Edited and written by David Gordon, senior fellow of the Mises Institute and author of four books and thousands of essays.

Discovery in the Balance

Spring 2001

The Driving Force of the Market: Essays in Austrian Economics by Israel M. Kirzner (Routledge, 2000; xii + 295 pgs.)

In a masterly essay included in The Driving Force of the Market, Israel Kirzner asks whether Hayek can best be seen as a hedgehog, who sees one big thing, or as a fox, who sees many things. If the same question is posed about Kirzner himself, the answer admits of little doubt. The distinction that Isaiah Berlin adapted from Archilochus seems made for our author. He is a hedgehog among hedgehogs, developing throughout his work a central insight.

The insight in question can at once be explained if we turn to "Rationality, Entrepreneurship, and Economic `Imperialism'," a penetrating discussion of the work of Gary Becker. Professor Kirzner finds in the analysis of the famed Chicago economist a fundamental flaw. Becker's entire apparatus assumes that equilibrium is at hand. "An examination of Becker's work in applying the economic approach to areas usually reserved to other social sciences, indeed reveals that the assumption of universally attained equilibrium is taken very seriously and quite self-consciously" (p. 266). (I digress to point out that Kirzner mildly upsets my equilibrium by placing a comma between subject and verb. I fear that he quite often thus lapses into grammatical sin.)

Here lies Becker's error and Kirzner's central insight. The market cannot accurately be characterized by the equations of equilibrium, which assume that actors, relying on perfect knowledge, always choose optimally. To make this assumption flies in the face of reality. Actors in fact operate in the midst of uncertainty, a circumstance that inevitably gives rise to errors and offers a chance to correct them.

Kirzner criticizes without mercy economists who see optimality everywhere. How can they fail to grasp that the market is a process, not a static state of equilibrium? Some Chicago economists go so far as to extend the assumption of universal optimality to governmental intervention. "The late George Stigler, pursuing this logic to its bitter end (an end many are likely to consider a reductio ad absurdum), argued that . . . [t]o declare a public policy to be economically `wrong' is . . . not to assert a scientific conclusion: it is merely to engage in "preaching". The world, according to its own lights, is always in an optimal state. But all this seems, surely, abundantly perverse" (p. 261).

We have not yet reached the core of Kirzner's work-the center of the center, as it were. Because economic actors make errors, entrepreneurs have room to operate. An entrepreneur alertly recognizes that prices somewhere are out of line. He can, by his perception of error, "buy low and sell high," thus earning a profit. Each correct act of entrepreneurship brings production to greater accord with consumers' demands and thus moves toward equilibrium. But of course the data constantly change and equilibrium never arrives.

As our author sees matters, the entrepreneur is in essence an arbitrageur. Kirzner campaigns for his view with all the skill of a great general, but at one point he overextends himself. On the arbitrage theory, "the emphasis . . . is on the ability of the superior entrepreneur to identify, more correctly than others are able to do, where today's market undervalues future output" (p. 118). So far, so good; but now Kirzner falls into error.

It does not follow from Kirzner's arbitrage theory that the successful entrepreneur corrects a misallocation of resources, as he more than once suggests. He states, on one occasion: "The market process consists . . . in the continual correction of false prices that occurs in the course of entrepreneurial competition. . . . False prices are false in that they incorrectly reflect the urgency of consumer demand for the various alternative possible products that can be created with these factors. It is this discoordination between what might be produced and what in fact is being produced, which offers alert entrepreneurs opportunities for pure gain (p. 153, emphasis mine).

But if the error that the entrepreneur perceives is that future prices will exceed future costs, why need there be any present misallocation of resources? Even if all goods were produced in the exact quantities consumers now demand, estimates of future prices might still be out of line. Hence, the entrepreneur need not detect something that is now being produced in the "wrong" quantity; it is enough that he foresees an error in futures markets.

It would be folly further to do battle with so distinguished an economist in his own specialty. Prudently, then, I turn to another topic. Our author, ever the hedgehog, endeavors to extend his insights about the entrepreneur to ethics: and here I cannot think the result is entirely successful. He contends that entrepreneurs, as they profit from perceived errors, bring about an increase in the extent that people's plans are coordinated. Of course, entrepreneurs often err, but still the tendency toward coordination dominates. "For although entrepreneurs can . . . make errors, there is no tendency for entrepreneurial errors to be made. The tendency which the market generates toward greater mutual awareness, is not offset by any equal but opposite tendency in the direction of diminishing awareness" (p. 31, emphasis and grammatical sin in original). The tendency toward coordination never completes itself in equilibrium, but nevertheless is a pervasive feature of the market.

From this tendency, our author generates an ethical criterion. Plans of action are coordinated, he contends, if each actor takes account of everyone else's action. And not just what each person in fact does must be considered: each must bear in mind everyone else's alternative actions. As an example, "were two airplanes to collide, we would say that the actions of their respective pilots were not mutually coordinated. Each pilot failed to take into account what the other pilot was doing" (p. 136).

We have not yet reached Kirzner's criterion. It is not, as you might have guessed, the extent to which actors in the economy have their plans in coordination. Rather, it is the extent to which a dynamic tendency exists to bring about this happy state of affairs.

Our author, with his customary precision, exactly specifies the sense in which he claims that his criterion is objective. To accept it as a goal, he readily admits, involves a judgment of value. But whether the criterion is met is a pure matter of fact. "What is needed for an objectively-based normative economics, is a criterion which . . . can be unambiguously identified by economic science" (p. 134, grammatical sin in original).

You might at first think that Professor Kirzner has landed himself in a quandary. Even if the extent to which the criterion is met can be objectively determined, how does this help him if accepting it involves a value judgment? Does he not at once fall back into subjectivity? But I fear that I have thus far been unfair to him.

With his customary sagacity, our author has anticipated our objection, as would be evident had I not truncated the quotation just given. Kirzner goes on to say that the criterion must seem "likely to be able to serve as a norm for goodness in the light of independently established, widely shared or otherwise assumed moral principles" (p. 134). Our author thinks, then, that although accepting his criterion involves a value judgment, it is one that bears its truth on its face.

And this is exactly what I question. No doubt each person is usually better off if he knows what other relevant actors will do, though not always. (Suppose, e.g., that you would not have undertaken a risky but beneficial action had you not been ignorant of someone's possible response.) It does not follow from this that everyone is better off if Kirznerian coordination prevails. Let us return to our author's favorite, the entrepreneur. He can hardly rate it an improvement if others become aware of his intention to buy low and sell high. If they do, they will block his moves and he will gain no profit.

I suspect Professor Kirzner will respond that this objection misfires. He does not claim that his criterion measures an increase in aggregate social utility. Quite the contrary, he denies that such a thing makes scientific sense. Why, then, do I judge his criterion by a standard he explicitly disclaims?

But if the criterion is not a measure of welfare, what is its purpose? Why is the mere spread of knowledge taken to be a good in itself? Kirzner wants a criterion that relies on commonly accepted ethical principles, but he does not come close to providing that. One can easily think of cases such as his pilots example in which an increase in knowledge is noncontroversially good. I venture to suggest, though, that these examples will be ones where knowledge increases welfare. Absent this, the criterion rests on nothing.

Our author of course dissents. He claims, if I have understood him, that anyone "morally concerned that members of society undertake their actions in a way that does not inevitably spell disappointment and/or regret (such as must ultimately ensue from patterns of action which incorrectly anticipate and depend upon the actions of others in the system)" (p. 145) should endorse the coordination criterion.

By no means has he shown this. Why is it taken as obvious that the more people can achieve the goals they anticipate, the better? Perhaps in other circumstances, more people will fail to achieve their plans, but at the same time will face alternatives that they judge more desirable than those they would face under coordination. You might well prefer an even chance of being hanged to the certainty of execution, even though you can much more readily anticipate the actions of others in the latter situation.

However much one may disagree with Professor Kirzner on various points, one cannot but admire the painstaking skill in conceptual analysis he displays in this outstanding book.

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