7. Some critical comments to Kirzner’s work

An objection can be raised to the best of books and small defects contribute to a good book -as to a good man- to the same extent as virtues. I would not, therefore, like to conclude this comment on Kirzner’s work on social ethics without referring to two specific aspects in which I think his position could be improved.

The first objection we would raise to Kirzner’s analysis refers to the concession -unjustified, in our opinion- that he makes when he affirms that it will be in circumstances where the levels of disequilibrium, uncertainty and creativity are greatest that the principle of justice he proposes, based on the appropriation of the goods and services discovered by the entrepreneurs, will be most relevant. However, according to Kirzner, in relatively more stable markets and particular circumstances, his rule of justice will be less relevant (14). In our opinion, the dynamic rule of justice proposed by Kirzner has, on the contrary, universal validity, regardless of what the particular circumstances appear to be at any given moment. Whenever institutional coercion is used in order to redistribute the social product, the use of a creative capacity which originates from the most intimate and essential nature of the human being is being prevented to a greater or lesser extent, thus harming the possibilities of creating information and coordinating the social process. Furthermore, there is no analytical possibility of distinguishing situations in which the relatively more “stable” nature of the social process supposedly permits application of alternative criteria based on “social” or distributive justice from those in which the relative social stagnation is, precisely, a direct result of the systematic practice of State coercion with which such alternative criteria always manifest themselves. However, Kirzner himself acknowledges that “The extent to which discovery insights need to be introduced into both the economics and moral philosophy of capitalism seems to be grater and greater as capitalism itself develops and becomes more intricate and ‘open-ended'”.(15) Our (partial) disagreement with Kirzner, therefore, stems from the fact that we consider that there are no exceptions to the principle of justice based on entrepreneurship that he proposes, which is universally applicable to all conceivable historical circumstances in which a human being, intrinsically endowed with an innate entrepreneurial and creative capacity, is involved.

The second objection refers to two somewhat disconcerting articles in which Israel Kirzner has upheld the thesis that the theory of entrepreneurship, which he has developed so brilliantly and with so much perseverance throughout his academic life, is not directly applicable in order to justify the existence of a spontaneous trend towards the formation and improvement of social institutions.(16) The main argument put forward by Kirzner in support of his thesis is the supposed existence of an “externality” that prevents the institutional improvements relevant to society from materializing in the form of opportunities for explicit gain that may be exploited and appropriated by the entrepreneurs. Thus, according to Kirzner, the process of entrepreneurial creativity and discovery would not take place in the field of institutions, since the entrepreneurs would be unable to appropriate the profits arising from their entrepreneurial activity in the institutional field for themselves. Kirzner correctly maintains that, in a market context, the existence of a situation of “public good” cannot be considered a defect if the State prevents an adequate definition and/or defense of property rights by force, since it is absurd to classify the non-existence of a Utopian situation resulting from institutional insufficiencies as a “market defect”. However, Kirzner goes on to say, and this is where we disagree, that these institutional insufficiencies may also emerge and be maintained as a result of a supposed situation of “public good”, which would prevent, according to Kirzner, entrepreneurial activity from discovering and driving forth the necessary institutional improvements.(17)

We cannot share this paradoxical and restrictive position that Kirzner has recently adopted in relation to the application of his own theory of entrepreneurship to the emergence of institutions. Firstly, within the dynamic context of the market process, we do not consider that public good problems are not a market defect simply because they emerge as the result of an institutional “inefficiency”. In our opinion, the public good “problem” is never a market defect since, whenever an apparent situation of joint supply and the impossibility of exclusion of free riders arises, in the absence of the coercive intervention of the State, the incentives necessary for entrepreneurial activity to come into operation emerge and, appropriating the results thereof, it tends to discover the technical, juridical and institutional innovations required to eliminate the supposed public good situation. This is, for example, what occurred in relation to the commons in the American West where, until it was possible to adequately define the property rights over the land that belonged to the different users (farmers and stockbreeders), there were significant conflicts and difficulties in social coordination. However, this situation created precisely the incentive for the entrepreneurs to finally discover and introduce an important technological innovation: barbed wire, which, from then onwards, allowed the property rights over large extensions of land to be separated and defined at a reasonable cost. This innovation resolved the public good problems. Another example refers to lighthouses as an aid to navigation. At many times in history, they have been run privately, various technical and institutional procedures having been found through entrepreneurship in order to force preferences to be revealed and for the beneficiaries to assume the cost thereof (social boycott of free riders, associations of fishermen and shipowners, etc.). We do not even need to mention many other technological innovations, like cable television, that have solved, thanks to entrepreneurial creativity, the public good problems that existed up to now in their respective fields. Therefore, from a dynamic point of view, if the State does not intervene, the set of public goods tends to become empty as a result of the creative capacity of entrepreneurship.

It is true that in the field of social institutions (juridical, moral, economic and linguistic), the problems arising from the individual appropriation of the results of entrepreneurial creativity are more arduous and difficult. However, this does not mean that it cannot be done and that, therefore, improvements are not constantly being tried and introduced. Moreover, without the creative capacity of entrepreneurship, neither the process of generation nor that of development and improvement of the most important social institutions can even be conceived. This is precisely what Menger showed in his analysis of the evolutionary emergence of social institutions, which he applied specifically to money and which can only be understood as the result of the initial leadership of a few relatively more alert human beings, who realized before the others that they could attain their ends more easily if, in exchange for their goods and services, they asked for goods that were more easy to commercialize on the market, which thus spontaneously began to be demanded as “means of exchange”. This behavior, through a learning process, was extended throughout the market until the means of exchange become generally used and, therefore, were converted into money.(18) In addition, it is clear that languages are constantly evolving and that, thanks to the creativity of a large number of actors, new terms are introduced, old ones are improved, grammatical rules and rules of pronunciation are simplified and modified, etc., in such a way that, if we compare documents written in the same language at different times, we note important changes and very significant differential details. None of these could be explained without the entrepreneurial capacity and alertness of the users of each language in each moment of history.

Finally, it is evident that there is no objective criterion that allows us to establish that a “rationally” conceived institution is more efficient from the point of view of the dynamic social processes moved by the impetus of entrepreneurship than one which has been formed through evolution. Is, perhaps, Esperanto a more perfect and “efficient” language than English or Spanish? Using what criteria can we establish that a metric system is more efficient from the point of view of dynamic coordination processes than any other? And, with regard to the very few essential juridical principles that make social coordination and the practice of entrepreneurship possible, they have clearly emerged over an evolutionary process and could be reduced to: respect for life, for property, for peacefully-acquired possession and fulfilment of contracts.

The consideration that the theory of entrepreneurship developed by Kirzner is precisely, in spite of its author’s opinion, the missing link that was required in order to improve and provide adequate foundations for the Austrian theory on the emergence and development of social institutions does not mean that it is not possible to theorize on the possibilities of “improving” currently existing social institutions (19). However, this “improvement” could only be the result of immanent “criticism”, in other words, of exegesis, refinement of logical defects and application of the principles formed through evolution to new areas and challenges which arise as a consequence of entrepreneurial creativity (for example, the application of the body of traditional principles of contract law to new privatized areas of the sea, etc.). We can, therefore, conclude that, curiously, Kirzner does not appear to be sufficiently Kirznerian with regard to the recognition of the possibilities of applying his own theory of entrepreneurial analysis to the emergence, development and improvement of social institutions.


Jesús Huerta de Soto
Professor of Political Economy
King Juan Carlos University of Madrid, Spain

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(14) .See Kirzner 1989a, pp. 126-127, 176-177.

(15).See Kirzner 1989a, p. 176.

(16) .See Kirzner 1992 and 1993.

(17).”There appears to be no obvious way in which any private entrepreneur could be attracted to notice the superiority of the metric system – let alone any chance of it being within his power to affect its adoption. The externality of the relevant benefit to society arising from a change in the metric system appears to block the translation of this unexploited opportunity, jointly available to members of society, into concrete, privately attractive opportunities capable of alerting entrepreneurial discovery” (Kirzner 1992, 174).

(18) .”The happy idea of proceeding in this way could strike the shrewdest individuals, and the less resourceful could imitate the former’s method” (Mises 1966, 406). Perhaps there is no more concise and precise way of referring to the dominant role played by entrepreneurial alertness and creativity in the emergence of institutions than these words written by Mises in his comment praising Menger’s contribution.

(19).This consideration does not in any way legitimate the neoclassical analysis of law and juridical institutions which it has been attempted to make to date assuming a context of constancy, equilibrium and the strict rationality of the economic agents based on the principle of profit maximization. The contradiction contained in the economic analysis of law is obvious since, in the static framework described, laws and institutions would not be necessary: simple commands that included the full information which is assumed to be available would be sufficient to coordinate society. To the contrary of this paradigm, we consider that juridical rules and institutions should not be judged in the narrow terms of static efficiency that originate from Pareto, comparing costs with supposedly known profits, but should rather be judged by a criterion of dynamic efficiency. In other words, depending on whether or not they promote and encourage the entrepreneurial coordination of the market. Therefore, rather than “optimal” case-law rules and decisions from the Paretian point of view, what should be sought are just case-law rules and decisions which, from the point of view of the dynamic efficiency of the entrepreneurial market processes, drive the coordination therein.