're just taking one stage and we're replacing it with some sort of innovation now of course such division of tasks that Adam Smith is talking about is really limited by the nature of those tasks because if they are already simple tasks like in the pin factory we can say well why don't you just cut the thread why don't you put the head on why don't you sharpen the other end of it fairly easy but if it's a different task how do we how do we split for instance making dough out of flour how do we split that into several different operations is it one operation or is it plenty we need to stop there right following Adam Smith we can't go further because that is seems to be at least one operation or one task of course only raises the question what about innovation where does that come from how do we implement innovation in this market and can we at all get to new products or do we need to just stop in 1776 it says we are on the height of civilization no more right well obviously we didn't so something happened we're producing things today that we're producing in 1776 so something happened you might have heard of the iPhone for instance I don't think Adam Smith had one so things have happened right and here he talks about exactly that again showing to you that I'm not lying and he's talking about agriculture and how agriculture does not admit of so many subdivisions of labor nor of so complete a separation from another as a manufacturer okay so what he actually says is that well a farmer and someone who is caring for the cows and what not well those are already specific tests we can't separate them anymore we can't do division of labor of these tasks obviously we have already but that's what he says you can't do that and then he says that in manufacturers this is a lot easier well why is it easier within the factory does that mean simply that if we put a farm on the factory floor that it's going to be easier to engage in specialization under the division of labor what is he talking about here he seems to be talking about two different things and I'll get to that later on but somehow he thinks that these are exactly the same okay so we can get to the farmer, the miller, the baker Adam Smith is talking about I can be a farmer have my piece of land and I can grow wheat and I can harvest the wheat and then I can smash it up and make flour out of it and I can bake this is a hypothetical example I can make a loaf of bread I can do that well then I can have a dozen kids and they grow up and then I say okay you three you are farmers you three why don't you make flour and then you three you bake bread and then the rest of you eat it or something like that that's easy to see how we can get there because these are very very separate types of operations at least it seems so after the fact but these are still even if we would oh we need to do this all of us we still shift from one to the other throughout this process it's a lot harder to get to database programming as a specialization or as I saw was a thing obviously pet therapy how do we divide labor into getting into pet therapists that's not as easy because I don't think so anyway I don't think it was a specialization that existed from the beginning oh I'm really good at pet therapies I'll do that part that's not what happened I'm pretty sure I haven't checked empirically I should I admit but still okay so what about the division of labor within a stage say this guy for instance well within a stage if we want to split it up it has exactly the same problems as introducing a new production process we have exactly the same problems so we require some sort of collective action to identify who does what and when and what exactly is the deliverable from the first sub-stage to the second sub-stage and so forth we will have serial interdependence simply because we need to be compatible with what we're doing what I'm producing needs to work in your production process because you're going to use that as an input if I suddenly change it then you're screwed and then I'm screwed because I can't sell it to you and there's no market to sell it in either because we're the only ones doing it so we're subject to incompleteness if anyone screws up or changes the idea or says I'll take the day off or something then none of us will be able to do anything which of course is a huge problem so I'll look at this where is Roger? is this okay? okay so if we look at this process again right it's really the Hayekian triangle right where we go from from a virgin land basically adding labor producing capital extending this into a process of different stages and then finally we offer this valuable final good to consumers but of course we want to be able to extend this into more roundabout production and that's where we have the problem like we talked about just a minute ago where we replace one stage with something else how do we actually do that so here we have the process again and this guy produces Wijje from Wijje that's his task now if we add more people to this just like in Adam Smith's example these can do exactly the same thing that's fine but what we have here is really an opportunity just like Adam Smith says that they can specialize and we can engage in a division of labor between these five people producing this stage so if we split this up just to show how they can do this then they can do it this way so this guy does the first fifth say then this guy uses that first fifth and produces the second fifth and so forth or they can do it this way so these two create the first third then these two take over and create the next third and then there is one single guy putting it all together perhaps that's one way of doing it they can of course do it this way which is they can do exactly the same things they're just more people doing it that's really no big deal the big deal is the other two examples alright in this example if you remember let's go back this is the input Wijje this is the output of this sub-process Wijje what they need to maintain whatever they do is that they together are compatible both the input traded in the market the Wijje and the output traded in the market whatever they do in between doesn't really matter right but what matters is that they can sell to other producers of what they produce and that they can use what is available made available by other producers in previous stages if they're incompatible in any way say they start using something different then they're not going to find a supplier if they produce something that is they find to be really cool but that doesn't really fit with the rest of the production process then they're also incompatible they can't find another producer to sell to so they will face incompatibility and incompatibility is failure now for all but the last example whether they do exactly the same things which is really not a problem that's just sharing the workload and completeness is a concern because they are completely dependent on each other for the simple reason that there is no market to turn to if one of them fails so they are completely dependent on each other and of course as we create new specializations there can't be a market it's impossible because we are the first ones we're breaking new ground so if we summarize the problem then in order to specialize actors must bear the uncertainty of acting in a non-market setting rather than in the market, in the market it's easy you can just trade with whomever you like because they're standardized intermediate products if you're acting in a non-market you have serial interdependence and you risk being incompatible with the market even if you coordinate action you suffer these consequences you coordinate a bunch of people splitting the tasks in a certain way but should one fail well sorry, tough luck you all fail that's what is going to happen now this means that there is a sort of deadlock for non-trivial specialization so people will tend towards market standardization because that's the least cost option unless there is some sort of either hierarchy or someone can go in and say you do this, you do that and I will hold you accountable and the more specialized the market is, the harder it is for people to engage in this sort of extra specialization so what this actually means is that this is more or less a prohibition of innovation, you can't actually implement innovation in this market or add a new type of production within the production structure that doesn't exist already so this is sort of a chicken or egg problem, you need to get into the circle somehow but how which takes us to the solution right and we know these guys and they say the solution kind of and that's more this guy's fault than this guy so what is the solution well we will engage in the division of labor if the gains of specialization is greater than the cost of uncertainty that's sort of the simple calculus of this and the cost of uncertainty here would be the interdependence, the incompleteness and so forth there are really two kinds of specialization that can go on in the market here and one is the simple division of tasks which is what Adam Smith is talking about where oh I'm doing these 10 operations and then I found these other guys doing the exact same 10 operations why don't you do the first part and I'll do the next one and so forth that doesn't really mean that we have a big problem the other kind is innovation which is either advanced task splitting or adding advanced machinery or something like that or creating a new type of production process adding a new product or something like that Smith's division of labor story is completely based on the first one it's a really trivial one and of course with trivial specialization under the division of labor then there's going to be a gradual slow population based increase in growth we're going to primarily divide labor between already known operations the deliverables are already known there's no knowledge problem if you will all of this stuff there's no real problem with incompatibility because we're already doing all this all this stuff and it's not really hard to reverse to what we did before so if I was the farmer and you were the miller and someone else was the baker and then someone leaves town or something like that well it's easy for me to go back to okay I'll just do the milling as well because that's the process that I did before before we engaged in specialization it's no big deal really it's going to be more costly but it's not going to be the end of the world okay so we get back to the extent of the market and how trading and population is what drives this process and it's really a picture that looks much like this and this wall around this I think it is a city but I'm not sure the wall is really the extent of the market there's no trading going on with whatever is outside of those walls what happens is we reallocate stuff between the houses we can add some floors maybe to some of these buildings but we do not go outside the extent of the market we could push the wall a little bit when needed but it's not going to be a radical change anyway we might gain an inch or two here or there but it's going to be a very gradual slow process just like Adam Smith is talking about now with the second option with advanced task splitting and innovation it's very different because here we have new goods and services we have new types of production new production process new types of capital that we innovate and that we produce we have new solutions not simply taking a task and splitting it up and one example that has been used is my own work university professor that's one perfectly specialized trade apparently what that means is that what I do is so integrated that I can't really split it up so I teach students and I do research on the same thing and I copy their tests and whatever it is I do I can't engage in more specialization we can't divide this up we can't see people doing research and others doing teaching which seems a little odd but even if we accept this then isn't it the case that more specialization in the university which by the way has probably not undergone specialization since like 1420 isn't it the case that we would replace what is done today with something different we do it in a different way not simply just split the tasks of course we would have a different process a different type of production process when we're teaching students not simply adding more people and saying why don't you teach the first half of the lecture and you do the second half that doesn't make any sense we probably add internet or whatever it is I'm not an entrepreneur so I can't do that I don't even understand it but obviously we're going to replace what we're doing with something different so what this suggests is then that this new different thing where you have this problem with incompatibility and incompleteness it's an island of non-calculable chaos and that's Mario Rothbard's words and in this island we have to rely on imaginative entrepreneurship can't be anything else it can't be workers spontaneously specializing into doing different tasks you do that task, I'll do that task and so forth because this is some untreaded ground this is new things we don't know what exactly is going to happen here we have to figure this out someone needs to have the idea and imagine how this is going to happen and then we need to figure this out somehow now funny thing is a competitor in socialism, capitalism and democracy defined entrepreneurship in this way it says that the function of entrepreneurs is to reform or revolutionize the pattern of production by exploiting an invention or more generally an untried technological possibility for producing a new commodity or producing an old one in a new way imagine that that seems to fit perfectly with my presentation if this is how we see entrepreneurship then we can sort of see a possible way forward right? but this type of entrepreneurship necessarily happens outside the walls of this city because we're not doing exactly what we did before we're doing something new and of course this cannot happen passively this is not something that workers simply adopt by themselves we need someone to figure the whole thing out and then tell people what to do or help people discover how to do it and organize this new process so it can't simply emerge that's impossible we can recognize this too because this is very different this is not simply trading in standardized intermediate goods in the market this is outside of the market's production possibilities frontier simply because this novel is original it's new it's disruptive it causes change to the existing market as well because it leads the way and shows completely different way of doing things and thereby it becomes a driving force of the market economy itself simply because it leads by example if it's successful others are going to probably try to copy this which means that they will incorporate this sort of island outside of the extent of the market so what this creates then is this type of productive action through entrepreneurship is an island of specialization because this is a new type of specialization that has been implemented or realized by this imaginative entrepreneur or entrepreneurial group that could be a collective action right now this island of specialization of course is it has all these problems that we talked about before within completeness it needs to be coordinated all of these tasks are interdependent one fails then all of them fail this requires uncertainty bearing it requires upfront financing as well because you need to cover the actual expenses and any entrepreneur knows that the last thing you probably get is the revenue if you can get it sooner then that's a good thing but usually you have to cover your costs first which really sucks that's why it's so hard right since it happens outside of the extent of the market it also means that it's automatically encapsulated it's integrated for the simple reason that we're all interdependent within this new little island so we can think of this as a firm we can identify this fairly easily because this is not just standardized market production this is something very different this is a different animal it doesn't fit with everything else so funny thing when Smith says which we talked about before that in agriculture you can specialize a little bit but within the manufacturer you can specialize a lot further what is this then is it an argument for specialization in the trivial sense or is it an argument about the difference between these two senses we can't really tell because he's trying to exemplify the trivial specialization using the manufacturer which seems to be very different right the pin factory seems to be it could be anyway an innovation it doesn't necessarily be it isn't necessarily one of those well the funny thing here is that Carl Marx actually suggests an answer to this type of problem he says that specialization in the market and in firms differ not only in degree but also in kind the division of labor within the manufacturer is very different from the division of labor within the market now if there is a real difference then we can start to make sense of Adam Smith's example of course Marx he went on saying that oh yeah division of labor hence exploitation taking off like that but the economic analysis seems to actually fit and here is Marx again from capital where he says that the division of labor in manufacture demands that a division of labor in society at large should previously have attained a certain degree of development inversely the former division reacts upon and multiplies the latter so what it means is it takes whatever production structure already exists in the market and it goes further in some sense can't really say in what sense of course but the division of labor within the firm or the manufacturer is very different it's a different kind and it goes further than what is already going on in the market so the solution then to Smith's limitation how do we get outside of the extent of the market or how do we get economic growth that happens faster than population growth it's Marx's identification of what happens in the manufacturer is a different kind of division of labor and it's Schumpeter's entrepreneur as an innovator or firm creator which here would be the same thing right so the economic firm in this sense is necessarily entrepreneurial there is really no difference this is basically an identity so what the firm does is breaks free from the extent of the market it challenges the status quo of production as it happens in the market what entrepreneurship then does is simply creates value through new and more intensively specialized production it is novel it happens outside of simple market trade, it can still use inputs from the market of course probably should if it's within a production structure then it should produce what other stages use as inputs but this also means that the extent of the market is not fixed or very very gradually expanding but rather that the whole thing is just expanding really quickly depending on how much innovation we have which has important implications for economic analysis and this is what I think where the Austrian school is very different from other schools of economics for the simple reason that we do not see the market or probably should not see the market as having a fixed extent or one that is increasing so slowly that we don't have to care about it whether if the market is expanding quickly and rapidly then it's not a matter of simply allocating resources between different processes that are underway right now, it's about figuring out what the heck is going to happen in a couple of days, in a couple of weeks or a year from now because the whole market is going to be different so allocation of resources happens within this expanding extent which is a very different problem from saying within these fixed boundaries we're going to reallocate resources towards new ends which is sort of a cursinary and arbitrage story with imaginative entrepreneurship in a sort of shumpeterian way this is a very different problem and I think we need to recognize this and I think Mises did, I think Rossbar did as well but it's not always obvious that the market extent is expanding of course a shameless plug for my own book which is a good ending this is what I discuss in my book, The Problem of Production trying to figure out how all these pieces fit together, not necessarily as a critique of Adam Smith but as a way of producing theory that explains how the market expands and where growth comes from and how entrepreneurship fits in this whole picture thank you