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ASSIGNMENT INSTRUCTIONS
Assignment
Synthesize Ludwig von Mises’ views on the economic essence of entrepreneurship and entrepreneurial profit and explain why—without making any reference to his comments on taxation—he thinks the idea of “excessive” (entrepreneurial) profits is an illogical economic concept. As part of your response, be sure to comment on how von Mises’ ideas related to “maladjustment” can be made compatible with Steven Johnson’s descriptions of the “adjacent possible.”
If you wish, here’s an outline you can use to organize your thoughts:
How does Mises define “entrepreneurial profit” and “entrepreneurial loss”?
In the spirit of the Hayekian knowledge problem (FYI: Hayek was a student of Mises), why would there be no entrepreneurial profit or loss if all economic actors had perfect information/knowledge?
According to Mises, what makes entrepreneurial profits “disappear” and how does the argument relate to opportunity cost related to the alternative uses of scarce resources (per Alchian and Sowell)?
Given your response(s) to the above, why does Mises argue that “interest on capital employed” (think: the interest due on a business loan) and “entrepreneurial quasi-wages” (think: the wages a small business owner pays himself or herself) do not properly belong to the idea of “entrepreneurial profit”? (Mises puts other items on the list, but the two mentioned are the most intuitive.)
For purposes of the essay, assert that Mises’ ideas regarding “maladjustments” are synonymous with Johnson’s ideas comprising exploration of the adjacent possible. Craft an argument for the uninitiated reader that explains why they can be thought of as the same thing.
What does Mises mean by his imagery connected to “The Ballot of the Market”? As part of your answer, comment specifically on how “capital scarcity” matters for the imagery.
When Mises’ ideas about maladjustments and the ballot of the market are merged together, why would Mises condemn the notion of “excessive” profit as economically illogical?
HOW TO WORK ON THIS ASSIGNMENT (EXAMPLE DRAFT/ESSAY)
Ludwig von Mises, a leading economist of the Austrian School of Economics, argued that entrepreneurial profit arises from the ability of entrepreneurs to anticipate changes in the market and allocate resources accordingly. According to Mises, entrepreneurial profit is the difference between the total revenue generated by a firm and the total costs incurred in the production process, including the opportunity cost of the resources used. Conversely, entrepreneurial loss occurs when the total revenue generated is less than the total cost of production, including opportunity cost.
In the Hayekian knowledge problem, Mises posits that if all economic actors had perfect information and knowledge, there would be no entrepreneurial profit or loss. This is because all economic actors would make decisions that lead to perfect resource allocation, leaving no room for profit or loss.
Mises argues that entrepreneurial profits “disappear” due to market competition and the opportunity cost of alternative resource uses. In a competitive market, firms will enter the market and replicate the success of profitable firms, thus eroding their profits. Additionally, the resources used by a firm could have been used for alternative purposes, and the opportunity cost of those resources represents the cost of capital. This cost is subtracted from entrepreneurial profit, reducing the overall profit earned.
Mises distinguishes between entrepreneurial profit and interest on capital employed and entrepreneurial quasi-wages. The former refers to the interest due on a business loan, which is not a profit but a cost of borrowing. The latter refers to the wages a small business owner pays himself or herself, which is not a profit but a labor cost.
Mises’ ideas on “maladjustments” can be related to Steven Johnson’s descriptions of the “adjacent possible” through their shared emphasis on the importance of experimentation and adaptation in the market. Mises’ concept of maladjustments describes the inefficient use of resources due to market distortions, while Johnson’s concept of the adjacent possible refers to the available innovations that can be discovered through experimentation and adaptation. Both concepts suggest that the market is a dynamic system that requires experimentation and adaptation to achieve efficient resource allocation.
Mises’ imagery of the “Ballot of the Market” refers to the market process of consumer choice, where consumers use their purchasing power to “vote” for the goods and services they prefer. Capital scarcity matters in this imagery because it limits the ability of entrepreneurs to allocate resources to produce the goods and services that consumers demand. Thus, entrepreneurs must make strategic decisions on how to allocate scarce resources, based on market signals such as price signals and consumer demand.
When Mises’ ideas about maladjustments and the ballot of the market are merged together, he would condemn the notion of “excessive” profit as economically illogical. This is because market competition and the opportunity cost of alternative resource uses limit the ability of entrepreneurs to earn excessive profits. Moreover, any attempt to regulate profits would hinder the market process and limit experimentation and adaptation, which are necessary for efficient resource allocation.
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