Introduction
Entrepreneurship refers to the act of identifying a business opportunity and successfully starting and running the venture while considering the financial perils. Israel Kirzner is an American economist famous for his contributions to the field of entrepreneurship. According to his model, capitalists balance supply and demand by spotting market limitations and exploiting them (Ramoglou and Tsang, 2016). He maintains that market flaws are caused by bounded rationality and information asymmetry (Ramoglou and Tsang, 2016).
Kirzner believes that the proceeds investors get from entrepreneurship are the reward for their tolerance of uncertainty as they reject arbitrage chances established by incumbent companies’ unawareness or inability (Ramoglou and Tsang, 2016). He recommends that entrepreneurs be vigilant to recognize economic opportunities that other capitalists cannot see, such as the necessity for new products and services (Ramoglou and Tsang, 2016). Therefore, future managers should be watchful and keen enough to recognize, opportunities, which can lead to a successful business venture.
Opportunities are often available only because of incumbents’ unawareness; otherwise, other individuals have already exploited them. Chances for the establishment of a successful venture are attributed to officeholders’ lack of knowledge (Ramoglou and Tsang, 2016). Ignorance causes errors that can be corrected by the capitalists (Ramoglou and Tsang, 2016). They act under improbability and cannot know if their actions will contribute to profitability until they take the initiative to go for the price.
For a successful business venture, an entrepreneur must acknowledge that losing money is part of the process (Ramoglou and Tsang, 2016). This paper explores the fundamentals of Kirzner’s model of opportunity and its application in analyzing Elon Musk and his opportunity management abilities.
Literature Review
Kirzner established his concept of opportunity upon the basis of Ludwig von Mises’ human action model. According to Mises, the economic problem is an action towards a given course (Ramoglou and Tsang, 2016). Human actions are based on the concept of dismissing feelings of nervousness, but can only succeed in continuing if they understand the relationship between the ends and the means(Ramoglou and Tsang, 2016).
Therefore, the fundamental aspect of Kirzner’s model is alertness. It contributes to discoveries that are significant in the satisfaction of human wants. It is also significant for entrepreneurs because it helps them find opportunities for selling products at a profit (Ramoglou and Tsang, 2016). Mises’ ideology was therefore proven to bear a relationship with Kirzner’s view on alertness.
Kirzner’s framework has indicated that lucrative opportunities originate from market gaps. Some individuals are often alert to these opportunities, and their endeavors lead to changes in prices. An example of alertness is the arbitrageur, which finds an inconsistency in current prices, which can be utilized for profit optimization (Ramoglou and Tsang, 2016).
In a simple scenario, the capitalist is aware of a new commodity or a groundbreaking manufacturing process, and they take the initiative to fill the market gap before other individuals. Therefore, in this scenario, success does not originate from observing a well-specified maximization problem, but from understanding that other people do not have (Ramoglou and Tsang, 2016). Therefore, according to the case examples, exploiting inconsistencies in the market to make profits.
Similarly, other economists such as Joseph Schumpeter and Frank Knight supported Kirzner’s entrepreneurship perspective as an economic utility and not an employment classification. The critical outcome of the entrepreneurial utility is market balance, which implies that the closure of unawareness pockets in the market promotes balance (Ramoglou and Tsang, 2016). Contrary to Kirzner’s ideals of an entrepreneur not participating in supplying labor and performing entrepreneurial utility, real-life moguls may be somewhat entrepreneurs because they are partly capitalists (Ramoglou and Tsang, 2016).
The correlation between entrepreneurial innovation and capital investment differentiates Kirzner’s model from Knight’s and Mises’ (Ramoglou and Tsang, 2016). Because Kirzner’s theoretical entrepreneurs perform the discovery function instead of the investment role, they do not possess capital because they should be vigilant of profit opportunities (Ramoglou and Tsang, 2016). Therefore, they do not establish firms, raise capital, or manage the venture. They are only supposed to play the discovery role and nothing else.
Kirzner’s Contribution
Kirzner’s involvement in seminal works in his book Competition and Entrepreneurship is significant in the concept of alertness. His understanding of capitalism has been widely acclaimed and has had a substantial influence on economics. He also extends the notion of the market process as a repetitive process of capitalist discovery of earlier profit opportunities (Ramoglou and Tsang, 2016).
The rewards earned in this process mirror the innovation and exploitation of lucrative opportunities, which would not have been exploited in the absence of entrepreneurial pursuit (Ramoglou and Tsang, 2016). Therefore, a capitalist utility is beneficial because it lessens the coordination problems brought by the knowledge division (Ramoglou and Tsang, 2016). Here, Kirzner raises the concept of welfare as borrowed from Friedrich Hayek’s “plan coordination,” a notion, which was controversial within the Austrian school (Ramoglou and Tsang, 2016). His contribution to the model of alertness has influenced several seminal works in contemporary society.
His idea of a theoretical capitalist is introduced to clarify the coordinating function of innovation. While Mises brought the same idea to explain entrepreneurship’s selected features, Kirzner perceives his concept as capturing its principle (Ramoglou and Tsang, 2016). From the beginning, Kirzner has always maintained that an entrepreneur is not an owner. He also argues that proprietorship and capitalism are two distinct functions (Ramoglou and Tsang, 2016).
When the agreement of concentrating all aspects of capitalism into the hands of theoretical entrepreneurs is accomplished, the asset owner is excluded from an entrepreneurial function (Ramoglou and Tsang, 2016). From Kirzner’s perspective of capitalism, an entrepreneur is a pure decision-maker, and anyone can act as one.
Critical Evaluation
Kirzner’s concept of capitalism has been criticized for isolating real-life entrepreneurs’ psychological characteristics and the factors of alertness. It overstresses the contribution of alertness and overlooks the significant role played by judgment and interpretation (Ramoglou and Tsang, 2016). Moreover, the concept has been criticized for abstracting from reality that nearly surrounds real-world capitalism and disregards the vital role of cultural aspects in entrepreneurship (Ramoglou and Tsang, 2016). While the concept may be subjected to various criticism, it remains significant in elaborating the idea of entrepreneurship.
Kirzner’s discovery approach has received several criticisms, especially on the concept of both creation and discovery entrepreneurs. A recent debate has questioned the entire concept of opportunities and whether they are discovered or created (Ramoglou and Tsang, 2016). For example, discovery capitalists focus on forecasting methodical risks, formulating complete and stable tactics, and obtaining capital from external sources (Ramoglou and Tsang, 2016).
In contrast, creative entrepreneurs appreciate significant decision-making. They are also comfortable developing and variable strategies, as they depend on internal finance (Ramoglou and Tsang, 2016). Such critics have highlighted some of the strengths and flaws of Kirzner’s view of capitalism. Regardless of the disapproval, Kirzner offered a comprehensive explanation of entrepreneurship, especially the concept of alertness that explains how individuals become successful capitalists in the business world (Ramoglou and Tsang, 2016). Alertness has been shown to give entrepreneurs a strategic advantage over others because they can spot lucrative opportunities.
Elon Musk As an Entrepreneur
Elon Musk is a business mogul whose origin can be traced back to South Africa. He is one of the most successful American entrepreneurs with affiliations in companies such as Tesla Motors, SpaceX, and the Boring Company. He was born in 1971 and spent most part of his childhood interested in books and computers (Ramoglou and Tsang, 2016).
In 1995, he relocated to Silicon Valley, where he enrolled in a Ph.D. program in applied physics at Stanford University. Together with his brother, they launched their first company, referred to as Zip2, an online business guidebook equipped with maps. Later in 1999, Musk and his brother sold the company they had built to Compaq for an approximated 307 million USD (Ramoglou and Tsang, 2016). The following section explores the entrepreneurial journey of Elon Musk while also applying the key concepts of Kirzner’s approach in its analysis.
Musk’s prosperity in the business world is primarily attributed to his entrepreneurial traits. If field expertise is the mechanism, Musk could not have prospered in such fields. While knowledge, raw talent, and resources are essential for innovation, individuals who possess such resources and establish ventures still fail in the long run. Industrialists who have none of these resources and capabilities continue to flourish (Ramoglou and Tsang, 2016). Therefore, Musk’s company’s success cannot be attributed to the talent, expertise, and resources he had, but rather to his ability to recognize gaps and opportunities that lead to profitability.
Musk is equipped with particular responsiveness that bolsters his ability to spot these gaps and opportunities. He could see what others could not see, as explained by Kirzner’s concept of entrepreneurial alertness (Ramoglou and Tsang, 2016). Kirzner argued that success comes to those who discover market gaps, which can be utilized for financial gain, and an exemplary setting is in the case of Elon Musk (Ramoglou and Tsang, 2016). Moreover, the ability to identify “competitive defects” in a marketplace is a critical element of a successful entrepreneur (Ramoglou and Tsang, 2016).
Identifying opportunities involves a significantly diverse way of thinking of what is needed for complete execution in business. Applying strategic scheduling and logical analysis are significant essentials for peak business performance. This fact explains why most CEOs possess such skills, but these attributes are not enough to create and discover (Ramoglou and Tsang, 2016). Therefore, Elon Musk was able to spot what was missing and established new solutions to fill the void.
Musk’s realized that inadequate electric cars in the automobile sector were a market gap. Therefore, he showcased his entrepreneurial abilities, as Kirzner explained, in the case of Tesla Motors (Ramoglou and Tsang, 2016). The car industry has always focused on producing vehicles that are powered by fuel energy. Such vehicles have always presented several challenges, especially to the environment. For example, gasoline-powered cars contribute to the greenhouse effect because they have a large carbon footprint.
Musk was able to identify the market gaps that were present in the automobile industry (Ramoglou and Tsang, 2016). He realized that the world needed a new type of car, especially one not powered by gasoline. Therefore, he developed the concept of manufacturing electric cars that offer more advantages over the ones powered by gasoline.
His entrepreneurial alertness was also observed in the case of car batteries. The automobile sector has always portrayed car batteries to be an expensive concept that cannot be developed to yield profits. However, Musk criticized that logic, dismantling battery packs down to their components to analyze the case from a ground level. His theory was based on the simple concept that he could make batteries cheaper than those in the industry.
While battery power costs approximately 600 USD per kilowatt-hour, he discovered that the battery parts’ open market calculation had a different story. He evaluated the market value of nickel, aluminum, steel, and carbon and discovered that these components’ total price was approximately 80 USD per kilowatt-hour. By obtaining the fundamental components of a battery pack and assembling them in a new way, Musk could make a new battery and believes that electric vehicles will always be affordable. Today, Tesla Motors is one of the most successful automobile manufacturers, which is attributed to Musk’s ability to spot gaps in the market.
Another case where Musk showcased Kirzner’s concept of alertness is the SpaceX company. Musk established the company to facilitate air transport for the colonization of Mars. The idea behind the establishment of this company is to minimize the cost of space transportation. Although Musk’s idea of SpaceX sounds impractical, he has already received a contract worth 2.6 billion USD from the National Aeronautics and Space Administration (NASA) for procurement.
In analyzing the components of Musk’s idea of intergalactic transport, one can see that he applied the concept of alertness, where he intends to reduce the costs of transportation. Initially, he considered purchasing the equipment from Russia, but he decided to build space shuttles from scratch. Musk is an entrepreneur who is always vigilant since he spotted various discrepancies in the space transportation industry.
Currently, space shuttles burn upon re-entering the earth, and such, vehicles, which are expensive and have a short lifespan do not conform to Musk’s ideals. Therefore, SpaceX’s goal is to make a durable space shuttle, especially one that can return to Earth without damage. The case above has highlighted Musk’s entrepreneurial alertness and how he was able to prosper.
Musk astonished the world with his astounding successes, which he established from scratch. He was a visionary entrepreneur who envisioned the world as a place of space travel, sustainability, artificial intelligence, and the human genome. He created his companies from these simple concepts, especially Tesla, SpaceX, and the Boring Company. When he first introduced SpaceX, he was ridiculed for his “impractical plan.” He also learned the basics of rocket science before setting out to pursue his dreams of building a space company. Therefore, Musk becomes one of his generation’s most successful entrepreneurs, revolutionizing the automobile, and space aeronautics industries. He is regarded as an exemplary figure who portrayed the concepts of Kirzner in entrepreneurship.
Conclusion
This paper has explored the significant concepts of Kirzner’s postulation of entrepreneurial alertness. The theory merges with the fundamentals of the microeconomic model about arbitrage and equilibration and has contributed to the processes of assessment, environmental recognition, decision-making, and evaluation.
Irrespective of Joseph Schumpeter’s contributions to the field of capitalism, Kirzner’s works can be seen to have influenced a significant percentage of seminal works. In his development of the concept, he postulated that the key characteristic that defines an entrepreneur is his alertness to opportunities. He explains that lucrative opportunities are presented by prices, quantities, value, and other product features. Furthermore, he maintains that a capitalist is an individual who can discover market gaps, especially ones that can allow them to sell their products at a profit.
Kirzner’s model of entrepreneurship has also been used to examine the life and career of American business tycoon Elon Musk. The latter is a prominent figure known for Tesla Motors, SpaceX, and other significant companies. From the beginning, Musk has always possessed the characteristics of an entrepreneur, as explained by Kirzner. For example, his capitalist’s alertness enabled him to establish Tesla Motors.
He was able to spot the market discrepancies in the battery segment, where he deconstructed them to find out he could produce such batteries at a lower price than the industry’s prices. Therefore, Kirzner’s approach to capitalism has been showcased in Musk’s case, from the time when he established Tesla Motors to the time when he discovered opportunities in the space sector for establishing SpaceX.
Reference
Ramoglou, S., & Tsang, E. W. (2016). A realist perspective of entrepreneurship: opportunities as propensities. Academy of Management Review, 41(3), 410-434. Web.