Skip to main content

Surprise! Innovation, market process and 'the nature of discovery'

Confined to our homes during the pandemic, many of us have taken up new hobbies, exercise regimens or new learning. While my physical fitness has taken a hit in the six weeks since the RIG team started working from home, I have joined an online microeconomics course in an effort to cajole myself into a productive lockdown. 

I signed up out of personal interest and so wasn’t expecting to write about it in a #RIGBlog. But having come across an article by Israel Kirzner, an economist of the Austrian school, on market process theory, I rather changed my mind. Critical of more established equilibrium economics, Kirzner finds market process theory – which is concerned with explaining how the market moves towards a state of general economic equilibrium rather than assuming equilibrium arises instantaneously – a more useful tool for considering the modern world. In elaborating on this preference, he discusses the concept of discovery at length. For Kirzner, discovery in this context is not a deliberate act of learning but rather a process by which ‘surprise’ information (Rumsfeldian ‘unknown unknowns’) is discovered essentially at random. Such moments might include walking into the corner shop you never shop at only to find they are selling ice cream for half the price of the other shop’s ice cream; such information could not have been reasonably predicted, but its discovery leads to the diffusion of your newly acquired pricing knowledge. Pretty soon, the price of a corner shop Ben & Jerry’s will adjust to reflect that fact. Kirzner sees these surprise moments of discovery as crucial to helping the market in the equilibrating process.

The relevance of this to a #RIGBlog is, I appreciate, not immediately clear. But it struck me that Kirzner’s thoughts on discovery seem to be a useful prism for thinking about the work that RIG does in helping early stage companies establish product-market fit. For many global industries, novel technologies lie very much in the ‘unknown unknowns’ category. There may be an innovation that can help industries improve an aspect of the good or service that they provide – there is probably more than one innovation  – but they cannot reasonably be expected to know about it. Often established industries will continue on in more or less blissful ignorance; the same is not true of a start-up. Innovative young businesses that have developed a novel platform technology are often unaware of the best application for their technologies. How should a carbon capture technology know which carbon-producing company/industry it should prioritise? How can an antimicrobial technology know which microbial challenges it makes sense to tackle first? Many such companies run out of cash before they have a chance to find the right answer. At RIG, we help turn that random process of application ‘discovery’ into one that is structured and focused around realising the potential of innovation. We try to transform Kirzner’s ‘discovery’ into active deliberation, in so doing bridging the chasm between early stage companies and their full potential.

Crucially for early stage companies, a commercialisation process that follows Kirzner’s model of discovery does not always sit right with potential backers. If an investor asks why the organisation seeking funding has prioritised a particular early market application, and they are told that it was the result of a chance conversation down the pub, they may well choose instead to put money into a company that has a definable, rigorous process for approaching their market. Regardless of the technology. Randomness always has its role to play, and this is no call to look a gift licensing agreement in the mouth; but as Kirzner states, “many ‘discoveries’ turn out to be mistaken.” Turning unknown unknowns into opportunities is an essential part of any early stage company’s skillset.