Carry Water on Both Shoulders

|Peter Boettke|

That is what Murray Rothbard criticized Israel Kirzner of doing in his review for the Volker Fund of the book, Market Theory and the Price System (1963).  Rothbard was correct in that assessment, as Kirzner has in fact admitted.

Kirzner in that 1963 work, and then again in his more developed theoretical exposition in Competition and Entrepreneurship (1973), was trying to intellectually square his understanding of mainstream neoclassical price theory, and his understanding of Misesian price theory.  In short, he did not reject mainstream price theory, he accepted it but also accepted its own internal critique (provided by Arrow, but also pointed out earlier by individuals such as Joan Robinson) and sought to salvage the theory by way of Mises.  Arrow had asked how can price ever change to clear markets when all the actors are themselves price takers; and Robinson years earlier had pointed out that they only to get into equilibrium under standard assumptions was to already be in equilibrium.  Kirzner provides an answer with only slight modification of the assumptions to the neoclassical model.

In the comments to the post on my recent working paper with Fred (written for a volume honoring Kirzner's contributions), Peter Klein points out that the Mengerian tradition of price theory offers an alternative track that need not worry about such Walrasian puzzles.  I concede his point.  But would just insist that such a refusal to "carry water on both shoulders" does limit the ability to communicate across paradigms, and that the dominant scientific paradigm in economics circa 1960 was general competitive equilibrium theory.  In my reading of the history of modern economics, Kirzner's effort to engage the mainstream of economic theory enabled him to bring attention to Mises's contributions in a way that attempts to eschew that conversation did not.

In a certain fundamental sense, Kirzner did for Austrian economics what Robert Nozick did for libertarian political philosophy.  Austrian economics could be part of the mainstream conversation because in Kirzner's presentation it was proposing a solution to a problem that mainstream theorists themselves recognized, just as Nozick by addressing the Rawlsian theory of justice head on.  Neither Kirzner nor Nozick are completely persuasive to the mainstream, but their work is part of the conversation.  In Nozick's case we get discussions of rights as trumps and process versus end-states in justice.  In Kirzner's case we get discussion of entrepreneurship, the role of advertising, and outside of equilibrium welfare economics.

I do consider Buchanan to be fundamental to this intellectual effort with his restatement of the exchange paradigm, as well as Armen Alchian (and his shift away from the price taking model and to a price searching model of the competitive market).  But Kirzner's work was fundamental to the emerging respect for a dynamic theory of the competitive market process among the mainstream of economics.  A lot has changed since 1980, let alone 1960.  But Kirzner's subtle role in helping forge that change should not be forgotten.  Neoclassical economics was derailed in the 1940-1960 (see Frank Machovec's Perfect Competition and the Transformation of Economics), and Kirzner attempted to get fundamental theory back on track with the aid of Mises's theory of the market process.  We no longer exist in that same world --- theoretically, applied theory, and public policy --- and while I would not claim that Kirzner is solely responsible for this shift (he is NOT) but he did play a role.  And that role was only possible because he carried water on both shoulders.

Comments

[Roger Koppl]

I think Pete right about Kirzner. It supports his point to compare Kirzner's 1973 book to his 1982 article for the Mises centenary volume. Kirzner used to point to the latter as one of his three main statements. (The other two being C&E and his JEL article.)

I think Kirzner did not follow through consistently on the Lachmannian points he makes in the 1982 article. He did try to say that entrepreneurship is always equilibrating. Though he seemed to concede at other times that it is not. Austrians had to overcome these infirmities in Kirzner's position, which made them seem like big problems at about the time Jerry and Mario were working on their book. Thus, if you zoom in close enough, the criticism that Kirzner was too conservative seems right. If you pan out far enough, however, Pete's picture comes into view. It's one of those unusual cases in which you really can say that opposing views are both right.

[Gene Callahan]

Wow, Rothbard chose a weird metaphor -- because, of course, using both shoulders is the right way to carry water! I guess what was being recommended was carrying water on one shoulder, giving us the image of someone all lopsided, grotesquely hunched over to one side -- in fact, an excellent self-portrait by Rothbard!

[Peter G. Klein]

Pete, my response -- which you've heard before -- is two-fold. First, I think you vastly exaggerate Kirzner's influence on mainstream microeconomics. The Nozick of Austrian economics? Not a chance. Some influence on Virginia public choice, and heterodox types like Colander, perhaps but virtually none on MIT-style micro. And why would it have much influence, if it's just putting a faint "Austrian" gloss on the standard model, without affecting its essence or conclusions?

Second, by defining the problem as the existence or non-existence of equilibrating tendencies -- *within the Walrasian system* -- Kirzner directed Austrian economists' attention away from the alternative, Mengerian price-theoretic tradition that was central to Austrian economics from its origins through the 1930s and 1940s. Kirzner says there are equilibrating tendencies within the Walrasian system, Lachmann denies those tendencies within the Walrasian system, a grand controversy ensues, and before long virtually all Austrians take the Walrasian framework for granted. From this perspective, the Kirzner-Lachmann debate was a huge distraction and a setback for the Austrian school (though, of course, much interesting, valuable, and important work appeared in the context of that debate).

[Roger Koppl]

Peter K:

It seems like you are saying that the broadly Walrasian tradition is totally separate from the Austrian tradition of Mises and Hayek. Correct me if I have misunderstood. If not, well, I just don't see it.

In the 1930s and 1940s Mises, Hayek, Machlup, and the others thought of themselves (correctly!) as neoclassical economists and Walrasian GET was a part of that. Mises' ERE is pure Walras. Hayek's trade cycle theory starts with in general equilibrium. And so on. Now, as the calculation debate unfolds the Austrians saw that they handled GET differently than many other neoclassical economists. Thus we see things like Hayek's 1945 essay marking out important differences from other neoclassicals. By the time we get to 1970 the Austrian "neoclassical" view is no longer neoclassical. Partly the Austrians moved, mostly the label came to apply more narrowly. It is an interesting story with an big element of Menger vs. Walras. But GET is still a part of the Austrian tradition and not wholly separate.

[Peter G. Klein]

Roger: Not totally separate, but distinct. Consider the context: When Mises wrote in _Epistemological Problems_ that the Walrasian, and Jevonsian versions of marginalism "differ only in their mode of expressing the same fundamental idea and . . . are divided more by their terminology and by peculiarities of presentation than by the substance of their teachings," he meant in comparison to the German Historicists. In this sense, I agree, Austrian economics is part of a "neoclassical" tradition, broadly conceived. Even Rothbard saw himself as part of an older, "sounder" neoclassical tradition while he was writing MES. Consider the footnotes! But the Mengerian, Jevonsian, and Walrasian versions are different in important ways. Mises's ERE as "pure Walras"? Hardly! You are saying you see no important differences -- other than Kirznerian discovery, equilibrating tendencies, etc. -- between Arrow-Debreu and, say, Mises?

[Jacob Roundtree]

I am nearly completely ignorant of Kirzner's major work, so what contribution has Kirzner made to Austrian economics taken as a scientific tradition, rather than as a school of professional economists? Even just pointing out one contribution would help me better understand what Kirzner has contributed to our tradition.

[Jerry O'Driscoll]

Pete,

You are more convincing in your paper on Mises and the market process than on Kirzner's conribution. As you see from the responses here and at your previous post, you aren't convincing those who don't already agree on Kirzner's role.

In your paper, Kirzner comes across sounding like Alchian and UCLA. I won't say more because I don't want to pile on.

[Roger Koppl]

Arrow-Debreu is already pretty far from Walras-Pareto, Peter. That point aside I think agree with your last comment. But I don't see how it squares with your earlier comment that seemed to say something to the effect that Kirzner dragged Walras into the discussion artificially. Even if he had, BTW, it would be no criticism. Part of Pete's point is precisely that you gotta address the existing conversation in economics. Otherwise you're like a physicist working out the dynamics of phlogiston in the ether. Maybe the world is a plenum, but then you gotta show where modern physics goes wrong rather developing your alternative paradigm in splendid isolation.

[Steve Horwitz]

@Jacob:

One way to view Kirzner's contribution to the Austrian tradition per se (at least one I've argued) is that he offered a Misesian solution to a Hayekian problem. That is, he used Mises's entrepreneur to explain how markets empirically generate the learning process that Hayek identified in the 1937 "Economics and Knowledge" paper.

Hayek asked how the knowledge necessary to generate the observed relationship between prices and costs is made available to producers and consumers. Kirzner's answer is the Misesian entrepreneur.

You can read this as the Austrian view of Pete's point about Kirzner addressing the Arrow question.

[Greg Ransom]

Kirzner is great on fleshing out the reality of open ended discovery and genuine uncertainty in the economic process.

This stuff is at the core of the economic mechanism, but it isn't easy to talk about, and it certainly can't be captured or discussed non-pathologically in the language of mathematics.

[Greg Ransom]

The task of fleshing out the reality of open ended discovery and changes of understanding within a relative price / profit-loss system is a central part of task of linking together the Misesian entrepreneur and Hayek's knowledge problem / learning mechanism solution.

Kirzner has done more in this area than anyone I can think of.

[Current]

"It seems like you are saying that the broadly Walrasian tradition is totally separate from the Austrian tradition of Mises and Hayek. Correct me if I have misunderstood. If not, well, I just don't see it."

Yes. And before that Bohm-Bawerk, for example, veers into things very like general equilibrium.

[Ryan Murphy]

Can someone direct me to where I can find Rothbard's review? And what is the name of Peter Klein's paper de-emphasizing Kirzner?

Thanks

[Peter G. Klein]

Ryan, I think some of the comments on this and the sister thread refer to Dan Klein, presumably his lead paper in the Spring 2010 Journal of Private Enterprise. I also have a paper in that issue that deals with Kirzner: http://organizationsandmarkets.files.wordpress.com/2010/07/fk_jope_2010.pdf. The general argument I'm making here is presented in more detail here: http://mises.org/journals/qjae/pdf/qjae11_3_1.pdf. BTW I'm totally opposed to self-promotion.

[Peter G. Klein]

Sorry, the auto-link feature added the periods to the URLs. They should be

http://organizationsandmarkets.files.wordpress.com/2010/07/fk_jope_2010.pdf

and

http://mises.org/journals/qjae/pdf/qjae11_3_1.pdf

[Lode Cossaer]

So if I got it correctly, Kirzner's contributions are within a Walrasian framework - and trying to improve it Austrian style - which prof Boettke thinks is a huge succes, while prof Klein thinks this is not a good idea and we should go back to Menger-Mises and improve on that concept of price theory?

I'm just a philosophy undergrad, but could someone point out to me what is so Walrasian with the Kirznerian argument in Competition and Entrepreneurship? (Linkage to an article or something will do fine. :))

As far as I read it, it was a price theory relating to human action in an uncertain world and causal-realistic. So it seemed oke, as far as it went.

[David Andersson]

I think Pete B. is right. The way I see it is that Kirzner is a very compelling gateway drug, after which a small number try out the headier potions of Lachmann, Loasby or Rizzo. Indeed, I have been surprised by how many students get some of Kirzner's ideas, and yet seem totally confused when confronted with his critics (such as Rizzo's 1996 introduction to the 2nd edition of Time and Ignorance, which I think is quite persuasive). So Kirzner has undoubtedly had a much greater impact in term of the number of people affected. And this impact has surely clarified more than it has obscured their understanding of the world in the great majority of cases. Kirzner presents his theory in a way that is intelligible to the general open-minded reader, in the way that Nozick and Buchanan are also relatively accessible. So it's all a question of clarity and communication vs. depth and rigor (not that Krizner isn't deep and rigorous, but O'Driscoll and Rizzo probe the darkest depths of the economists' ocean!).

[Rafael Guthmann]

I don't see the fundamental difference between Menger and the walrasian view of price formation. Only that menger is more process oriented, while the walrasian focus is more on the end state of the process. In the end, the walrasian equilibrium is a special case of mengerian price theory.

Kirzner's 1963 book incorporates the mises/hayek discoveries of the 1930-40's into a micro textbook. My impression is that that book represented the standard austrian view of price theory in the 1960's. Yes, it is identical to mainstream microeconomic theory in many parts, but that's because austrian economics is quite orthodox economics.

[Peter G. Klein]

Rafael: Please see http://organizationsandmarkets.com/2007/09/14/menger-the-empiricist/ for some remarks on the differences between Menger and Walras. Menger himself did not see Walras's approach as a special case of his own, but as an entirely different approach.

[Michael]

Steve,

In your reply to Jacob you say: "You can read this as the Austrian view of Pete's point about Kirzner addressing the Arrow question."

If the "Arrow question" is similar to the coordination of plan through non-market decision making; does Kirzner address this? If I am misunderstanding the context of the "Arrow question," would you be kind enough to clarify?