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Kirzner on the Market

Mises Daily: Monday, December 04, 2000 by

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The Driving Force of the Market: Essays in Austrian Economics

by Israel M. Kirzner

Routledge, 2000. xii + 289 pgs. Review by Robert P. Murphy

Israel M. Kirzner

The Driving Force of the Market (Buy from Amazon.com for $100 or Laissez-Faire Books for $24.95) is the newest addition to Mario Rizzo and Larry White’s "Foundations of the Market Economy" series. Those familiar with the work of Israel Kirzner—the undisputed leader of the "Hayekian" wing of the modern Austrian School—will not be surprised by the clarity and insight displayed in this book. Kirzner continues in his role of elaborating and, at times, correcting the work of his cherished mentors, Mises and Hayek. (Indeed, the book closes with touching obituaries of these two economists, as well as one of Kirzner’s close friend, Ludwig Lachmann.)

The Driving Force is a series of essays, which—unlike his previous collections, which at times suffered from redundancy—covers a broad range of Kirzner’s interests. In this book, Kirzner deals with his patented notion of the nature of profit, but also with the full implications of subjectivism (and the mainstream’s refusal to accept them), the ethics of competition, whether the Misesian emphasis on universal rationality is the same thing as Becker’s economic "imperialism," and the distinction between Schumpeterian "creative destruction" and Kirznerian equilibrating "alertness."

In each of these essays, Kirzner exhibits his characteristic precision and almost unparalleled courtesy to intellectual opponents (with the one exception being noted below). The constraints of space require the present review to confine itself to only the most notable of the essays. In "Mises and his understanding of the capitalist system" (165-179), Kirzner starts with an "apparent tension" within the Misesian system: Mises seems to argue against government intervention in the price system, on the grounds that market prices reflect the best efforts of individuals to improve their situations. Yet, at the same time, Mises clearly speaks of "false prices" (which must be corrected through entrepreneurial action). It would seem trivial indeed to base any sort of optimality argument for the market on the grounds that it achieves merely the "plain state of rest."

Kirzner resolves the apparent tension by explaining the distinction between the plain versus final states of rest, and demonstrating that the Misesian emphasis on consumer sovereignty is a necessary component of his argument against government intervention. Here we have Kirzner at his finest; he goes out of his way to find a subtle (yet only apparent) contradiction within Human Action, which, when convincingly resolved, leaves the reader with a much deeper appreciation for the scope and coherence of the Misesian vision.

"The driving force of the market: the idea of ‘competition’ in contemporary economic theory and in the Austrian theory of the market process" (222-238) will pleasantly surprise the Rothbardian who laments the widespread appeal to empirical tendencies, rather than a priori categories, in economic arguments. In this essay, Kirzner argues that by definition the market process is "competitive," regardless of the level of so-called "monopoly power" which so worries the neoclassical.

Having said that, the Rothbardian will no doubt be unpleasantly surprised by the uncharacteristically stern rebuke Kirzner offers in "Reflections on the Misesian legacy in economics" (151-164) to those who emphasize the distinction between the Misesian calculation problem and the Hayekian knowledge problem. Although he softens the blow by a warm introduction (praising Rothbard and his followers), Kirzner quotes Joe Salerno’s comparison of Hayek to the market socialists, and then exclaims in a footnote:

The biting sarcasm employed in [Salerno’s comparison] is but a relatively mild example of the rhetorical excesses appallingly to be found in the "two-paradigm" literature against such writers as Hayek, Lachmann, and others charged with having diverged from the asserted "Misesian paradigm." I take this opportunity to strongly protest the use of verbal terrorism in Austrian economics. Even if (which is far from being the case) the asserted criticisms of Hayek, Lachmann, and others were valid, there would be absolutely no justification for the manner in which these great economists have been treated in the literature under discussion. The near-demonization of Hayek and Lachmann for alleged deviations from an asserted Misesian orthodoxy is a most distressing phenomenon. If Austrian economists (and the Review of Austrian Economics) are to be able to work constructively in the rough and tumble of the intellectual market place, anything approaching rhetorical brawling must once and for all be rejected. (162-163, fn 2)

First, the present reviewer must endorse Kirzner’s sentiments; surely it is not wise to virtually scrap Hayek or Lachmann’s immense contributions simply because the methodology of the former is too empirical and the latter too nihilistic for one’s liking.

However, the present reviewer must also consider Kirzner’s remarks a bit strident. Although it is a subjective matter, Salerno’s comparison struck this reader as biting irony, rather than "sarcasm." More significant, in "Mises and his understanding of the capitalist system," Kirzner argues that the perception of an "apparent tension" is quite understandable for "someone not familiar with Mises’s understanding of the market" (165), to "the beginner-reader of Mises who finds himself puzzled by these statements" (166), and to "students coming to Mises from a background in standard microeconomic theory" (167). Kirzner offers the comforting thought that a "more mature student of the Misesian system is able to reassure such a puzzled beginner" (166).

Inasmuch as the "apparent tension" is due to the interpretation of Mises given by none other than Joe Salerno, Kirzner is implicitly saying that Salerno is a beginner-reader of Mises whose misunderstanding is to be attributed to his use of neoclassical spectacles. Whether such a charge represents biting sarcasm or rhetorical brawling is left for the reader to decide.

But to return to the calculation debate, both sides must concede that Kirzner offers an ingenious argument. He does not deny the distinction between the calculation and knowledge problem, but claims that the use of market prices (for calculation) is only significant to the extent that these market prices integrate dispersed knowledge (161). Whether this novel insight reconciles the two camps must, again, be left to the reader to decide.

The present reviewer heartily recommends The Driving Force, yet is compelled to offer one warning: Kirzner’s style, precisely because of its incomparable precision and clarity, at times will surely be construed by some as tedious. In particular, the book contains a generous helping of parenthetical remarks. This must be a consideration for potential readers.

(To give two specific examples:

There is little doubt that Machovec (following McNulty (1967) and others) is correct in reading the classical economists as seeing competition (not, as Stigler had believed, as a perfectly competitive state of affairs which they were not quite able to articulate correctly and precisely, but) as a rivalrous process. (208-209)

But this assumption (of universal awareness of all circumstances relevant to choice) conceals within it also the assumption that the decisions being made (besides—or rather as a result of—their all being rational) have all somehow already been modified and coordinatively arranged in a mutually sustaining (i.e. an equilibrium) pattern. (268) )

The Driving Force of the Market is quite arguably the finest collection of Kirzner’s essays to date, which the present reviewer would, without hesitation, recommend to any Austrian reader. The Rothbardian who has not yet sampled Kirzner’s work would do well to pick up this volume, if only to familiarize him or herself with some of the best of modern "Hayekian" thought.

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Robert Murphy (ofur1984@hotmail.com) is a graduate student in economics at New York University.

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