The Capitalist and the Entrepreneur: Essays on Organizations and Markets

The Capitalist and the Entrepreneur gathers papers Peter G. Klein published between 1996 and 2009, lightly revised for this 2010 Mises Institute edition and followed by shorter commentaries. Its project is an Austrian theory of the firm built from two sources: Ludwig von Mises's account of capital and monetary calculation under uncertainty, and the transaction-cost economics Klein learned from Oliver Williamson. The central argument is that firms exist, draw their boundaries and organize internal control because someone must commit heterogeneous assets toward an unknown future, and that this commitment travels with ownership.

Klein takes the term judgment from Frank Knight. Judgment is required where neither the range of outcomes nor their likelihoods can be listed in advance, so it has no measurable marginal product and no market as a service. A decision-maker who hires forecasters still decides whether to act on their forecasts, and that decision runs through control of resources. Klein frames this as a complement to Williamson, whose framework he credits with room for bounded rationality and incomplete contracts; what institutional theories lack, he argues, is a unified theory of capital, though many recognize heterogeneous assets. Much of the book's value lies in how far that premise travels.

Within the Austrian school, Israel Kirzner made alertness to unnoticed price discrepancies the driving force of market adjustment, and his pure entrepreneur, who owns nothing and so bears no loss, served as an analytic device. Klein cites Kirzner's own writing on bold, imaginative action and his later account of losses from misreading markets. His objection targets applied research that put opportunity identification at its foundation, extending a metaphor Kirzner introduced to explain how markets adjust. Losses, Klein argues, arise when resources are committed on a mistaken forecast, so analysis should begin with that commitment. His reading of Knight and Mises is one contested position among Austrians.

The capital chapter, written with Kirsten Foss, Nicolai J. Foss and Sandra K. Klein, supplies the mechanism. Assets differ in their attributes, including rights, timing and possible combinations as well as physical traits, and many attributes remain unknown when an asset is bought. Residual control lets an owner try a newly discovered use without having to specify or renegotiate it in advance, while existing contracts and the legal rights of others still apply. Where the legal system works, the owner can normally keep the value such trials create, so ownership lowers the cost of experiments and rewards them. How well a target's assets suit a buyer's remains partly uncertain until they are combined, so the authors treat a takeover as partly an experiment.

Delegation follows from the same premise. Owners retain original judgment, the residual rights of control, and employees exercise derived judgment over delegated decisions. Employees can therefore innovate; the authors' hypothetical franchisee might discover a local taste that becomes a product across the chain. Discretion also lets agents devise new forms of moral hazard, hold-up and rent seeking, which reduce firm value. Monitoring aimed at that destructive activity may stifle useful discovery too, so organizational design involves a trade-off between the two. Foss, Foss and the Kleins describe this analysis as exploratory and incomplete, and say it sets out no explicit testable propositions; the tests they outline remain proposals.

Klein's opening chapter follows Murray Rothbard in applying Mises's calculation argument to firm size. A firm that makes a component in one division and uses it in another needs a transfer price to judge each division's profit, and an outside market price can supply one. Without any outside price for an internally traded good, Klein argues, divisional calculation would suffer even in a large private firm, and he presents this as an upper bound on integration. Like Rothbard, he counts a thin market with one other seller as sufficient. He also calls unique inputs an obstacle innovators must overcome, suggests market-simulation accounting could help, and notes that little empirical work has tested whether firms using market prices outperform those using administered ones.

Those qualifications sit in tension with the strict wording, under which no firm could become both sole producer and sole user of an intermediate good. If innovators can overcome the obstacle and estimates can help, the argument reads more convincingly as a cost that grows as outside benchmarks thin, with its weight left to empirical study. Measuring that weight would take performance comparisons across firms with and without outside benchmarks, more than observing that firms trade internally.

Chapter 3, written with Sandra K. Klein, asks whether divestitures reveal that earlier acquisitions were predictable mistakes. The authors summarize their study of 222 pairs of firms that merged between 1977 and 1983, of which 64 had been divested by July 1995; a duration model relates pre-merger characteristics to the time before a sale. Proxies tied to managerial empire building, such as price-earnings gaps and the medium of payment, showed no significant effect. Related mergers lasted longer, consistent with agency and experimentation accounts alike. Target R&D and a match-seeking indicator shortened duration, as an experimentation account predicts, and so did merger clustering among acquirers within an industry, though clustering among targets was not significant.

A later sale can be the learning stage of an experiment whose result nobody could know at the outset, so a divestiture by itself leaves open whether the purchase was a sound bet. Accordingly, the authors judge the divestitures in their sample more consistent with experimentation than with predictable error. Those findings rest on associations within one sample of publicly traded targets and leave the soundness of mergers in general open. Their suggestion that regulatory interference could be a major source of the uncertainty behind acquirer clustering reaches past the measure, which counts deals by industry and registers shocks of any kind. Their own regressions detect associations across many deals even though each acquisition's outcome remains uncertain when it is made.

Chapter 5 treats investment, including human capital, as the core of entrepreneurial action, and extends judgment to syndicated finance, cooperatives and management teams. Chapter 7 defends causal-realist price theory while finding uses for several equilibrium constructs. The commentaries are shorter and less systematic: one grants government's role in funding the early Internet, and another engages Yochai Benkler's case for peer production while allowing open-source collaboration under private property. Economically literate students and researchers who study firms, contracts or capital will benefit, provided they accept dense citation and repetition across papers. Founders seeking operating advice will find research instead. Careful readers gain a framework for judging how organizations divide ownership and discretion under uncertainty, and the Mises Institute publishes the official text.