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Bizarro-World Kirzner Awarded the 2014 Nobel Prize in Economics

  • Riksbanken Skylt

Here's a real shocker:  The 2014 Nobel Prize in Economics was not awarded to Israel Kirzner, as many Austrians fervently hoped.  Instead the prize was given to Jean Tirole, a French engineer, mathematician and economist for advancing "The Science of Taming Powerful Firms,"  Tirole for all his technical proficiency and inventiveness is a garden variety neoclassical economist whose views on competition, efficiency and economic welfare are worlds apart from Kirzner's. Plus ça change, plus c'est la même chose. Tirole won the prize for his work in devising new methods to improve regulation of industries dominated by a few large firms with "market power."  Tirole uncritically accepts the long entrenched neoclassical view that “oligopolistic” firms commit the unpardonable sin against economic efficiency of being able to “influence the prices, volume and quality” of products in the markets in which they operate while planning production on the basis of expectations of each other’s decisions.   In other words they do not operate according to the assumptions of perfect competition under which each firm is infinitesimally small and unable to vary the price or quality dimensions of its product one iota from that of its equally teeeny-weeny competitors, whose actions it does not take account of in its own production decisions. Compounding the ”market failure” of oligopoly is the fact that dominant  firms know more about the product that they are selling than the regulatory authority.   This is  a species of the  problem of "asymmetric information" in which each entrepreneur is, heaven forfend, more intimately familiar with the attributes of the product he is producing and selling than consumers of his product. In any case, using game and contract theories, Tirole was able to contrive “a clever set of production contracts” between the regulator and dominant firms that solve the problem of asymmetric information while giving the firms an incentive to produce and cut costs while draining away “excessive profits—a bad thing for society. “ So, Tirole was awarded the Nobel prize for concocting complex technical solutions to what Austrians have long known and taught to be pseudo-problems for a dynamic market economy driven by rivalrous competition among entrepreneurs eager to earn profits by anticipating and serving ever-changing consumer demands. Regarding oligopoly, Murray Rothbard in 1962 incisively clarified the phenomenon and showed that it was tractable to general economic analysis, which oligopoly theorists had long denied.  Furthermore, Rothbard demonstrated that game theory was inapplicable to oligopoly, at a time when game theory was still an arcane discipline in its infancy and a plaything of a handful of mathematical economists.  Thus Rothbard (pp. 725-26)  argued:

The relevant consideration is not the fewness of the firms or the state of hostility or friendship existing among firms. Those writers who discuss oligopoly in terms applicable to games of poker or to military warfare are entirely in error. The fundamental business of production is service to the consumers for monetary gain, and not some sort of “game” or “warfare” or any other sort of struggle between producers.  The jockeying and raising and lowering of prices that takes place in“oligopolistic” industries is not some mysterious form of warfare,but the visible process of attempting to find market equilibrium. . . . The same process, indeed, takes place in any market, such as the “nonoligopolistic” wheat or strawberry markets. In the latter markets the process seems to the viewer more “impersonal,” because the actions of any one individual or firm are not as important or as strikingly visible as in the more. “oligopolistic” industries. . . . And, in oligopoly situations, the rivalries, the feelings of one producer toward his competitors, may be historically dramatic, but they are unimportant for economic analysis.

As for “asymmetric information,” Ludwig von Mises and F.A. Hayek showed long ago that, far from a “market failure,” this phenomenon is one of the fundamental conditions for the very existence of markets.  The Mises-Hayek point was emphatically and eloquently expressed in  a recent article by Tom DiLorenzo (p. 252)

 Consider these questions: Who knows more about home building—home builders or home buyers? Who knows more about supplying grocery stores with fresh meat—ranchers and farmers, or average consumers? Who knows more about manufacturing automobiles—automotive engineers employed by automobile manufacturers, or car purchasers? Who knows more about producing and marketing articles of clothing—clothing manufacturers and distributors or clothing shoppers? The point . . . is that all information about all products and services is asymmetrical in successful, capitalist economies because of the division of knowledge (and labor) in society. If we all had symmetrical information about all of the above tasks, none of the above-mentioned businesses and occupations would exist. It is neither desirable nor possible for everyone to have symmetrical information.  To paraphrase Mises, what distinguishes man from animals is the insight into the advantages that can be derived from cooperation under the existence of asymmetric information and the division of knowledge in society. . . . Indeed, differences in information—and different interpretations of the meaning and importance of information to each individual—is the sole cause of trade and exchange.

Joseph Salerno is academic vice president of the Mises Institute, professor emeritus of economics at Pace University, and editor of the Quarterly Journal of Austrian Economics.

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