If you were to summarize in three points what the fundamental roles of the market are; what would you say? Austrians have a comparative advantage in this exercise, as they are the only ones with a truly realistic and fully coherent market theory. There is actually too much to say and it is hard to summarize it all in three points – which is also why it is interesting to try.
In my view, the market’s three main roles are:
- A knowledge discovery process via entrepreneurial competition;
- A feedback process via the profit and loss system; and
- The result of the first two leads to an accountability role providing governance.
The market as a discovery process of knowledge is a theme that runs deep in Austrian economics. From F. A. Hayek and his famous 1945 paper “The Use of Knowledge in Society” to I. M. Kirzner and his Competition and Entrepreneurship. The knowledge which would enable a better coordination of individuals’ plans is dispersed or non-existent. Entrepreneurial competition is the process by which this knowledge comes to be revealed and used.
The market as a feedback process is the other side of the discovery process coin. The discovery process cannot take place without the existence of pure profits: they are the incentives for discovery. Profits and losses are the sorting mechanism, which helps weed out good (i.e. socially beneficial) entrepreneurial ideas from bad ones. This presupposes institutions: the law of property and contract – as it evolved in the English Common Law for instance. This second role has been explored by many but is exemplified in L. Mises’s great paper: “Profit and Loss”.
The market as providing governance is a more recent theme now explored by many young (Austrian) scholars. This is the idea that self-governance emerges from market relations. My fellow co-bloggers P. Boettke and P. Leeson have done interesting work in this field. Boettke's paper Anarchy as a Progressive Research Program is a reference. Leeson has many papers on the subject. Among others, I recommend his Trading with Bandits and Cooperation and Conflict.
As this is my last post before Christmas, let me wish you a Merry Christmas.