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How Markets Work: Disequilibrium, Entrepreneurship and Discovery
In the last hundred years or so, the neo-classical school has come to dominate microeconomic thinking. Economists concerned with competition have taken refuge in increasingly complex models which emphasize the end-state of competitive equilibrium. This paper presents, in non-technical terms, an 'Austrian' view of how a market economy works. The writer of this book follows in the Austrian tradition as he tries to crystallize the theory of entrepreneurial discovery and of its implications for economic understanding and policy.
80 pages, Paperback
First published June 1, 1997
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About the author
Israel M. Kirzner
63 books42 followersLeading economist of the Austrian School.
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Displaying 1 - 3 of 3 reviews
May 14, 2019
This is the best and most concise summary of Kirzner's Neo-Austrian theory of entrepreneurial competition and discovery. As such, it should be mandatory reading for anybody interested in economics, whether sympathetic to the Austrian position or not.
There is a lot of overlap between this volume and the other volume that I have reviewed elsewhere, called Competition, Economic Planning, and the Knowledge Problem. So, a lot of what I said in that review stands for this volume, as well. So, I hope I will be excused for quoting my other review regarding some of my disagreements with 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.
For all these reasons, Kirzner's theory fails to offer a comprehensive doctrine of how markets work. At best, it offers a new starting point for thinking about how we disequilibria, evolution, uncertainty, and subjective value operate to produce the complex dynamics of the markets. Kirzner fails to take the final step of seeing technological change and mutation as endogenous to the evolutionary process itself. This has been better explored by contemporary evolutionary economists.
However, despite my problems with the theory, this whole package is dynamite. The fact that it should be read with caution does not change the fact that it should be read. Read it.
There is a lot of overlap between this volume and the other volume that I have reviewed elsewhere, called Competition, Economic Planning, and the Knowledge Problem. So, a lot of what I said in that review stands for this volume, as well. So, I hope I will be excused for quoting my other review regarding some of my disagreements with 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.
For all these reasons, Kirzner's theory fails to offer a comprehensive doctrine of how markets work. At best, it offers a new starting point for thinking about how we disequilibria, evolution, uncertainty, and subjective value operate to produce the complex dynamics of the markets. Kirzner fails to take the final step of seeing technological change and mutation as endogenous to the evolutionary process itself. This has been better explored by contemporary evolutionary economists.
However, despite my problems with the theory, this whole package is dynamite. The fact that it should be read with caution does not change the fact that it should be read. Read it.
September 11, 2010
I strongly recommend this excellent book to all first-year economy students. The book concisely describes problems of neoclassic main-stream economy and argue for austrian theories.
[sk/cz kniha vyšla v liberálním institutu; sotva sto stránok, ale stojí to za to]
[sk/cz kniha vyšla v liberálním institutu; sotva sto stránok, ale stojí to za to]
January 15, 2013
An interesting paper examining mainstream neoclassical and Austrian market theories. The cornerstone of the neoclassical model is the market equilibrium theory, which stipulates that price is always tending towards market-clearing levels at an equal state between supply and demand. In contrast, the Austrian method interprets the market process as a series of "entrepreneurial discoveries," or the continual discovery of potential pure-profit opportunities in disequilibrium conditions. As a derivatives trader and economic dilettante, this stuff is right up my alley. Fascinating read.
Displaying 1 - 3 of 3 reviews