Monday, July 30, 2012

The Curious Case of Kirzner and Lachmann

Israel Kirzner and Ludwig Lachmann are two very prominent theorists associated with the modern Austrian school of economics. Both are very insightful, creative, and thought-provoking. Both have very distinct, clearly articulated views on the nature of the market process, which are fundamentally opposed to each other. Moreover, as far as I'm concerned, the view of each of them contains elements which are fundamentally opposed to each other as well.

Kirzner, for all his talk about the dynamic and change-oriented nature of the market process, effectively expunges from his analysis the most crucial element of entrepreneurial decision-making - namely, exercising judgment under conditions of uncertainty. Kirznerian entrepreneurs deal with ignorance (synchronic uncertainty), but not with diachronic uncertainty (the "unknown unknowns" of future market conditions), which is the source of both entrepreneurial profits and, equally importantly, entrepreneurial losses. Kirzner's theory of entrepreneurship cannot account for the latter and cannot demonstrate that they are outweighed by the former, and thus fails to establish a logically cogent proof of the existence of a market tendency towards equilibrium.

Lachmann, on the other hand, for all his talk about the heterogeneity, complementarity and multi-specificity of capital, as well as the temporal dimension of the capital structure of production, espouses the view that we live in a "kaleidic" world, where consumer preferences, the supply of consumer and producer goods of various orders, and technological possibilities constantly change, rendering the future essentially unpredictable, which I find incompatible with the possibility of bringing any capital good, let alone a full-fledged capital structure, into existence in the first place. This is because the production and utilization of capital goods presuppose their necessarily time-consuming assembly and successful deployment, which in turn presuppose a requisite, even if minimal, degree of preference stability and correctness of entrepreneurial foresight, neither of which can exist in a genuinely kaleidic world.

In sum, it is interesting to note that in an attempt to address a thoroughly realistic phenomenon of the market process, each of the abovementioned distinguished economic theorists created his own very insightful, but fundamentally unrealistic vision of economic reality, veering too far either in the direction of the neoclassical epistemological Panglossianism or in the direction of the historicist epistemological nihilism, while, perhaps unwittingly, abandoning the original Mengerian research paradigm, focused on, to quote Klein and Foss, "entrepreneurial action under uncertainty, investment, real prices, and the resulting profits and losses".

Monday, July 2, 2012

A Praxeological Proof of Political Opportunism?

According to the Ricardian Law of Association, specialization and division of labor increase productivity. From this it follows that any given field of professional activity will be dominated by specialists.

Franz Oppenheimer's distinction between the economic means and the political means, combined with the insights provided by the Ricardian Law of Association and the Austrian theory of entrepreneurship, suggests that whereas the economic means will be utilized most successfully by those capable of combining heterogeneous capital goods so as to produce the final goods that will harmonize with the uncertain future wants of the consuming public, the political means will be utilized most successfully by those capable of creating and wielding institutionalized violence, aggression, and coercion.

Now, let us assume for the sake of the argument that there is nothing inherently contradictory in the notion that one's liberty can be violated to one's own prudential or moral advantage, and, thus, that there is nothing inherently contradictory in the concept of a benevolent despot.

However, in view of all of the observations made in the previous paragraphs, the concept in question, even if logically coherent, at the same time seems logically constrained to denote an empty set. After all, just as someone who can operate profitably both on the gold market and on the silver market should be thought of as a better precious metals specialist than someone who can operate profitably only on the gold market, someone who can wield coercion both for the supposed good of his subjects and for his own private advantage is more specialized in using the political means than someone who can use them only for the former purpose.

In addition, even in our scenario of relaxed moral assumptions, achieving good results does not require initiatory violence - persuasion and charity are equally effective in this context, if not more so. In order to achieve opportunistic gains, however, a politician needs to resort to some form of initiatory violence, be it naked coercion or fraud. In other words, the political means are particularly well suited to advancing opportunistic, not benevolent behaviour.

In sum, in view of the praxeological nature of the political means and the praxeologically necessary consequences of the Ricardian Law of Association, for every would-be politician who sincerely believes that he is well suited for the role of a benevolent despot, there will be a far more effective politician concerned exclusively with his private gain, and the latter will always outcompete the former in the realm of power-seeking. Thus we get a purely logical proof of the conclusions of the Public Choice literature.