Economic Policy and Entrepreneurship: Alertness or Judgment?

It is uncontroversial that poor public policy undermines entrepreneurial behavior and reduces public welfare. However, the exact mechanisms by which policy interventions affect entrepreneurial behavior are often unclear. This paper contrasts two competing theories of the relation between public policy and entrepreneurship: the theory of entrepreneurial incentives suggested by Israel Kirzner, and the theory of economic calculation and judgment proposed by Ludwig von Mises and Joseph T. Salerno. I argue that the alertness theory provides inadequate grounding for policy analysis because it rests on a paradoxical approach to opportunity discovery. The calculation view, on the other hand, is well-suited for application to policy problems, as it rests on a realistic view of entrepreneurial decision-making.