Austrian versus Chicago Formalism

    

Reading Lewin's second follow-up to the Lachmann exchange, I wonder how Austrians will react to this observation: "I was surprised to find in the "other Austrians" views much closer to the neoclassical paradigm than Lachmann's and views apparently devoid of his concerns about the implications of divergent expectations."

This point fits perfectly with Lavoie's assertions about the logical formalism of the Austrianism of his day, a point which shocked many Austrians at the time who frequently cited their well-known criticisms of static equilibrium of the neoclassical sort.

To my mind, and I am most definitely not an economist but an historian, one can begin to see just what Lavoie was driving at by examining one of the great debates between Kirzner and that premier Chicagoan, Gary Becker, in their justly famous exchange on the value of the idea of purposefulness in economic analysis.  

It seems clear that most people's evaluation of the outcome of that exchange hinges, as Lewin's remark suggests, on their different background assumptions. This is historian's territory, so let's apply a little Verstehen.

In his original post, Lewin made this remark that has stayed with me for reasons about which I was not at first entirely clear, but that now, in light of the above quote, seem altogether understandable:

Kirzner asked a simple question: if the existing price and quantity are not market-clearing, how does the market move toward equilibrium? Who makes this happen? And of course the answer is, anyone who sees an advantage in doing so, anyone who sees that the market price is likely too high or too low and acts accordingly, will move the market toward that market-clearing price. There is no guarantee that that market-clearing price is a fixed target. It may be changing. Yet as long as these entrepreneurial actions are successful in creating value for the actors, the price and quantity will move toward market-clearing.

Notice the last sentence. That "market-clearing" price is an abstraction that would not exist in the absence of the subjective valuations of the actors and most especially of the "entrepreneurial actions" involved. That new price comes into being only when the entrepreneur recognizes the wants of persons within an existing set of exchanges and says, "I can do better." What results is a new market. Kizner knows this well, designating that moment as the entrepreneurial element. 

Yet the abstract concept of the "market clearing" point exists in the mind of economists as an entity in itself, by which they then explain formally "why" actions are adjusted. How difficult it must be, then, to maintain the Lachmannian focus when one's professional inclination is to explain by abstracting from a point that is presumed by the very terms of analysis to be already out there rather than reasoning from the interiority of the acting persons involved!

I believe this explains much of what was going on between Becker and Kirzner. To recap that debate, Gary Becker, asserted that purposefulness in any form, whether in its more broadly formulated Misesian variety or the more traditional modes of rational self-interest, is entirely irrelevant to the analysis of markets because of budgetary constraints. Kirzner went to great lengths to contend that such a view leaves out valuable information: "If molecules," he wrote, "acted purposefully, no physicist would dare ignore the information which he could derive from this very fact." (Kirzner [1962] 2009, 219)

But most of the profession, including Kirzner, was focused on the formal process of getting to that abstract equilibrium point, and so he made no further headway other than with those who already affirmed the value of purposefulness as a category.

Here is where understanding Lachmann comes in. What would he have said?  Well, we actually do not have to go very far to find out. As noted, Lachmann's essay on the significance of Austrianism gives his position clearly. We must dive into the content of purposes, in this case, entrepreneurial plans.

The value of purposefulness is not in its categorical form. If that were all, the efficacy of the concept would be pretty meager, and Becker would win simply on the ground that purposes of any kind are superfluous to the running of his formulas. The key is to recognize the subjectivism of Kirzner's entrepreneurial element through the actual, and one might add, historical, creation of new markets, which is what actually occurs in real life.

It is when an entrepreneur recognizes a consumer want or a perceived need and a means to fulfill that desire (i.e., that a want can be satisfied in another way via cost savings or technical innovation) that all the action of specific purposes and their importance come into focus. Becker's formalism is helpless to explain such innovation in either its Schumpeterian or Kirznerian forms. In the Chicago mode, entrepreneurship is just baked into the cake. It just happens.

For most social scientists, and I would hope most economists, that sort of crude tautology could never amount to much of an explanation of anything.  At best, it might give us a way of understanding exogenous changes to specific resource inputs of a given, fairly stagnant, and already existing market. But what does it tell us about the creation of anything really new? Exactly nothing.

It is here that Lachmann's perspective ultimately rescues one of the central tenets of Austrianism, and it is why his work must continue to hold the attention of economists in general.