Beyond the Bliss of Equilibrium

Rival Views of Market Society and Other Recent Essays, by Albert O. Hirschman, New York: Viking, 197 pages, $18.95

Albert Hirschman is well known as one of the pioneers of development economics. His 1958 book, The Strategy of Economic Development, is widely regarded as a classic in this field. But a number of his recent books have demonstrated Hirschman's deep interest in the history of ideas, particularly in the history of economics and other social sciences. Rival Views of Market Society and Other Recent Essays is a volume of recent writings by this senior scholar: Hirschman tells us in the preface that his favorite working title for this collection is "Last Essays, Volume One."

The collection reflects both of the intellectual interests of its author. A number of the pieces deal retrospectively with the emergence of Hirschman's own principal ideas in development economics. The two essays making up part two of the book (and including the essay that provided the title to the volume) deal with the history of ideas and with Hirschman's own reflections on the limitations of conventional economic theory.

The general reader, especially one concerned with understanding the economics of a free society, is likely to be more interested in Hirschman's broader observations on the nature of economics and the social sciences. Yet it's plausible to argue that it is his reservations about standard economic theory that have given character to his ideas on economic development (besides having helped shape his interest in the history of the social sciences.)

Readers who understand the benefits of market processes are likely to be disappointed in the book. These readers are likely to share at least some of Hirschman's reservations regarding conventional economics but will probably believe (as does this reviewer) that he has drawn the wrong lessons from his well-founded criticisms of mainstream economics. While this disappointment need not diminish one's admiration for Hirschman's lively and ingenious explorations in intellectual history, it should alert us to certain limitations that circumscribe his perspective.

The trap into which Hirschman has fallen is the common one of believing that both the core of economics and the case for a market economy rest entirely on the properties of the narrow neoclassical model of economy-wide competitive equilibrium, that hypothetical state of economic bliss where prices have precisely coordinated what is brought to market by producers and purchased there by consumers. Hirschman's own rich observations of both developed and developing economies taught him at the outset of his career to be wholesomely and profoundly skeptical of attempts to mechanically deploy this competitive-equilibrium model to address complex cultural and economic conditions of real-world economies. Pursuing the implications of this healthy skepticism, Hirschman was led early in his professional life to react negatively against what he calls "the visiting-economist syndrome; that is, against the habit of issuing peremptory advice and prescription by calling on universally valid economic principles and remedies…after a strictly minimal acquaintance with the 'patient.'"

This healthy disdain for the self-deluded expert who naively believes himself uniquely equipped by his graduate school training to engineer "balanced" economic growth for developing economies led Hirschman to appreciate the possibly stimulating effects of strategic imbalances, of disequilibrium states of affairs. It was this appreciation that nourished Hirschman's special contributions to development economics.

But the reader who has learned his lessons from Austrian economics—Hirschman does not appear to have heard anything at all about this school of thought—will immediately recognize that in focusing on the unrealism of equilibrium models, on the fatuity of working with models in which all relevant resources are assumed already known, and on the possibly stimulating effects of disequilibrium conditions, we are very close to what in fact constitutes the true case in economic theory for a free-market economy. That case does not rest on the balanced aesthetics of equilibrium conditions. Rather, it rests on the vigorous, dynamically competitive process initiated by entrepreneurial exploitation of the opportunities offered by disequilibrium states of affairs. In this process it is the attractive force of pure profit opportunities that inspires the imagination of entrepreneurs to discover new resources and production imbalances calling out for correction.

Moreover, appreciation of the central role in economic understanding played by this competitive-entrepreneurial discovery process might tend to soften, surely, Hirschman's unhappiness with the narrow boundaries that economic theorists have imposed on their discipline. A pervasive theme in this volume is the arbitrariness and artificiality that Hirschman sees in these erected boundaries—and the consequent hazards of blindly applying such narrowly conceived economic models to the complex social realities that make up the world outside theoretical journals. And Hirschman devotes an entire essay, "Against Parsimony," elegantly arguing for "complicating" the theory of choice. This would include recognizing the role of "metapreferences" (referring to man's deliberations concerning what he should concretely prefer), the role of ("noninstrumental") activities the utility of which is not wholly a function of their outcomes, and the subtle intricacies that are immediately introduced once awareness of benevolence is permitted into the analytical field of vision.

In pursuing these perceptive insights into significant aspects of choices made in society, Hirschman is following the long tradition of historical and institutionalist critics of economic theory. But there is a difference. Those critics were wrong in believing that their insights, perceptive though they might have been, invalidated the explanatory framework developed by economic theory. That framework was general enough to be able, in principle, to incorporate their insights. At the same time, it was the outstanding merit of economic theory to point to explanations that would hardly leap to the eye were it not possible to abstract, at least temporarily, from the "complications" introduced by these institutionalist critics.

Hirschman's crusade against theoretical "parsimony," on the other hand, seems inspired not by a sense of invalidity in the positive core of economics but by his skepticism of directly using economic theory to formulate concrete, activist, economic policy. But in this line of criticism, we may all heartily concur.

It is one thing to argue, on the basis of abstract economic reasoning, that a free market is likely to promote the fulfillment of human preferences most effectively; it is quite another thing to use that same economic reasoning to fashion a five-year development plan for a particular economy in utter disregard of the history and culture of that economy. The second of these two uses of economic reasoning is properly subject to Hirschman's strictures, but the first is much less vulnerable. Once it is understood that the case for giving the market free rein rests on its ability to inspire discovery of relevant preferences and relevant production possibilities, rather than on any particular pattern of equilibrium resource allocation mapped out in theory, the limited realism of economists' models becomes of much lesser concern.

In other words, Hirschman's dissenting ideas, both on economic theory and on development policy, have been justifiably provoked by mainstream misapplication of economic reasoning. One's sympathies with Hirschman's dissatisfactions would, however, be stronger if he had more carefully considered how much of traditional economics can be salvaged when the fashionable misapplications are avoided. As it is, one can warmly admire Hirschman's wide reading in current and earlier social science, one can appreciate the urbane scholarship with which he delves into intellectual history—and yet regret the presence of a certain "blind spot" in Hirschman's field of vision. What this blind spot has obscured, it may be submitted, is an appreciation for the character of dynamic, spontaneous market processes and for the long tradition in economic literature in which such processes have been explicated.

Israel Kirzner is a professor of economics at New York University and the author of Discovery and the Capitalist Process, among other works.