Summary of JOIE article (6 January 2023) by Thierry Aimar, Faculty of Law and Economics, University of Lorraine, France. The full article is available on the JOIE website.
The objective of the article is to show that the integration of the exploration-exploitation dilemma into the Austrian theory adds new fruitful elements to the function of the destructive entrepreneur, as presented by the Austrian economists of the firm.
Contemporary Austrian theory has expanded widely on the relationship between entrepreneurship and the structure of production, yet it has never touched on the existence of an exploration-exploitation dilemma within organizations. This well-known dilemma in management literature expresses the idea that the success of firms is both conditioned by their ability to explore alternatives (strategic flexibility) and their capacity to exploit current production plans (operational efficiency). But the development of one works to the detriment of the other, resulting in reciprocal exclusion (March 1991; Levinthal and March, 1993).
Mises (1966) did note that the implementation of technological innovation could be hampered by the current structure of production. But his successors did not try any further to determine under what technical and organizational conditions the newly discovered opportunities could be implemented within the firm as production plans. Austrian economists of the firm (Klein, 1996, 2010; Salerno, 2008; Foss, 1999; Foss and Klein, 2012) do not identify any obstacle specific to the complexity of the firm which would prevent it from reorganizing its production structure around new assets (or new uses of current assets), whose marginal rate of return would rise consequent to entrepreneurial discoveries.
Our analysis extends the field of the Austrian theory of the destructive entrepreneur (Foss and Foss, 2002) by reintegrating into its scope the exploration-exploitation dilemma, reinterpreted in Austrian terms. Using the Austrian theory of capital, we show that the complexity of capital structure puts constraints on any implementation of entrepreneurial discoveries in the firm, and thus determines an exploration-exploitation dilemma. This approach of the dilemma through complexity adds a new argument to the function of the destructive entrepreneur, as defined by modern Austrian theory. In Foss and Foss’ theory, the destructive entrepreneur destroys value to the detriment of the shareholder and it is only to the extent that he reduces the “monetary joint surplus” that he produces a harmful effect on the social surplus. Our approach extends the proposed theory by showing that the destructive entrepreneur can also be understood as an effort to maximize the monetary joint surplus of firms that have become too complex and rigid to be restructured profitably. But this effort would here be made at the expense of the whole economy. This analysis raises big issues in the macroeconomic field because for Austrians it is implementing entrepreneurial discoveries that determines the ability of our market economies to overcome ignorance and thus ensure a “tendency towards equilibrium” (Mises, 1966; Kirzner, 1973). If these implementations are blocked by complex firms to ensure their survival, the efficiency of market mechanisms and of the “Competition as a Discovery Procedure” (Hayek, 1968) is called into question.
The article also enriches to the Austrian theory of the relation between institutions and entrepreneur, by inverting the causal relationship between the two. While the Austrians traditionally see the institutional environment as either encouraging or discouraging ‘good’ entrepreneurship (in much the same way as Baumol (1990), who sees the institutions as being one causal element of the nature of entrepreneurial behaviour), our argument defends the idea that the destructive entrepreneur would be one of the causes of degradation of the institutions devoted to competition. This reverse relation of causality, as yet unnoticed by Austrian literature, should encourage new reflexions for policies meant to improve the institutions.
Beyond the Austrian school, our vision could also be said to enrich the theories that see in the entrepreneur a cause of institutional changes, in offering them microeconomic bases for bad institutional entrepreneurship. The complexity of the productive organizations and the consecutive factorial rigidity would constitute a key element for understanding the degradation of the institutions. Adding this information to the whole of economics theory would thus contribute to lowering the long run mobilisation costs of institutional change (Ruttan, 1984, 2011, Ruttan and Hayami, 1984) and thus to increasing the social surplus.
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