Austrian Economics Reading Group Session 4 Spring 2010

The NC Austrian Forum met for the fourth time this past Friday (March 26, 2010) and discussed “Equilibrium Versus Market Process,” by Israel M. Kirzner and “On the Central Concept of Austrian Economics: Market Process,” by Ludwig M. Lachmann.

There were unfortunately almost as many professors as there were students—fortunate if you’re one of the students. There were only 2 graduate students and three undergraduates. Hopefully, now that Spring Break is behind us, there will be more next time.

One of the first issues that were brought up was by Stephen Margolis. He thought a critical point was when Kirzner asks, “If no one raises or lowers price bids, how do prices rise or fall?” In the model of perfect competition, the solution is through perfect knowledge. No adjustment process is necessary because we are always in equilibrium. However, that is not the world in which we live. So then how does it get done? Without the actions of the entrepreneur, it doesn’t get done. We also looked at what several principles economics textbooks had to say and it was not encouraging.

Kirzner next draws a distinction between Robbins (Robbinsian) and Mises (Misesian) conception of economics. As Kirzner states,

“Lord Robbins defined economics as dealing with the allocative aspect of human affairs, that is, with the consequences of the circumstance that men economize by engaging in the allocation of limited resources among multiple competing ends. Mises, on the other hand, emphasized the much broader notion of purposeful human action, embracing the deliberate efforts of men to improve their positions.”

Here we see the fundamental difference: for Neo-Classicals it is a simple, static maximization problem. For Austrians on the other hand, it is the searching for means to accomplish ends through time.

For Kirzner, the entrepreneur is the key to the market moving toward equilibration. While we might not ever get to such a point in the real world, the fact that the market equilibrates allows us to engage in comparative analysis.

In the next article, Lachmann rejects this position. He argues that each transaction might coordinate one person’s plans, but at the same time it might throw another’s plans into chaos. Thus, there is no such thing as moving closer to equilibrium for there is no such thing as equilibrium outside of the static state.

In Lachmann’s words, “The market process is the outward manifestation of an unending stream of knowledge. This insight is fundamental to Austrian economics. The pattern of knowledge is continuously changing in society, a process hard to describe. Knowledge defies all attempts to treat it as a 'datum' or an object identifiable in time and space.”

While it is hard to deny such a position, it also leaves one in a state of economic nihilism. How does one conduct any comparative analysis if everything is kaleidic?

Lachmann argues, “To say that the market gradually produces a consistency among plans is to say that the divergence of expectations, on which the initial incoherence of plans rests, will gradually be turned into convergence. But to reach this conclusion we must deny the autonomous character of expectations.”

I agree that we do have to deny the autonomous character of expectations. I think that expectations are shaped by experience. In a market setting, if one raises price and expects to sell more units, then that person will not be in business for too long. The nature of our expectations is shaped by how the market works. Expectations cannot be random and to the extent that Lachmann means this, he is wrong.

What do you think?

On a separate note, the NC Austrian Forum decided not to cover the next two readings on Capital Theory because the readings assume some background knowledge of people and issues. As a result, the two readings for next week will instead be: F. A. Hayek, (1935) “The Conditions of Equilibrium between the Production of Consumers' Goods and the Production of Producers' Goods,” Prices and Production, 2nd edition, Lecture 2, pp. 32-68. (The pdf is for the whole book, so don't just hit "print.") The second one is, Ludwig M. Lachamann (1977) “Complementarity and Substitution in the Theory of Capital,” Capital, Expectations, and the Market Process, pp. 197-213. Again, the pdf is for the whole book, so don't just hit "print."

Then we will cover Rothbard’s article “The Austrian Theory of Money,” and O’Driscoll and Shenoy’s article “Inflation, Recession and Stagflation.” These will round out the semester and then it will be on to Fall Semester. (Wow, time has moved fast!)