Introduction

The “theory of the firm” in modern economics is essentially an opti­mization exercise within an equilibrium framework. It suggests a firm's decisions concerning inputs depend exclusively upon a given production function and the given relative prices of those inputs.

K. Jakee (B)

Florida Atlantic University, Boca Raton, FL, USA

e-mail: kjakee@fau.edu

S. M. Jones-Young

United States Coast Guard, Department of Homeland Security, Washington, DC, USA

© The Author(s) 2021 27

A. John and D. W. Thomas (eds.), Entrepreneurship and the Market

Process, Mercatus Studies in Political and Social Economy, https://doi.org/10.1007/978-3-030-42408-4_3

and technology that is given and monolithic; the latter assumption rules out problems of deciding which one of potentially multiple technologies would be optimal. In other words, even though the moniker “theory of the firm” evokes a predictive framework of considerable generality, it largely ignores choices associated with the notion of “entrepreneurship,” including firm creation, innovation of products and production processes, and even what the firm should produce in the first place.

In contrast to the standard maximizing approach, we contend that entrepreneurial choices are, first, choices over bundles of subsidiary or co­requisite decisions that are not easily disentangled.

The second aspect of entrepreneurial decision-making follows from the first: entrepreneurial choices necessarily involve significant computational complexity because they subsume many other underlying choices. It is, in other words, difficult to determine the bundled decision that represents the very best decision possible. In sum, if entrepreneurial decisions— including what types of goods to produce, what production process to use, where to locate and so on—are highly complex bundles, then the standard microeconomic framework based on marginal conditions is inadequate for the task.

While we contend the lumpiness and multidimensional nature of entrepreneurial decisions make marginal tools maladapted to the task of analyzing them, marginal analysis can be valuable in other applications. Its usefulness can be appreciated if we divide firm decision-making into two stages, one involving entrepreneurial decisions and the other involving the day-to-day running of the firm. It is the second stage, when basic deci­sions about what to produce and how to do it have already been made, that constitutes the traditional “theory of the firm.” In this second stage, the “mere manager”—the term used by Schumpeter ([1912] 1983, 83)— fine-tunes a production process already in place. Such fine-tuning cannot, by definition, change the production function, but can change the input mix into the production function. The well-known marginal conditions might therefore be helpful in this second stage.

The first stage, by contrast, involves an agent creating some new production process or transforming an existing one. Since the agent does not have a production process already in place, she must decide “what” and “how” to produce in discrete, mutually exclusive ways.

In fact, while this paper largely focuses on two dimensions—bundled decisions and the inherent complexity of those bundled decisions—we want to acknowledge that our approach is consistent with a nondeter- ministic, dynamic process of creative entrepreneurship. Furthermore, it is important to recognize that nondeterministic processes are intrinsi­cally tied to the notion of “radical uncertainty.” Radical uncertainty is an epistemic position that claims individuals necessarily make decisions and carry out tasks without knowing, ex ante, all the precise consequences of those decisions (see, i.e., Shackle 1958, 1972; Lachmann 1986). Radical uncertainty is implied in models that take the passage of time seriously, or what O’Driscoll and Rizzo (2015, 106) call “real time.” Real time is best understood in contrast to what they call “Newtonian time.” The problem with the latter concept is that it “spatializes” time, meaning it repre­sents the flow of time as mere “‘movements’ along a line” (106). This view, which they argue has been “uncritically adopted” across neoclassical theory, implies the flow of time can be treated, mechanistically, like any other parameter.

In contrast, real time suggests that, as time passes, the physical world changes, but more importantly the social world does too: individuals— both inside and outside of firms—pose competitive challenges, change course in their purchases, adapt to changing circumstances, improve their performance on tasks, reformulate mental models of the world, and work out creative solutions to an untold number of problems; in other words, their subjective view of the world, which informs their decision­making framework, changes (see O’Driscoll and Rizzo, 2015, 110-118). Crucially, learning and discovery occur with the passage of real time and these imply knowledge about the world must evolve as time passes. From this perspective, individuals clearly cannot know all the future implica­tions of their actions today. As such, real time is inherently coupled with real uncertainty, which describes, in essence, the better-known concept of “unintended consequences.” While the notion of unintended conse­quences is frequently referenced by economists to offer caution in the context of state interventions, these fundamental relationships between time and uncertainty remind us the concept has much broader relevance in the social sphere. Indeed, the inability to fully predict the future is, we believe, particularly applicable to entrepreneurial processes, if those processes are set in motion by the imaginations of entrepreneurs.

While the approach we take in this paper is entirely consistent with one that relies on radical uncertainty, we focus particularly on the discrete and complex nature of entrepreneurial decision-making and argue these two characteristics can be analyzed independently of radical uncertainty. As a result, much of our argument is unrelated to the issues raised by real­time, although we do return to considering the passage of time in the Section entitled “Inframarginal Choice Plus Time: Path Dependence,” which analyzes problems arising from path dependence in entrepreneurial decision-making.^[3]

In what may seem unusual for a paper on entrepreneurship, we largely sidestep the two titans of entrepreneurial theor y, Joseph Schumpeter and Israel Kirzner.

Despite our nontraditional intellectual footings, we feel it necessary to emphasize that our approach is unequivocally process-oriented. We are consistent with Hayek's project on the knowledge problem, Buchanan's (1969) and Coase's (1981) emphasis on the subjectivity of costs, and radical-subjectivist insights on uncertainty, learning, and creativity, among other themes. Indeed, we hope that, as the paper unfolds, our compati­bility with a number of these market-process themes will clearly emerge, and that our broader argument will contribute to better understanding the process of organizing production.

We briefly explain our position on Schumpeter and Kirzner in the next section. Section “Characterizing Entrepreneurs” presents our view of the nature of entrepreneurship and how standard neoclassical economics has failed to interpret it adequately. The section, “Corner Solutions and Totals,” presents a novel, inframarginal approach to entrepreneurship. The section, “Inframarginal Choice Plus Time: Path Dependence,” argues that, once time is brought back into the model, the transaction costs involved in acquiring and liquidating complex, bundled assets, combined with the fact that the entrepreneur will be relatively more productive over time in her current activities imply that path dependence will arise in entrepreneurial processes.