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Competition, Economic Planning, and the Knowledge Problem
No other economist in recent times has been so closely identified with the Austrian School of economics as Israel M. Kirzner, professor emeritus of economics at New York University. A leader of the generation of Austrian economists after Ludwig von Mises and F. A. Hayek, Kirzner has been recognized as one of the minds behind the revival of entrepreneurship and market process theory in the twentieth century. Competition, Economic Planning, and the Knowledge Problem expands on the ideas Kirzner first discussed in Competition and Entrepreneurship ―the role of the entrepreneur and its relation to the determination of prices and the coordination of individuals’ plans―as well as economic planning, the knowledge problem, market-process theory, and the parts played by information, knowledge and advertising. It includes a paper on F. A. Hayek’s theory of market coordination and the Austrian business-cycle theory―seen now for the first time in its original English. Over the course of this book’s nineteen articles and one monograph, Kirzner stresses the fundamental idea that competition is a rivalrous process of entrepreneurial activity in which individuals and firms discover, innovate, and outdo each other. Kirzner discusses why this dynamic view of the market process is so important to understand, particularly in the contexts of economic planning and the workings of competitive markets. In Kirzner’s view, free market competition has epistemic properties that cannot be replicated in other ways. Indeed, though knowledge is present in all economic interaction, it is also dispersed in the economy such that no individual mind can ever centralize it all. This “knowledge problem” implies, as Hayek has argued, the impossibility of central planning. Kirzner’s contribution is to show that, ultimately, it is only the free, competitive entrepreneurial process that can overcome this problem through generation of knowledge that enables a relatively efficient, yet perfectible, allocation of scarce resources. Peter J. Boettke is University Professor of Economics and Philosophy at George Mason University and the BB&T Professor for the Study of Capitalism at the Mercatus Center. His publications include Living Economics, The Handbook of Contemporary Austrian Economics, and The Elgar Companion to Austrian Economics. He has been the editor of The Review of Austrian Economics since 1998. Frédéric Sautet is Associate Professor at The Catholic University of America, Tim Busch School of Business and Economics. He is a specialist in Austrian market process theory, and he teaches entrepreneurship studies. He is the author of An Entrepreneurial Theory of the Firm and has published widely on entrepreneurship.
- GenresEconomics
384 pages, Hardcover
Published March 12, 2018
About the author
Israel M. Kirzner
63 books42 followersLeading economist of the Austrian School.
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Displaying 1 - 2 of 2 reviews
May 5, 2019
This collection puts together some of Israel Kirzner's central neo-Hayekian insights on the nature of entrepreneurial competition as a discovery procedure. It is essential reading.
Kirzner is a follower of the Austrian school of economics. His theory follows explicitly on the dual footsteps of Ludwig von Mises and Friedrich Hayek, whose free market insights on competitive market forces he interprets as mutually complementary. His theory is somewhat more limited and focused than that of either Mises or Hayek. Kirzner is narrowly interested in one question: explaining how markets produce the consistent harmonization of individual expectations, plans, and projects. His answer, following Mises and Hayek, is that the solution is found in unleashing the process of knowledge communicating entrepreneurial dynamism. He hypothesizes that free markets characterized by low regulation and the absence of coercive monopolies are productive of such a process of harmonization and equilibration, which has the (imperfect but consistent) tendency to dispel pricing errors and correct resource misallocations.
The collection is one volume of the collected works of Israel Kirzner. It has been put together as a reference work which contains all the major writings of Mr. Kirzner on this particular topic. The editorial emphasis, understandably, has been on completeness rather than cohesiveness. This means that I would not recommend reading this book cover to cover unless one has an exegetical interest in his works. There is a huge amount of near verbatim repetition of entire sections.
Aside from my major agreement with his central thesis, I do have some disagreements with some of Mr. Kirner's arguments and methods:
1) As is common to the Austrian school, the sharpness and clarity of Kirzner's arguments goes hand in hand with a lack of interest in, or an explicit rejection of, the empirical method of economic analysis. On the level of abstractness with which Kirzner operates, this lack of empirical grounding is not necessarily a big problem. There is an important place for abstract theory on the explanatory plenum that interlinks concepts, intuitions, and strict formal logic, with only illustrative excursions to empirical data. However, this excuse does not work. Kirzner's main argument is broadly conceived as consequentialist ("competitive markets produce comparatively better outcomes than alternative economic arrangements"). The shunning of empirical questions and the nuances of the comparative institutional debate feels unjustified in an argument with empirical implications. This somewhat constrains the real-world applicability of his abstract and excellent analysis. Furthermore, the highly stylized and formalized way in which Kirzner presents his argument, which claims to be logically airtight, is even more susceptible to the accusation of being out of touch than the less formalized and more eclectic prose of, say, Hayek's scientific output.
2) Kirzner should get credit for bringing to the fore of the economic debate the questions of error-prone disequilibrium conditions as containing the seeds for entrepreneurial competition. In thus seeing the underlying impetus for the market-clearing process of equilibration in the prior disequilibrium, consisting of the misallocation of factors of productions, the Austrian perspective has done wonders to liberate economic thinking from the constraints of the neoclassical straitjacket. However, Kirzner's method still sees a major role for equilibration, and he ends up smuggling it back into the equation. His highly idealized theory of markets ends up replicating equilibrium economics. In short, he argues that markets have a systematic tendency to correct errors and misallocations without any corresponding systematic tendency to produce further errors and misallocations. This allows him to say that the "ever-rotating economy" of Mises and the "market-clearing equilibrium" of post-Marshallian mainstream economics are pointing to the same equilibrium outcome of the dynamic market process. I agree with him that markets can, in many instances, replicate such equilibrium tendencies, but I would argue that there are sufficient reasons to worry about the prevalence of systematic disequilibrium tendencies EVEN under the most optimistic and ideal free market conditions. My problem with the highly idealized notion of equilibriation - even if tempered by Austrian insights into epistemic fallibility - is that it does not do sufficient justice to the bounded rationality of human psychology. The systematic failings of equilibrium models taint the ideal purity of Kirzner's highly rigorous and beautiful analysis.
3) My last problem is more minor but it still bugged me: Kirzner's views on advertising. I found them rather weak and implausible. Like his stylized theory of equilibration, the problems with his stylized theory of advertising stem from the abstract and unempirical nature of his method. He argues that contrary to common prejudice, advertising actually serves a useful and vital communicative and knowledge producing function in the economy. So far so good. But I think, whether deliberately or accidentally, that he goes too far in his apologetic to advertisement. He ends up interpreting every appeal to irrationality and emotions in the best possible light. He ends up excusing the worst of exploitative advertisement as justified by the process of discovery. He thereby ignores or downplays the way in which opportunistic and exploitative behaviour, with very tenuous connections to human welfare, can thrive even under conditions of maximal competition.
...
In sum, I believe Kirzner's neo-Austrian analysis constitutes an important contribution to the expansion of Hayekian insights into 20th and 21st century economic thinking. This collection, although somewhat repetitive, contains some of this very best writings. There is very little excuse to remain ignorant of the extent of our ignorance - and the proper remedy is a swift crash course in Mises and Hayek as percolated through the sharp mind of Mr. Kirzner.
Kirzner is a follower of the Austrian school of economics. His theory follows explicitly on the dual footsteps of Ludwig von Mises and Friedrich Hayek, whose free market insights on competitive market forces he interprets as mutually complementary. His theory is somewhat more limited and focused than that of either Mises or Hayek. Kirzner is narrowly interested in one question: explaining how markets produce the consistent harmonization of individual expectations, plans, and projects. His answer, following Mises and Hayek, is that the solution is found in unleashing the process of knowledge communicating entrepreneurial dynamism. He hypothesizes that free markets characterized by low regulation and the absence of coercive monopolies are productive of such a process of harmonization and equilibration, which has the (imperfect but consistent) tendency to dispel pricing errors and correct resource misallocations.
The collection is one volume of the collected works of Israel Kirzner. It has been put together as a reference work which contains all the major writings of Mr. Kirzner on this particular topic. The editorial emphasis, understandably, has been on completeness rather than cohesiveness. This means that I would not recommend reading this book cover to cover unless one has an exegetical interest in his works. There is a huge amount of near verbatim repetition of entire sections.
Aside from my major agreement with his central thesis, I do have some disagreements with some of Mr. Kirner's arguments and methods:
1) As is common to the Austrian school, the sharpness and clarity of Kirzner's arguments goes hand in hand with a lack of interest in, or an explicit rejection of, the empirical method of economic analysis. On the level of abstractness with which Kirzner operates, this lack of empirical grounding is not necessarily a big problem. There is an important place for abstract theory on the explanatory plenum that interlinks concepts, intuitions, and strict formal logic, with only illustrative excursions to empirical data. However, this excuse does not work. Kirzner's main argument is broadly conceived as consequentialist ("competitive markets produce comparatively better outcomes than alternative economic arrangements"). The shunning of empirical questions and the nuances of the comparative institutional debate feels unjustified in an argument with empirical implications. This somewhat constrains the real-world applicability of his abstract and excellent analysis. Furthermore, the highly stylized and formalized way in which Kirzner presents his argument, which claims to be logically airtight, is even more susceptible to the accusation of being out of touch than the less formalized and more eclectic prose of, say, Hayek's scientific output.
2) Kirzner should get credit for bringing to the fore of the economic debate the questions of error-prone disequilibrium conditions as containing the seeds for entrepreneurial competition. In thus seeing the underlying impetus for the market-clearing process of equilibration in the prior disequilibrium, consisting of the misallocation of factors of productions, the Austrian perspective has done wonders to liberate economic thinking from the constraints of the neoclassical straitjacket. However, Kirzner's method still sees a major role for equilibration, and he ends up smuggling it back into the equation. His highly idealized theory of markets ends up replicating equilibrium economics. In short, he argues that markets have a systematic tendency to correct errors and misallocations without any corresponding systematic tendency to produce further errors and misallocations. This allows him to say that the "ever-rotating economy" of Mises and the "market-clearing equilibrium" of post-Marshallian mainstream economics are pointing to the same equilibrium outcome of the dynamic market process. I agree with him that markets can, in many instances, replicate such equilibrium tendencies, but I would argue that there are sufficient reasons to worry about the prevalence of systematic disequilibrium tendencies EVEN under the most optimistic and ideal free market conditions. My problem with the highly idealized notion of equilibriation - even if tempered by Austrian insights into epistemic fallibility - is that it does not do sufficient justice to the bounded rationality of human psychology. The systematic failings of equilibrium models taint the ideal purity of Kirzner's highly rigorous and beautiful analysis.
3) My last problem is more minor but it still bugged me: Kirzner's views on advertising. I found them rather weak and implausible. Like his stylized theory of equilibration, the problems with his stylized theory of advertising stem from the abstract and unempirical nature of his method. He argues that contrary to common prejudice, advertising actually serves a useful and vital communicative and knowledge producing function in the economy. So far so good. But I think, whether deliberately or accidentally, that he goes too far in his apologetic to advertisement. He ends up interpreting every appeal to irrationality and emotions in the best possible light. He ends up excusing the worst of exploitative advertisement as justified by the process of discovery. He thereby ignores or downplays the way in which opportunistic and exploitative behaviour, with very tenuous connections to human welfare, can thrive even under conditions of maximal competition.
...
In sum, I believe Kirzner's neo-Austrian analysis constitutes an important contribution to the expansion of Hayekian insights into 20th and 21st century economic thinking. This collection, although somewhat repetitive, contains some of this very best writings. There is very little excuse to remain ignorant of the extent of our ignorance - and the proper remedy is a swift crash course in Mises and Hayek as percolated through the sharp mind of Mr. Kirzner.
November 26, 2021
" He has really good reasons!"
Thus spoke a Laramie County, Wyoming school psychologist in response to President Biden's Keystone Pipeline shutdown. The fact that really smart people are nescient with regard to basic economics is staggering.
Israel Kirzner's "Competition, Economic Planning, and the Knowledge Problem," may have a palliative effect. The book's 20 articles make clear that competition has an epistemic effect that cannot be replicated through central planning. Kirzner is persuasive in arguing that a dispersion of information leads to revised plans, and individual coordination actualized through a market economy, and leads to prosperity.This book deserves its just due.
Experience is a hard master. Jimmy Carter, "Phone Cheyenne."
Thus spoke a Laramie County, Wyoming school psychologist in response to President Biden's Keystone Pipeline shutdown. The fact that really smart people are nescient with regard to basic economics is staggering.
Israel Kirzner's "Competition, Economic Planning, and the Knowledge Problem," may have a palliative effect. The book's 20 articles make clear that competition has an epistemic effect that cannot be replicated through central planning. Kirzner is persuasive in arguing that a dispersion of information leads to revised plans, and individual coordination actualized through a market economy, and leads to prosperity.This book deserves its just due.
Experience is a hard master. Jimmy Carter, "Phone Cheyenne."
Displaying 1 - 2 of 2 reviews