Radical subjectivism theory of entrepreneurship

What is the radical subjectivist theory of entrepreneurship?

Ludwig M. Lachmann was a German Economist who proposed a radical subjectivist theory of entrepreneurship as an alternative to existing Austrian School theories of entrepreneurship (e.g., altertness theory or uncertainty-bearing theory or creative destruction theory).

According to Lachmann, entrepreneurs develop plans according to their subjective knowledge and expectations. Expectations form as a result of the creative imagination of entrepreneurs, who may envision many competing futures. Entrepreneurs continually revise their plans as they encounter new bits of market information during exchange experiences. Capital is seen as continually recombining due to the process of capital regrouping. As capital is invested sub-optimally, errors lead to new temporary stocks of capital that need to be redeployed toward new purposes. Institutions are viewed as signposts that provide the rules of the game for millions of individuals, allowing for mass coordination.

Lachmann assumes that individuals experience time differently and that the only way to interpret events is to reconstruct them from bits of information after they have occurred.

Have you ever looked back on a past experience and realized that your interpretation of it has changed over time? Maybe a memory that once filled you with regret now brings you a sense of gratitude for the lessons it taught you. Or perhaps an achievement that once seemed like the pinnacle of your success now pales in comparison to your current goals.

This is the crux of Lachmann's theory of knowledge - that our understanding of the past and our expectations for the future are constantly evolving. And for entrepreneurs, this has important implications for how they approach their plans and strategies.

Imagine you're a startup founder with a grand vision for disrupting an industry. You've done your research, gathered feedback from potential customers, and mapped out a plan for how you'll bring your product to market. But according to Lachmann, your interpretation of the market and your expectations for its future are bound to change as you gather more information and insights.

Perhaps you'll discover that your initial assumptions about your target audience were off-base, or that a competitor has entered the market with a similar offering. These new developments could prompt you to revise your strategy, pivot your focus, or even scrap your original idea altogether.

For some entrepreneurs, the idea of constantly revising their plans might sound daunting - after all, it can be hard to let go of an idea or direction that you've invested time and energy into. But according to Lachmann, this flexibility and adaptability are key to success in a rapidly changing world.

By embracing the idea that knowledge is always evolving, entrepreneurs can stay nimble, responsive, and open to new possibilities. They can view setbacks not as failures, but as opportunities to learn and grow. And they can cultivate a mindset of resilience and innovation that will serve them well in the long run.

While other Austrian views of entrepreneurship have received more attention, some scholars are working to (re)introduce the radical subjectivist perspective into mainstream entrepreneurship literature (see Chiles, Bluedorn and Gupta, 2007 for example).