Every student of economic history knows the Austrian tradition had all but died out by the middle of the 20th century, supplanted by Keynesianism and a faith in central planning. Right? Wrong.
New York University's Israel Kirzner took on the conventional wisdom yesterday at George Mason University's Arlington, Virginia, campus, at an event, hosted by the Mercatus Center's F.A. Hayek Program, commemorating the 40th anniversary of Friedrich Hayek's acceptance of the Nobel Prize.
As most historians would have it, the free market Austrian school of economics had faded to obscurity by the 1930s and '40s. In reality, Kirzner said, that was an incredibly fruitful period for the school, with Hayek and fellow Austrian Ludwig von Mises actively making a series of novel doctrinal contributions. For Kirzner, their understanding of market competition as a process, not an equilibrium state, was one particularly groundbreaking development that came about during those years.
The belief that had (mistakenly) evolved among mainstream economists at the time was that the goal of market competition was to bring about a general equilibrium in which all the facets of an economy are balanced with each other and all the resources are efficiently allocated. These economists thought it realistic to expect central planners to be able to replicate, and perhaps even improve upon, that equilibrium state. The Austrians were meanwhile busy reminding people that market competition is a process that creates value precisely when an economy is in disequilibrium.
In equilibrium, profits converge to zero—there can be no new profit opportunities by definition. But outside of a perfect equilibrium, people who are clever enough can find gaps in the market and fill them. Entrepreneurs are therefore able to drive societal improvements through dynamic competition—to literally innovate their way to greater wealth.
Markets are a process, not an equilibrium state, Hayek said. More specifically, they are a process for discovering new knowledge. The absolute best a central planner can hope to do is to aggregate the information that already exists at a given moment. But the market process not only gathers and makes sense of vast, disparate information—it ushers into being knowledge that was not there before at all. Vernon Smith, another of the day's speakers and a fellow Nobel laureate in economics, quoted Hayek as saying, "I propose to consider competition as a procedure for the discovery of facts as [otherwise] would not be known to anyone."
This was actually a fresh and exciting revelation, Kirzner concluded, and it came at the very moment most onlookers were declaring the Austrian tradition dead. Mainstream economists at the time truly believed it was possible for central planners to acquire the requisite information and construct from it a utopia. Fortunately, Hayek and his Austrian school contemporaries were there to show the economics profession that the journey—an ongoing process of experimentation and discovery driven by the pursuit of profits—is far more important than the destination.
Of course, not everyone has taken Hayek's central insight to heart. Earlier this week, Scott Shackford published a dispatch from CityLab, the annual conference for urban planner types that he described as the "temple of urban progressive leadership." Featuring panels with names like "Narrowing the Gap: How Cities Can Fight Income Inequality," the confab is apparently a magnet for people who retain an unmatched faith in the ability of central planners to eradicate all society's ills. Unlike the George Mason event's attendees, it would seem CityLab's participants aren't quite up on their Hayek.