F.A. Hayek

Economic Historians Are Wrong About the Austrian School, Says Israel Kirzner

|

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.

Friedrich A. Hayek, Nobel winner
Wikipedia

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.

NEXT: Study: Providing Teens With Free Long-Acting Contraception Dramatically Lowers Births and Abortions

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. If you haven’t read The Road to Serfdom (lately), give it a look.

    It’s downright eerie how, um, contemporary that book is.

    1. I read it 15 years ago and felt that way at the time. I’m sure I wouldn’t feel any different on re-reading it now (which I should do anyway).

  2. You know who else went to an Austrian school?

    1. Franz Joseph!

      1. And you know who went to school with Ludwig Wittgenstein?

        1. An Israeli Twerking Troupe?

    2. Your mother?

  3. 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.

    Well, another Austrian insight might be that income inequality is actually just another signal of what is valued in an economy, and therefore attempting to reduce it by governmental means is just creating noise rather than doing anything beneficial.

    Seriously, though, I am sick of the “inequality” bullshit. If they really want to see humans who are equal, they should visit a morgue.

    1. Seriously, though, I am sick of the “inequality” bullshit. If they really want to see humans who are equal, they should visit a morgue.

      Socialists are with you on that. Why do you think they have attempted to turn so many countries into morgues?

      1. It’s odd – I was thinking about the issue last night, and almost exactly as you stated.

  4. I think the biggest issue the Austrian school faces is who currently represents them most publicly. Paul expanded awareness about it but we are all familiar with his baggage, and Rockwell, Hoppe, DiLorenzo, etc. don’t exactly make for good PR for the school.

    1. The biggest problem is that the other schools tell pols what they want to hear and gives them cover to payoff cronies and buy votes. The austrians OTOH generally tell them that the only good they can do is to stop doing harm.

      1. I’m not saying that’s not an issue, but I’m speaking more about public perception. It’s not hard for your opponents to dismiss you as a bunch of kooks when the guys I mentioned are your most visible figures.

        1. Those people are visible figures because the media wants them to be. Look at the guys who produced the Keynes v Hayek show down (love those two videos). Had they done that stuff where Keynes was the man on top, they’d have regular newspaper columns like Krugnuts.

          It is just human nature for people to want to control uncertainty. Austrians ask people to embrace the chaos and it is just terrible.

          1. Those guys run the Ludwig Von Mises institute, they’re not random names in Austrian economics. Rockwell was close with Rothbard, probably the third most prominent Austrian, as well as Paul, the most prominent libertarian politician in recent years. LRC is also the most viewed libertarian site on the internet iirc.

    2. Re Calidissident,

      Paul expanded awareness about it but we are all familiar with his baggage, and Rockwell, Hoppe, DiLorenzo, etc. don’t exactly make for good PR for the school.

      I could understand your problem with Rockwell or DiLorenzo, but what exactly is your beef with Hans Herman Hoppe?

      I read almost everything he writes because his arguments are so perfectly expressed, leaving very little to implied thought. I recommend you read his most recent essays.

      1. Really? He’s an admitted white supremacist and has argued that monarchy is preferable to democracy. Even if you are in agreement with him on those things (and I’m not on both), it’s pretty obvious how those positions don’t make for good PR in our society. He’s even worse baggage than Rockwell and DiLorenzo as far as his beliefs go, although he’s not as well known to the general public.

  5. In equilibrium, profits converge to zero ? there can be no new profit opportunities by definition.

    Probably the single worst paradigm invented by statist economists and neo-clasical economists is “equilibrium”. So many papers and formulas written around the idea of equilibrium, all worthless.

    1. The whole field of economics is worthless as is all “social science”. They are all pseudo-sciences where you cherry pick some “facts” and create a narrative around it that would make any con man envious of your ability.

      Nothing can ever be truly proven since the path not taken can only be assumed.

      You can tell it is worthless because the typical response from economists when their adopted policies don’t work is the same for all junk sciences – it would work but we didn’t do enough of what I suggested. Nobody ever admits they were wrong nor do they have to.

  6. driven by the pursuit of profits

    Is this really the best possible motivation that drives innovation and the acquisition of new knowledge? Seems to me that innovation results from this only incidentally. What about when it’s more profitable not to innovate? Or would that be considered the innovation of a use for stagnation? For example: Newspapers would be more profitable if the Internet never existed. They thus would have had no incentive to drive innovation of digital media. They were forced to innovate because the technology was developed–and not by for-profit entities–which changed the nature of consumer demand for their product.

    Was Einstein motivated by profit? Is science (the most important generator of new ideas) in general motivated by profit? What’s with the depressing, cynical, Ferengi-esque approach to life? And what’s with not acknowledging that many sweeping innovations that changed the market forever came from throwing lots of money at basic research?

    1. What about when it’s more profitable not to innovate?

      It’s never more profitable not to innovate, conspiracy-theories about the suppression of water-running engines and cold fusion aside.

      Was Einstein motivated by profit?

      I don’t know. Did Einstein tell the Institute for Advanced Study that he’d be willing to work there for free? I’m sure he enjoyed being able to feed and clothe his three children.

      1. Many companies have gone broke “innovating”.

    2. What’s wrong about allowing people to freely choose what level of money or meaning motivates them?

      Also, name 5 innovations that came from government controlled economies.

      1. Don’t move the goalpost, I’m not an idiot. How about you name one major extant company that doesn’t profit by something the US government invented?

        1. Re: Tony,

          How about you name one major extant company that doesn’t profit by something the US government invented?

          Only individuals invent things. A government is an organization of people that purports to have the monopoly of force.

          You would have to explain how is it that there is NO self-interest in inventing things, inside or outside government, which is the important point in this discussion.

        2. The “US government” cannot “invent” something as it is not an individual. (It’s not even a corporation!)

          And even when the government funds research, the intellectual property of an innovation first belongs to the inventor. This stance has been codified into law by the Bayh-Dole Act and the ruling of Stanford v. Roche.

          Queen to h4, Checkmate.

          1. Split some fucking hairs why don’t you. If government funded it, then it wasn’t done by profit motive and it wasn’t done by the private free market.

            1. Re: Tony,

              Split some fucking hairs why don’t you. If government funded it, then it wasn’t done by profit motive

              Of course it was done with a profit motive. Bureaucrats are also self-interested, Tony. They want their name to be embossed on these projects. That’s their psychic gain.

        3. Don’t move the goalpost

          “That’s my schtick, Mencia!”

          I’m not an idiot.

          [citation needed]

          How about you name one major extant company that doesn’t profit by something the US government invented?

          Tony: the less he knows about a subject, the more he’s sure he’s right.

          1. As I’ve said before, Tony is the avatar of the Dunning?Kruger Effect made manifest into flesh.

            1. I completely forgot about that one. It was a standby on the World of Warcraft rogue class forums c. 2008.

    3. “the technology was developed–and not by for-profit entities”

      This is wrong.

    4. Re: Tony,

      Is this really the best possible motivation that drives innovation and the acquisition of new knowledge?

      Yes.

      Profit is not only about money. You profit from added knowledge, hence the drive to learn. You profit from being loved, hence the search for love, etc.

      Was Einstein motivated by profit?

      Yes. He profited from the added knowledge, the satisfaction of solving problems, of breaking paradigms. Again, don’t confuse profit with money. Money has no natural value; value is exclusively a psychological phenomenon and thus so is profit.

      For example: Newspapers would be more profitable if the Internet never existed.

      Which is why newspapers did not develop the Internet.

      They thus would have had no incentive to drive innovation of digital media

      They didn’t, Tony. It was independent journalists who innovated in electronic media like Michael Kinsley (Slate) and Matt Drudge, but printed media were dragged kicking and screaming.

      1. The print media had a ton of incentive for innovating in the digital space, and could have made a killing if they realized it and implemented a coherent plan to get readership and advertising instead of giving it up to bloggers and Craigslist and the like. Their myopia is typical of entrenched interests when confronted with a new challenge.

        1. Re: KDN,

          Their myopia is typical of entrenched interests when confronted with a new challenge.

          That is likely what was at play in the decision by the printed media to disdain electronic media for so long – remember when Krugman said that this “Internet thing” was just a fad?

          However, Tony seems to believe two things which are not accurate: one, that printed media jumped immediately into electronic media and two, that it was paradoxical since printed media would see profits go down instead of up, which is also his conclusion. Both statements are utterly false; printed media did NOT jump into electronic media (mostly because they did not see the revenue possibilities,) which makes his conclusion wrong as well. He simply wants to believe people do things for other reasons besides self-interest. He shows a great deal of self-interest in perpetuating these lies of his.

          1. remember when Krugman said that this “Internet thing” was just a fad

            Unfortunately no. I first learned of Krugman when doing my major thesis in college. My adviser said, “oh, and look at Paul Krugman. His scholarly research on this subject is great. Just don’t bring me anything written after 1998; that man ceased to be an economist the day he got his column in the Times.”

        2. It’s a new twist on the classic railroad mistake.

          The railroad companies mistakenly thought they were in the railroad business.

          Should have realized they were in the transportation business.

          Trucking companies ate their lunch.

          Newspaper companies thought they were in the newspaper business.

          Should have realized they were in the information business.

          Internet companies eating their lunch as we speak.

    5. Re: Tony,

      What about when it’s more profitable not to innovate?

      That’s still a motive for profiting.

      All our actions are driven by profit, Tony. ALL OF THEM. Whenever we act with a purpose, the motive is to profit. I profit from entering into these discussions by meeting new people and learning new things. I’ve learned to compose in English using better language. There are other competing choices that will yield a profit but I choose the one I believe will profit me the most. That is how people choose.

      1. You’re really stretching the definition of profit. All you’re saying is people are motivated by self-interest, which is a trivial truth (one that Ayn Rand somehow managed to develop an entire philosophy around, though).

        If you want to talk about self-interest, then in what possible way is it not in my self-interest to have a strong central government? Why should I give the slightest fuck about your tax rate and your weird little philosophical hangups?

        1. Re: Tony,

          You’re really stretching the definition of profit.

          No, I am not. That is the definition: the psychic gain you perceive from an action.

          All you’re saying is people are motivated by self-interest, which is a trivial truth

          You’re not making any sense. What is a “trivial truth”?

          then in what possible way is it not in my self-interest to have a strong central government?

          Did I say otherwise? I contend it is NOT in MY self-interest, but only YOU can know what interests you.

          Why should I give the slightest fuck about your tax rate and your weird little philosophical hangups?

          The only thing you should be concerned about is acts of aggression against you. The thing I am concerned about is acts of aggression against me.

        2. Why should I give the slightest fuck about your tax rate

          Says the guy constantly bemoaning other folks’ tax rate.

    6. The problem with you fucking statists is that you think it is your business what motivates other people.

      That’s it. Number one, no others are close.

      Stop minding my fucking business. Start minding your own.

      No matter how hard you try, you and everybody else do not have the brain power or information necessary to even mind your own business, let alone anybody else’s, and to think that you can mind *everybody* else’s business is mind boggling hubris.

      1. But you want to mind my business if my business is stepping on your lawn and stealing your stuff. We’re all socialists; it’s just a matter of degree.

        And you sound like a bratty teenager more than someone making a political argument.

        1. Idiot. You argue like a 5 year old, that’s why you treat everybody else as 5 year olds.

          Any society of more than one person is always intruding on each other. Do you think you are some kind of 6 year old genius?

          1. So you agree that we’re all socialists?

            1. We are all individuals. I double dog dare you to disagree.

              1. Since “individual” is defined as “the clump of cells constituting one member of the species homo sapiens” then yes, by definition, we are all individuals. We are also highly social creatures incapable of surviving without a social support network.

                1. Re: Tony,

                  We are also highly social creatures incapable of surviving without a social support network.

                  That doesn’t mean we’re not individuals, Tony, and it does not make the state indispensable. We can still live in a social structure without resorting to stealing from each other.

            2. Or I could ask you if you live in a nation, and are thus a national socialist.

              Fucking moron.

        2. Re: Tony,

          But you want to mind my business if my business is stepping on your lawn

          When your actions conflict with the rights of others, whatever your business is becomes secondary. How would you respond if I make it my business to rub my body against yours without asking you first?

          You’re simply conflating two different things: one is choice and the other is rights. Just because you can choose to do something does not mean you have a right to that choice.

    7. For example: Newspapers would be more profitable if the Internet never existed. They thus would have had no incentive to drive innovation of digital media. They were forced to innovate because the technology was developed–and not by for-profit entities–which changed the nature of consumer demand for their product.

      Isn’t this an example of exactly what this article is discussing? You had these newspapers competing and profiting. But the market allowed different inventors and investors to try their hand at different delivery schemes. It wasn’t just the internet, but also the 24 hour news channels. The market was the process by which inventors, investors and customers tried- and often failed- to allocate resources in a way that generated more value. And the newspapers suffered for it, but the overall economy enjoyed massive upheaval and unlocking of wealth.

      You mention that the government created a bunch of technology, which is true. In that way, the government was no different than an investor. But it was the market PROCESS that built the internet. Private and sometimes public investors constantly tried out new ways to serve customers, building the Ciscos, Yahoos, Googles and myriad other services that today displace Newspapers and other pre-internet markets.

      1. And to add to my comments, the process of market disruption flies completely in the face of those who felt there was a perfect equilibrium of supply and demand that a market could reach. In a command economy, the internet would not have been able to arise because the central planners would have looked at the market for newspapers, and “perfectly allocated” the resources, with so many newspapers and publishers. And all the other computer programmers who might create the next Google would have been allocated to something else. Changing the equilibrium to divert some resources to this new technology would have taken the Central Planner envisioning a whole new market space with all these online properties and creating a new system FROM SCRATCH.

        For every Amazon or Google today there were hundreds of dot-coms that went bust in a massive emergent process where individuals voiced their preferences for delivering and consuming. The idea that a Central Planner could have skipped that process and designed a new market as diverse and robust is the stuff of not science fiction, but religious fantasy.

    8. Was Einstein motivated by profit?

      Yes, he was. Explicitly. He was determined to win the Nobel Prize in physics because he had promised to give the money to his wife if she granted him a divorce. The money was to help her raise his kids in his absence.

    9. ” What about when it’s more profitable not to innovate?”
      It is never profitable in the medium and long term. YOU can stop innovating, but the competition will not – and you will soon turn blackberry, IBM, Xerox, etc..
      Also, do you realize the amount of money generated on the internet ad sales?
      Basic research breakthroughs have to be exploited – the profit motive is the engine – other wise why bother? It is just human nature to strive/thrive.

  7. As a economics student at a very non-austrian University, can anyone recommend a good Austrian economics textbook or similar? More looking for textbook rather than philosophy book. I’ve read road to serfdom.

    1. A site like Coordination Problem is probably a better place to ask.

    2. Everybody will tell you to read Human Action or Man, Economy and the State, and they would be right. But if you want an introduction to Austrian economics, the best choice is to start with Economic Calculation In The Socialist Commonwealth, by L. v. Mises

      You can also dive into Free Market economic through Free Market Economics: A Syllabus by Bettina Bien Greaves.

      Also try An Introduction to Austrian Economics by Thomas C. Taylor

      All of these books are found in the mises.org website.

    3. A very good beginner textbook is Lessons for the Young Economist by Robert P Murphy or if that’s a bit too simple check out Randall Holcombe’s Advanced Introduction to Austrian Economics.

      I’d recommend doing that before tackling Human Action or Man, Economy, and State.

      1. Re: Tak Kak,

        Agreed. Murphy’s book is an excellent introduction to economics and to free market economics.

        Also Gene Callahan’s Economics For Real People is a great, readable and very entertaining introduction to economic thought. I downloaded the pdf years ago and still read it occasionally – it is that good.

    4. Thank you, I will read all your suggestions. Not that I need convincing of the faults of Keynesian economics, the ridiculous assumptions of our models in class made that clear, but I haven’t read a more strict Austrian economics model and how that works.

  8. The absolute best a central planner can hope to do is to aggregate the information that already exists at a given moment.

    Not only that; central planners will always work with hopelessly outdated information, and this is the reason:

    Individual buyers make their decision based on opportunity cost and time preference, that is: they trade according to what they feel is the most valuable of two choices and they buy if they cannot wait any longer – may be now, may be tomorrow, but only the buyer knows when. These decisions affect the demand of goods on a daily basis once the aggregated decisions come to play. A central planner can’t possibly keep up with this ever-changing panorama, unless he happened to be living on a small island with 5 people.

    1. A central planner can’t possibly keep up with this ever-changing panorama, unless he happened to be living on a small island with 5 people.

      Exactly this.

      Many of my more liberal friends are also computer science majors. The creation of the SETI@Home and today the cloud framework was a good illustration to them. With distributed computing, you can get far better performance than in the most expensive super-computers. Breaking up complex problems (like resource management) into smaller bits allows great scaling. And millions of even stupid people can integrate local information far better than a team of top men.

Please to post comments

Comments are closed.