This file is a single-author theoretical chapter, originally presented as a symposium paper. Kirzner’s subject is the place of error in economic analysis: why economists devoted to efficiency so often construct theories in which genuine error cannot occur, and why market theory cannot do without it.
Kirzner begins from the tight relation between efficiency and mistake.
Inefficiency can therefore not be thought of except as the result of an error, a mistake, an incorrect or wrong move.
The chapter’s first movement surveys failed or inadequate ways of admitting error. Mises’s marksman and physician show that mistaken outcomes need not be irrational; poor aim or incompetence may simply reflect deficient inputs. Croce’s “economic error,” by contrast, treats error as willing the wrong end, but Kirzner rejects this as scientifically unusable because economics cannot distinguish a person’s “true” goal from a temporary one without importing value judgments. Stigler’s economics of information then pushes even ignorance into choice: not knowing may be the rational result of economizing on costly information. Leibenstein’s X-inefficiency fares similarly when it means insufficient effort or motivation, since lower effort may merely express a preference for leisure or a chosen production technique.
Kirzner thus reconstructs the strongest case for an errorless economics:
Modern economic analysis, we are to understand, lacking a theory of error, can and does proceed only by assuming it away: error and waste simply have no place in the world of economic theory.
The central conceptual turn comes in “Ignorance and Ignorance.” Kirzner distinguishes lacking information from failing to notice information already available. His apple-store example shows a buyer passing a cheaper identical good “before his very nose.” This is not a lack of an input; it is missed opportunity. Purposeful action does not imply full perception.
Such failure, moreover, is not inconsistent with purposefulness, since an available resource ready to hand may not be noticed; purposefulness is not necessarily inconsistent with tunnel vision.
This distinction grounds Kirzner’s entrepreneurial theory. “Alertness” is not another resource chosen from a menu, because deciding to acquire it would already presuppose the very alertness in question.
Alertness thus appears to possess a primordial role in decision making that makes it unhelpful to treat it in the analysis of decisions, like any other resource.
The payoff is a reinterpretation of market process. Jevons’s law of indifference is not merely a static condition under perfect knowledge; it names a tendency for price discrepancies to be discovered and arbitraged away. Divergent prices embody pure profit opportunities, and their persistence means that someone has overlooked what was available to be noticed.
The law of indifference follows from our recognition that error exists, that it consists in available opportunities being overlooked, and that the market process is a process of the systematic discovery and correction of true error.
Equilibrium, therefore, is not omniscience. Since some ignorance may be rationally chosen, the relevant contrast is between unnoticed opportunity and its discovery.
The hypothetical state of equilibrium, it emerges, consists not so much in the perfection of knowledge, since costs of acquiring knowledge may well justify an equilibrium state of ignorance, as in the hypothetical absence of error.
Kirzner then revisits Leibenstein, Marshall, Robbins, and Stigler. In equilibrium, differences among firms can be attributed to differences in input quality, including entrepreneurial ability. But disequilibrium permits genuine disparities not reducible to inputs, because alertness is not an input in the ordinary sense. Here X-inefficiency survives as entrepreneurial scope.
Scope for entrepreneurship, we have discovered, is present whenever error occurs.
The chapter’s relevance lies in restoring disequilibrium, discovery, and entrepreneurship to the center of economic theory. An economics of errorless maximizers can explain inefficiency only through transaction costs or exogenous technological change. Kirzner argues instead that the real world is filled with unnoticed improvements, and that institutions matter because they channel the profit motive toward discovering them.
Only an economics that recognizes how the profit motive—by which we mean the lure of pure entrepreneurial profits—can harness entrepreneurial activity toward the systematic elimination of error can be of service in pointing the way to those institutional structures necessary for the steady improvement of the lot of mankind.
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