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Quotation of the Day…

… is from page 133 of Israel Kirzner’s 1985 volume, Discovery and the Capitalist Process:

Market prices in the Austrian view are not primarily approximations to a set of equilibrium prices; instead, they are (disequilibrium) exchange ratios worked out between entrepreneurial market participants.  On one hand, these exchange ratios with all their imperfections reflect the discoveries made up until this moment by profit-seeking entrepreneurs.  On the other hand, these ratios express entrepreneurial errors currently being made.  Market prices, therefore, offer opportunities for pure profit.  And we can rely on these opportunities to create a tendency for market prices to be changed through the rivalrous bidding of alert entrepreneurs.

DBx: The market is not simply a process; it is an error-discovery, error-correcting, and creative process.  And so to judge the real-world market at any moment according to the criteria of what economists call general competitive equilibrium – or “dynamic stochastic general equilibrium” – is a mistake.  General-equilibrium models correctly take account of the enormously complex economic interconnectedness of individuals and firms throughout a modern economy, but these models incorrectly emphasize equilibrium conditions.  A focus on the interconnectedness yields far more genuine economic insight than does a focus on the hypothetical equilibrium.  Unlike focusing on equilibrium conditions, focusing on the interconnectedness does not blind us to the incessant experimentation, error-discovery, error-correction, and genuine creativeness of the market process.

An economist overly focused on equilibrium, for example, might see (or thinks he sees) wages for some workers that are below the value of those workers’ marginal products, and then conclude that government should somehow force those wages up.  In contrast, an economist focused on the process understands that, as long as there are no government-erected barriers to restrict labor mobility, these excessively low wages are profit opportunities that entrepreneurs will likely soon exploit.  This economist understands also that government intervention (say, a minimum-wage statute) blocks this process of market adjustment.

Even if this intervention helps some workers without harming any other workers, it has achieved only what the market process was likely to soon achieve.  That is, at best a specific instance of market error was corrected by government sooner than it would have been corrected by the market process.  Some might chalk this achievement up as a positive accomplishment of intervention.  But government is emphatically not a process – at least not one as nimble, nuanced, and quick as the market process.  Once in place, the intervention – here, the minimum wage – remains in place.  If market conditions change (as they inevitably do), the minimum wage in the above example that was ideal when it was imposed almost certainly becomes a source of harm in the future.  The entry into the labor market of new workers who cannot produce enough per hour to justify their employment at the minimum wage search for, but do not find, jobs.  Some businesses that would have profitably served their owners and consumers – and have been a source of profitable employment for low-skilled workers – never are established because the minimum wage makes those particular business plans unprofitable.

There’s a deeper issue: the economist or politician or bureaucrat who claims to have discovered a market imperfection that can be remedied by government intervention claims to know more than do the entrepreneurs and other market actors actually on the ground and actually spending, or not spending, their own money.  While in principle the possession by the economist or politician or bureaucrat of such superior knowledge cannot be ruled out, in practice such knowledge is so unlikely to be possessed by these market outsiders that we should, as a rule, ignore outsiders who claim to possess such knowledge.  Why should these market outsiders – none of whom has much, if anything, personally at stake on their claims – know more than market participants about the specific opportunities currently extant in the market?  Why should we trust the assertion of a professor in his office, or of a politician on the stump, that some particular unexploited profit opportunities currently exist in the market, given that entrepreneurs and other market actors actually on the ground in the market have incentives to exploit and, hence, to rid the market of particular profit opportunities?  The likelihood is far too great that any such claim by such a professor or politician or bureaucrat or policy-wonk is mistaken.


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