What Did Kirzner Accomplish? Reply to Pete Boettke

    

In response to my criticisms of Kirzner’s price theory, Pete (”Situating Kirzner”) focuses on three related issues: 1) what Kirzner did, 2) how he did it, and 3) why he did it that way.

First: What is the nature of Kirzner’s achievement? Pete describes some core insights of neoclassical economics -- an account of the interconnectedness of markets as well as the equimarginal principle, the law of one price, and the marginal productivity of factor pricing -- while noting an important gap: “the theory failed to provide a theory of adjustment and adaptation to changing circumstances.” Fine, but my point is that Kirzner’s work does not fill that gap. Kirzner does not offer a theory of adjustment and adaptation; he simply asserts that adjustment and adaptation take place (via the existence of entrepreneurial discovery). Most economists -- in particular, the neoclassical economists Pete tells us that Kirzner wishes to reach -- would understand a “theory” of adjustment to be a fully specified dynamic model or, at least, a set of comparative propositions: under conditions A, B, and C, adjustment and adaptation proceed along the lines of X, Y, and Z. But Kirzner steadfastly refuses to do this, because in his system, alertness is an explanatory primary.[15] Put simply, what exactly is a neoclassical economist supposed to get out of Kirzner’s writings? What would this economist do differently, other than adding a footnote or introductory remark? “We assume that because of entrepreneurial discovery, market outcomes are close enough to the equilibrium results described here that the conclusions go through….”

Second, who is Kirzner’s audience? Pete tells us repeatedly that Kirzner was not talking to the general public, or to Austrians, but to mainstream professional colleagues. “Kirzner was writing to a reluctant profession in the heyday of positivism and formalism, while trying to present an alternative vision of economic science to students and would-be professional economist.  To do that, you have to begin with the existing conversation and engage in terms that your peers will understand and your students will be somewhat familiar with.” I am not all sure of this. Kirzner certainly did not adopt the language and rhetorical methods of his professional peers -- after all, he used English prose, not mathematical models. Moreover, if Kirzner wanted to reach professional economists, why did he largely eschew the major professional journals? Kirzner has a lengthy CV (https://www.econ.nyu.edu/dept/vitae/kirzner.htm), but he has published mainly in “house” journals, outreach periodicals, and books, (which themselves were largely collections of previously published articles).[16] I suspect that few mainstream economists have heard of these outlets, let alone read the papers. (Pete will respond that Kirzner published books with the University of Chicago Press and with Routledge, but in mainstream economics departments these are not remotely comparable to articles in top-tier, peer-reviewed journals.)

Third, what else could Kirzner do? In Pete’s words, “How [else] do we retain the core insights about general interconnectedness and theoretical constructs such as the equimarginal principle, the law of one price, and marginal productivity theory of factor pricing, and make conversational sense with our peers in this profession, unless we are willing to discuss in part on their terms and to tackle problems that they see in their own system”? Simple: we do it the way Austrian economists since Menger have done it: by using standard terminology as much as possible, by situating our work within the relevant literature, by engaging our critics, and so on. Kirzner’s particular approach -- invoking the concept of entrepreneurial discovery to harmonize Mengerian insights with Marshallian, Walrasian, and Arrow-Debreuvian equilibrium analysis -- is one way to do it, but hardly the only way. Menger, Böhm-Bawerk, Wicksteed, Fetter, Davenport, Mises, Hayek, Rothbard, and most of today’s practicing Austrians accept the interconnectedness of markets (which, as Mises noted in his introduction to the 1952 edition of The Wealth of Nations, is one of the great achievements of the British Classical School), some version of the equimarginal principle, and marginal-productivity theory, without adopting neoclassical equilibrium modeling. (See my 2008 article, “The Mundane Economics of the Austrian School,” listed in the Liberty Matters bibliography, for details).

To use just one example, marginal productivity is central to my own understanding of entrepreneurial profit and loss. In a hypothetical equilibrium state (such as Mises’s evenly rotating economy), factor prices equal their discounted marginal revenue products (DRMPs). In the real world, entrepreneurs bid against each other for factors based on their beliefs about DMRPs, which are only realized ex post. The accuracy of these beliefs is what generates profit and loss: entrepreneurs earn profits when they can acquire factors at prices below the eventual realized DMRPs, and losses if they pay more than the DMRPs. To an Austrian, marginal-productivity theory doesn't say that factor prices always equal DMRPs, for then there would be no profit and loss -- the phenomena we are trying to explain!

[15.] See Foss and Klein (2010) for some critical comments on Kirzner’s attempt to incorporate discovery into political economy. Kirzner wants to say that discovery somehow works better under conditions of economic freedom, but does not show how, because discovery is also present under socialism and in the mixed economy.

[16.] Besides his methodological exchange with Gary Becker in the Journal of Political Economy (1962), a methodological piece in the Southern Economic Journal (1965), a symposium paper on Menger in the Atlantic Economic Journal (1978), one paper in the Eastern Economic Journal (1978), and an invited review for the Journal of Economic Literature (1997), I count a large number of book chapters along with articles in the Cato Journal, Critical Review, The Freeman, Il Politico, Intercollegiate Review, Journal des Economistes, National Review, New Individualist Review, Economic Affairs, and so on. I’d guess less than 10 percent of Kirzner’s total output appears in peer-reviewed journals.