Market disequilibrium
Thomas J. Dean
It is common for entrepreneurship scholars to point to states of disequilibria as the fundamental source of entrepreneurial opportunities. As such, the concept is central to our understanding of the nature of entrepreneurship, the sources of entrepreneurial profit, and the role entrepreneurs play in the economic system. Explicating the concept of market disequilibrium requires an understanding of its antonym, the concept of equilibrium.
First, there is no singular application of the concept of equilibrium. Rather, equilibrium is better understood as a general modeling approach that is applied to multiple questions and contexts. Thus, equilibrium analysis in the field of economics is a tool used to analyze a variety of economic problems. Most relevant to the understanding of entrepreneurship and entrepreneurial opportunity are microeconomists’ perspectives on equilibrium. Within the field of microeconomics, equilibrium generally refers to the price and quantity at which a given market is in balance (supply equals demand). In other words, equilibrium exists at the intersection of the upward sloping demand curve and down ward sloping supply curve. Partial equilibrium results when a single market achieves equilibrium, while general equilibrium occurs when several interrelated markets achieve equilibrium simultaneously. Thus, general equilibrium models may gauge the extent to which an economy as a whole has achieved an equilibrium state. Furthermore, under the assumptions of competitive markets, such states have been mathematically proven to maximize social welfare (defined as Pareto efficient).
Regardless of its application, it is critical to understand that time is a central dimension in the concept of equilibrium. Reference to equilibrium typically suggests the condition of a system at a point in time. Thus, equilibrium is a state, rather than a process. Yet equilibrium analysis is a dynamic tool in two respects. First, a state of equilibrium implies that the system under consideration has reached temporal stability. In other words, barring external influences on the system components, the system has reached a stasis whereby it will continue in its present operation indefinitely. Second, time is relevant to equilibrium because systems normally require some time to achieve the static state referred to as equilibrium. In other words, it is typically over some period wherein action and reaction cycles evolve to a balanced state whereby the dynamics of the interaction no longer change.
Both the resource based view (RBV) of the firm (Barney, 1991; Wernerfelt, 1984) and game theory provide examples of equilibrium models wherein time is a critical element. RBV attempts to explain the persistence of economic profit at equilibrium. The basic premise is that all eco nomic profits should disappear with competition over time unless barriers to the movement of factors to production exist (Barney, 1986). Thus, RBV suggests that, with the passage of time and the actions and reactions of competitors, profits will be competed away, unless some thing obstructs the competitive process (i.e., valuable resources that are rare, inimitable, and non substitutable). Furthermore, the basic question of RBV is whether such a profit can persist indefinitely (in stasis or equilibrium) once the interaction of the various system elements has been completed.
The time required for a system to reach an equilibrium state varies substantially by the nature of the system. In chemical and physical systems, equilibrium may be achieved in nano seconds. In economic systems, however, achieving equilibrium may take years, decades, or perhaps even centuries, as economic actions 182 market disequilibrium and reactions require some time to complete. Economists refer to the period of interactions in which the system is moving toward the equilibrium state as the lag. Lags result because it often takes substantial time for economic information to be transferred to various agents, and for these agents to react to the information and implement appropriate economic actions. Realistically, some markets have the potential to equilibrate more quickly than others. For example, financial markets are often assumed to be efficient relative to certain factor markets.
With some exceptions, equilibrium analysis ignores the processes occurring during such lags, focusing instead on the final outcome of the interactions between economic agents. Thus, equilibrium analysis often recognizes the role of entrepreneurship but usually neglects to examine it. Furthermore, such analysis often assumes that markets equilibrate quickly and are therefore relatively uninteresting from an analytical standpoint. In short, the assumption of rapid market equilibration results in a de emphasis of the equilibration process in favor of examination of the end state it produces. In contrast, research in entrepreneurship is particularly interested in the process of market equilibration and, by extension, states of market disequilibrium.
Our consideration of the nature of market equilibrium suggests that the concept of mar ket disequilibrium represents a market condition wherein stasis has not been reached in the inter actions between economic players. What is important in this definition is that it focuses upon a market condition that exists at a given point in time. In other words, like equilibrium, market disequilibrium describes a state in the market. But perhaps most importantly, this state is necessarily temporary, as, by definition, it is not at equilibrium. Thus, disequilibrium implies even tual transformation in the nature of the eco nomic system over time, from a state of disequilibrium to either a state of equilibrium or alternative state of disequilibrium. Moreover, it is this market movement, or the drivers for movement, in the market, that is of particular interest to the study of entrepreneurship.
Researchers have often addressed the role of entrepreneurship in the movement of markets toward or away from the condition of disequilibrium. Schumpeter (1934) viewed entrepreneurs as disequilibrators who, through the process of creative destruction, introduce spontaneous and discontinuous change and thereby disturb the current state of the market. In contrast, Austrian economists (Kirzner, 1973, 1997) and others (Leibenstein, 1968, 1979; Schultz, 1975; Dean and Meyer, 1996) view the entrepreneurial process as fundamentally equilibrating as the actions of entrepreneurs move markets closer to a state of perfection. In this view, the market gaps and imperfections inherent to states of disequilibrium represent profit opportunities that are eliminated through entrepreneurial action. Dis equilibrium is created by exogenous changes in technologies, tastes and preferences, sources of supply, and other factors. As such, the entrepreneur is more of an arbitrageur who dis covers previously unknown changes in market conditions (Kirzner, 1973, 1997; Knight, 1921; Mises, 1949). The dichotomy between views of the entrepreneur as equilibrator versus entrepreneur as disequilibrator remains one of the fundamental paradoxes of the field, which, with some exception (Cheah, 1990), remains unexplored. The solution to this paradox likely rests in the separation of the disequilibrating and equilibrating roles of entrepreneurial actors, as it is possible that the act of implementing an entrepreneurial venture may have both equilibrating and disequilibrating influences.
Numerous authors, especially those who view entrepreneurs as market equilibrators, have as sociated the existence of disequilibrium states with opportunity for profit and/or entrepreneurship (Kirzner, 1997; Leinbenstein, 1968; Dean and Meyer, 1996; Shane and Venkatara man, 2000). Kirzner (1973, 1997), for example, refers to profit opportunities engendered in the errors and ignorance of market participants. Leibenstein (1968, 1979) discusses market imperfections that increase the scope for entrepreneurial activity, while Knight (1921) emphasizes entrepreneurial opportunities in dynamic, uncertain markets. More recently, Eckhardt and Shane (2003) emphasize the role of in formation asymmetries and exogenous shocks, while Dean and McMullen (2002) discuss conditions of market failure as the source of economic opportunity. Characterizing the nature and causes of disequilibrium states may market disequilibrium 183 be particularly productive for the study of entrepreneurship, as review of the economic literature suggests that some of the most fruitful conclusions from equilibrium analysis result from the study of departures therefrom.
Entrepreneurship researchers have also suggested that market systems, especially those with extended adjustment lags, are susceptible to continual external disruption, which effectively prevents attainment of an equilibrium state. Be cause an equilibrium state obtains from the fulfillment of initial system conditions, any alteration to these conditions prevents the attainment of that state and reestablishes the trajectory of the system. Many believe the lag is so long and external changes so continual that the market is better conceptualized as a dynamic learning process subject to continual external influence, disruption, and altered convergence. Indeed, this is perhaps a more realistic conception of the market. Of course, this conception is contradictory to economists’ emphasis on an ideal but perhaps unobtainable equilibrium state. In short, markets likely remain in states of disequilibrium, implying the continual scope for entrepreneurial action.
Our exploration into market disequilibrium suggests that the concept plays a central role in the understanding of the nature of entrepreneur ship and its function in the economic system. Whether we believe that entrepreneurs create or exploit disequilibrium conditions, it is clear that entrepreneurs alter market conditions and market conditions motivate entrepreneurial action. Central questions of the field revolve around the disequilibrium concept and include the nature of disequilibrium, the economic opportunities inherent therein, the means of exploiting such states, and the effect of the entrepreneur on market conditions and social welfare.
Bibliography
Barney, J. B. (1986). Strategic factor markets: Expectations, luck, and business strategy. Management Science, 32 (10): 1231 41.
Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17: 99 120.
Cheah, H. (1990). Schumpeterian and Austrian entrepreneurship: Unity within duality. Journal of Business Venturing, 5: 341 7.
Dean, T. J. and McMullen, J. (2002). Market failure and entrepreneurial opportunity. Academy of Management Best Paper Proceedings.
Dean, T. J. and Meyer, G. D. (1996). Industry environments and new venture formations in US manufacturing: A conceptual and empirical analysis of demand determinants. Journal of Business Venturing, 11 (2): 107 32.
Eckhardt, J. T. and Shane, S. A. (2003). Opportunities and entrepreneurship. Journal of Management, 29 (3): 333 49.
Kirzner, I. M. (1973). Competition and Entrepreneurship. Chicago: University of Chicago Press.
Kirzner, I. M. (1997). Entrepreneurial discovery and the competitive market process: An Austrian approach. Journal of Economic Literature, 35: 60 85.
Knight, F. H. (1921). Risk, Uncertainty, and Profit. Boston, MA: Houghton Mifflin.
Leibenstein, H. (1968). Entrepreneurship and development. American Economic Review, 58: 72 83.
Leibenstein, H. (1979). The general x-efficiency paradigm and the role of the entrepreneur. In M. J. Rizzo (ed.), Time, Uncertainty, and Disequilibrium. Lexington, MA: D. C. Heath, 127 39.
Mises, L. (1949). Human Action: A Treatise on Economics. Chicago: Henry Regnery.
Shane, S. and Venkataraman, S. (2000). The promise of entrepreneurship as a field of research. Academy of Management Review, 26 (1): 217 26.
Schultz, T. W. (1975). The value of the ability to deal with disequilibrium. Journal of Economic Literature, 13 (2): 827 46.
Schumpeter, J. (1934). The Theory of Economic Development. Cambridge, MA: Harvard University Press.
Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5: 171 80.
Tags