In the real world ignorance is pervasive, and we mustn’t fall prey to the mainstream economists’ unreal assumption that full knowledge about means, ends, and preferences is “just there” at the disposal of an economic planner. We know this is not the case in real life: First, knowledge is dispersed throughout society, not concentrated in some repository. Second, much relevant knowledge is in the nature of knowing how, not knowing that; that is, it’s tacit, unarticulated, and even inarticulable. Third, much relevant knowledge is discovered serendipitously in the course of acting, extinguishing ignorance that a person wasn’t even aware he suffered ..
If all that economics takes notice of is already known means, ends, and preferences, it misses the defining creative and entrepreneurial character of human action. Think about how you make real decisions, and you’ll see the point.
F.A. Hayek, beginning in the 1930s, called economics to account on this matter. What’s the point of thinking about an economy in equilibrium, with its assumption of complete knowledge about resources and preferences, Hayek asked, if no explanation is given of how an economy in theory could ever evolve to such a state. After all, we never have complete knowledge about resources and preferences. If economics as a discipline is to have any relevance for the real world, it must address the question of how a society rife with ignorance and incomplete knowledge can progress. Otherwise, economics is justly mocked in the joke about the economist who, stranded with nothing but canned food, “assumes a can opener.”
To fully appreciate the role of entrepreneurship, we turn to Israel Kirzner, one of Mises’s doctoral students. It was Kirzner who elaborated on what the entrepreneur does to help individuals better realize their objectives, that is, to facilitate cooperation that would not have taken place otherwise for lack of the necessary knowledge.
In effect, the entrepreneur enables A and B to cooperate in a way that otherwise would have eluded them — which is to say they would have been disappointed to learn that they missed out on an opportunity to exchange apples and oranges. The entrepreneur thus facilitates cooperation by being alert to potential price discrepancies, which are the inevitable result of our ignorance and error.
We now see that the battle cry “People before profits!” is based on a misunderstanding. In a freed market, profit is a sign of new social cooperation. Thus, a better battle cry would be “Exploit price discrepancies, not people!”