Quotation of the Day…

by Don Boudreaux on December 26, 2016

in Adam Smith, Competition, Complexity & Emergence, Economics

… is from page 52 of Frank Machovec’s important 1995 volume, Perfect Competition and the Transformation of Economics (original emphasis):

kirzner-presentation-6-638In classical economics, a specific class of agents did not take prices as given.  To the entrepreneur, prices are not parametric; that is, entrepreneurial behaviour is not based on the assumption of price immutability.  Entrepreneurs are constantly examining the current price structure of substitutes and complements to discern information that others do not yet see, and they exploit their findings to create new utilities [consumer satisfactions] which, in turn, alter relative prices.  In short, entrepreneurs undertake actions to change the terms of trade.  Instead of adjusting themselves to existing conditions, they pursue initiatives that induce other participants to adjust to newly discovered opportunities which better serve consumers.

DBx: Non-economists might think the above observation about the role of entrepreneurs to be trivial.  Yet it is not at all trivial, at least not when consideration is made of the course of mainstream economic theory over the past 90 or so years.  As Machovec ably shows in his book, the understanding of market economies that was achieved by most 18th- and 19th-century economists such as Adam Smith, J.B. Say, and Alfred Marshall was deeply misunderstood by most 20th-century economists.  The earlier economists understood the market to be a process – to be incessantly driven by entrepreneurial search for, and exploitation of, existing ‘market imperfections’ so that these imperfections might be improved by entrepreneurs (in rivalry with each other, and tested by consumers’ spending choices).  These improvements yield profits to successful entrepreneurs, as well as gains to others (the gains, of course, being the reduction or elimination of some market imperfections).  The earlier economists also understood that even as one set of market imperfections is eliminated by entrepreneurial actions, other sets of such imperfections are created or revealed.  And so the process goes, unendingly but with steady improvement in the lives of ordinary people.

In contrast, mainstream 20th-century economists came to regard competition as the situation that exists when all profit opportunities have been successfully and fully seized.  Competition, in this more recent notion, is an end-point – a static arrangement with no further change possible (unless change be sparked by events from outside the arrangement).  Competition, in this more recent notion, is not a process at all – it involves no rivalry and no change and nothing that any human being would recognize as genuine choosing.  Rather, competition, in this more recent notion, is a description of an idealized end-state.  In this end-state, no further human action is necessary or even possible.  The agents in the models are simply along for the ride.  The only roles of these agents are, as consumers, to carry their utility functions and, as producers, to house, computer-like, in their brains information about existing techniques of production.  The people in these models aren’t people at all; they are algorithms packed with accurate and unchanging information.

When economists see the world as mainstream economists have seen the world for the past nearly 100 years, they understandably notice that the reality in which they live differs greatly from the ideal markets that appear in their textbooks and theories.  Yet these economists – given their failure to really understand market processes – are not attuned to how real-world market processes respond to, and typically ‘correct,’ the ‘imperfections that these economists see all about them.  They see the ‘imperfections’; they are blind to the role of entrepreneurs and of market processes.  These economists then rather simple-mindedly resort to prayer: they pray to a higher power – the state – to intervene to correct the problems.  Q.E.D. (or so they suppose).

Most mainstream economists today are truly men and women of faith – faith deep and abiding – faith that the superior being that we call ‘state’ is our good guardian, our one savior, our caring redeemer.

Perhaps the single greatest contribution of the Austrian school of economists – along with that of Austrian fellow-travelers such as Aaron Director, Ronald Coase, Armen Alchian, Jim Buchanan, Leland Yeager, Yale Brozen, Vernon Smith, Harold Demsetz, Julian Simon, Bruce Yandle, Richard Wagner, Deirdre McCloskey, Arnold Kling, and Russ Roberts – has been to keep alive a focus on the process of competition.


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