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Reflections on Ethics, Freedom, Welfare Economics, Policy, and the Legacy of Austrian Economics

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Reflections on Ethics, Freedom, Welfare Economics, Policy, and the Legacy of Austrian Economics
Israel M. Kirzner. Eds. Peter J. Boettke and Frédéric Sautet
Carmel, Ind.: Liberty Fund, 2018
xiv + 782 pp.

Abstract: Everyone interested in Austrian economics owes a great debt to the editors of this vast collection of articles by Israel Kirzner. Two themes are commented on here: 1) the value-free nature of economics, and 2) the gap between the Kirznerian account of the entrepreneur and the causal realist view of Salerno and Klein. On the second theme, it appears that Kirzner may have come closer to Rothbard’s view that capitalist entrepreneurs appraise profit-making opportunities in the face of an uncertain future.

uncertainty    entrepreneurship   kirzner

Everyone interested in Austrian economics owes a great debt to the editors of the vast collection of articles by Israel Kirzner, one of the foremost students of Ludwig von Mises. Readers will find that Kirzner stresses certain themes repeatedly, and I should like to comment on two of these.

Enemies of the free market often claim that defenders of capitalism are ideologically motivated. Mises, for example, worked in Vienna as an official of the Chamber of Commerce, and he does not disguise his ardent support of the free market. Can those with other ideological commitments reasonably dismiss his views? Kirzner argues that they cannot. Economics is strictly value-free. Mises’s personal values and political allegiances make no more difference to the validity of his economic theory than Einstein’s political views do to the validity of the theory of relativity.

Kirzner puts the point in this way: “Mises, the passionate ideologue on behalf of classical liberalism insisted—in fact he passionately insisted—on the wertfreiheit of the economist. Precisely because he believed that economic science can offer powerful support for classical liberalism, he saw it is as crucially important that the reputability of that science be maintained beyond suspicion…. But the economist’s teachings can have the desired effect, Mises realized, only if the economist qua scientist maintains an austere detachment from the political ideological debates to which the science may be able to make crucial contributions.” (pp. 214–15, emphasis in original)

Even so strong a critic of the free market as Gunnar Myrdal recognized the commitment of the Austrian school to value freedom: “When Gunnar Myrdal wrote his The Political Element in the Development of Economic Theory… he gave the Austrian School high marks for refraining from permitting their political aims to shape their science.” (p. 213)

As an example, when Mises shows that economic calculation under socialism is impossible, this conclusion is in no way dependent on Mises’s own disdain for that system. It is a strictly scientific conclusion.

Important though this theme is, another theme surpasses it in interest to students of contemporary Austrian economics. Kirzner does a good deal to clear up the mystery surrounding his account of the entrepreneur, and in so doing narrows the gap between his position and the “causal realist” view that Joseph Salerno and Peter Klein have taken over and further developed from Mises and Rothbard. Some distance remains, but using material Kirzner himself provides, we can see why the causal realist account is better than its rival.

The key difficulty with Kirzner’s account concerns the opportunities for entrepreneurial discovery that he holds are “out there,” waiting to be found. Is this not bad metaphysics? Kirzner himself recognizes the difficulty:

My theory of entrepreneurship has sometimes been criticized as viewing the future as a kind of tapestry waiting to be unfolded: it is already there; it is simply behind the screen; it has only to be unrolled and then the future will come into the field of vision, whereas the truth surely is, the critics point out, that the future does not “exist” in any philosophically valid sense. It must be created so the notion of alertness in the sense of seeing what is out there in the future is a mistaken notion. (p. 696)

Kirzner accepts the criticism. He is not, he says, assuming that discoveries are “out there” but means only that entrepreneurs try to anticipate the future: “I recognize the philosophical validity of this kind of criticism…. I think the distinction surely is one between an ex ante and an ex post perspective…. From this perspective, the philosophical validity of the idea of future events is really not to the point. Ex post we look back and say: if only I had seen this coming. The opportunity was there. Does an opportunity exist? An opportunity is always something in the future: it does not exist. Yet we do talk about an opportunity existing, meaning that ex post we can say: well, the action I took was successful; or the action I took missed being a more proximate action that I might have taken.” (p. 695)

Has not Kirzner here come closer to Rothbard’s view that capitalist entrepreneurs appraise profit-making opportunities in the face of an uncertain future? Kirzner does not recognize this. He says, “Murray N. Rothbard… has argued that this recognition and emphasis by Mises on the role of uncertainty in the generation of pure profit is inconsistent with the interpretation which the present writer [Kirzner] has given Mises’s theory. For Rothbard, an ‘alertness’ theory of profit of profit must do away with uncertainty…. I have not been able to follow Rothbard’s reasoning on this matter….” (p. 349, note 33)

But exactly the target of Rothbard’s criticism was the view of profit-making opportunities as “out there” in the world, a view Kirzner has given up. In the article that Kirzner cites, Rothbard says:

Moreover, by stressing alertness, Kirzner is emphasizing a quality of perception, of perceiving an opportunity that virtually exists, as a real thing out there. In reality, however, any profit opportunity is uncertain, and rather than be a real existing entity, it must always be subject to uncertainty. It is never as simple as mere alertness. (Rothbard 1985, 281–82)

The difference that remains between Kirzner and the causal realists centers on profits and losses to the entrepreneur. The causal realists stress profits and losses to capitalist investors, but Kirzner is not satisfied: “It is true that the disembodied purely entrepreneurial function cannot be observed in the real world…. So that indeed entrepreneurial losses will, in the real world, be suffered by owners of assets. But this does not mean that the phenomenon of pure entrepreneurial loss is intrinsically associated with the purely capitalist function…. Entrepreneurial profit and loss is to be traced to the purely entrepreneurial function.” (p. 742)

We can use points Kirzner makes elsewhere to render his claim irrelevant. In his penetrating discussion of the Chicago School’s “economic imperialism” Kirzner very effectively notes that, absent the pursuit of monetary profit and loss in the capitalist market, no mechanism exists to enable good insights to drive out bad ones. “Within the setting of the market the entrepreneurial element in human action can be expected to set in motion a process of mutual discovery…. But outside the market setting…. there is nothing in the character of interpersonal interaction which suggests any systematic discovery process (analogous to the discovery process inspired in markets by the lure of pure entrepreneurial profit).” (p. 165)

In his skeptical remarks about non-market “spontaneous order,” Kirzner returns to this theme. “The emergence within society of a common language, a common set of standards for weight and measurement, and common codes of social behavior, differ sharply from the emergence of a market-clearing price for wheat or for unskilled labor in competitive markets…. The demonstration that widely accepted social conventions can emerge without central authoritarian imposition does not necessarily point to any optimality in the resulting conventions. What is demonstrated…. by short-run coordination theory (i.e., by the theory of the free-market economy) is that there does exist a spontaneous tendency toward social optimality under the relevant conditions.” (pp. 64–66)

Kirzner has thus given us sufficient grounds to render nugatory his insistence on “pure” returns to the entrepreneur outside the capitalist market. Nevertheless, readers will close the volume with admiration for Kirzner’s devotion to Austrian economics, immense learning, and dialectical skill.

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