Huerta De Soto on Entrepreneurship and the Division of Knowledge

The Subjectivist Revolution in Economics Continues

Humans act and they act purposefully: this is the axiom of action proposed by Ludwig von Mises, teacher of Hayek. From this he claimed that the whole of economics could be deduced. As Mises shows, in order to be, we act purposefully. Not being, we would not act, indeed we would not exist. We act upon satisfying our most urgent needs first, then our second most urgent needs, and so on and so forth, ranking our preferences, with the most urgent needs/demands being satisfied first, the least urgent, and the furthest away in time. From this hierarchy we derive the law of demand, the downward sloping demand curve, the law of diminishing marginal utility (see here for a good illustration) and on and on it goes. Lord Lionel Robbins in a masterful 1932 book, The Nature and Significance of Economic Science shows in very clear terms how all the laws of Economics are derived from the a-priori thought process.

To try to refute it, you cannot, as you act purposefully to do so. Just as Pythagoras’s Theorem is implied in the concept of a right angle triangle – and we knew about the concept of the right angle triangle before Pythagoras “discovered” his Theorem – so, too, do the laws of economics flow from the one irrefutable axiom that humans act purposefully. It is a bit like saying Darwin “discovered” the Theory of Evolution, when what he actually did was articulate it and find very plausible data sets to help explain it to the sceptical mind. Evolution was always there.

So What can this Axiom tell us About Entrepreneurship?

When we act, we choose to satisfy our most urgent needs first, and we forego other opportunities which form our subjective costs. Action implies a sacrifice: what opportunity you forgo is your cost, and what you hope to gain is more than your cost: this is your entrepreneurial profit. This entrepreneurial profit does not have to be measured in money; it can be the choice between going to the theatre or staying at home and watching a TV program.

The entrepreneur is someone who is good at generating entrepreneurial profit, not only for himself but in the way he/she can help many more others in achieving and consuming the results of entrepreneurial profit. He is more alert at spotting opportunities that will satisfy people’s most urgent needs in quicker and in better formats, and for this he is rewarded usually with more money for his efforts.

According to Jesus Huerta De Soto in his book called Socialismo Calculo Economico Y Funcion Empresarial” 1992 soon to be published in English by Edward Elgar in Association with the IEA and called: “Socialism, Economic Calculation and Entrepreneurship” 2010, there are six characteristics of the information and knowledge that the entrepreneur captures to use to provide better goods and services to all in society.

Knowledge is Subjective and not Objective and Scientific

I have just watched my local farmer bring in a grass crop frantically in 3 days as he assessed a window of opportunity for him to do so, since rain was coming. He could not send this up to a State planner to make a decision for him – only his local knowledge about this particular time and circumstance, and his informed intuition regarding the weather could lead to this decision. He has crop that he can sell now. A planner in Whitehall would neither have all the information necessary nor respond quickly enough to make this all happen.

Knowledge is Exclusive and Dispersed

In my farmer example, this knowledge about when to bring the crop in is exclusively his and resides in him alone.  In the same way, knowledge across the whole economy is broken up into little pockets of subjective knowledge held by millions of different people.

Knowledge is Tacit and it Cannot be Articulated

My farmer’s knowledge is tacit and in him, yet he probably cannot objectively articulate why he is doing it. Michael Oakeshott in “Rationalism in Politics”, 1962, gave us a very good example of a chef who is after all only following a formulaic procedure of putting together a recipe — add X of this to Y of that and cook at 200 degrees for 10 mins. But the instincts and unconscious background knowledge of an uber chef like Gordon Ramsey will allow him to produce outstanding food which I cannot hope to match simply by following the same recipe.

Entrepreneurship is Creative

There is no cost to an entrepreneurial idea, it is created ex novo. Bill Gates, when he created his first operating system, had his vision and his thought process, the idea, and then he got creating.  Profits are thus created new and from nothing.

The Creation of New Information

Each creative new act of entrepreneurship creates new information which is used by others to profit them as well. A new software solution developed by the creative minds of Apple alerts all their users to new ways of doing things that benefit them in a quicker, faster and better way.

I recently had a conversation with a potential entrepreneur who has identified an abundant source of farm waste product that could be excellent for fish feed. If his business is developed, farmers will suddenly be made aware that what was once a cost can now be a source of revenue for him. Thus he will adapt his farming processes to now harvest this waste and costly product for profit. The fish farmers will eagerly await this new source of protein and adapt their newer and better buying accordingly.

The Transmission of Information

Although the price system is objective and allows the allocation of resources, the fish farmer does not need to know all the subjective information of the entrepreneur who has developed the new feed out of the farms’ waste, just that he can buy it.  Likewise, the farmer does not need to know the detail of how it is going to be made useful to the fish farmer. All this knowledge is subjective and the briefest communication of it happens to facilitate trade.

Entrepreneurship is the foundation of society in that it insures the co-ordination of individuals’ behaviours. Without it, society would not exist.

Competition and Entrepreneurship

There is always a competitive and  on-going process of rivalry and discovery as this society-wide coordination process happens. It is limitless and produces progress if left uninterrupted. It is the single most important process which unites society and permits its harmonious advancement.

The Division of Knowledge v the Division of Labour

The division of labour as suggested by Adam Smith shows us how, in a pin factory, if people concentrate on certain tasks and specialise, more production happens. This is an objective measure. Underneath this, and prior to it, is the subjective division of knowledge. In-depth knowledge is held in widely dispersed formats, often tacitly, precluding its articulation across society; thus it is impossible for any one person body or machine or government department to know all of this information. Also, only tiny amounts need to be communicated to make coordination in society possible. So Huerta De Soto introduces a new concept into the body of knowledge concerning economics: the universal division of knowledge that exists as a deduction from the axiom that humans act and takes the subjectivist revolution started by Menger into our very understanding of the division of labour. He also moves man on from being the Robbinsian homo oeconomicus to the homo empresario. Acting man is entrepreneurship.

Once again Huerta De Soto has given some great new insights into economics in the field of economics. He has stood on the shoulders of Adam Smith, Mises, Hayek and Kirzner to great effect to knock the objective division of labour off its pedestal and put in its place the division of knowledge. This is what Einstein did to Newton in physics. Both still have their place, but the latter being of more fundamental importance.