Austrian Economics Forum Fall '11 #5--Chapters 5 & 6

I know that this should have been written up earlier, but life intervened.  I also think that I have been dragging my feet on this entry because I was not particularly impressed with the conclusion of Kirzner's book Competition and Entrepreneurship. 

Is it heresy to say that I did not think that his book was all that great?  Of course Cordato is right when he says that the book needs to be looked at in the context of the time it was written.  However, why hasn't Kirzner released a second edition?  There have been several objections raised about Kirzner's book, so why hasn't he written the second edition to clear up some of the misunderstandings?  I would find it interesting to know if anyone has ever asked him about this.  Anyway to the book...

Chapter Five is an odd chapter.  Eleven pages into it, he says that what you just read is prelude and that we can finally get to his point and the real purpose of the chapter.  Kirzner states:

"I will show that because market phenomena frequently represent the outcomes of long chains of decisions (each one a prerequisite for the later decisions), a market process which is seen as competitive from one point of view may turn out to be monopolistic when evaluated from a different vantage point.  This highly important insight is the real purpose of this chapter, and the discussions thus far are to be viewed as introductory."  p. 198.

Then why did I just bother to read the first eleven pages?  Why not just get to the point?  One of the frustrating things about reading Kirzner, at least for me, is that he is so verbose!  Can we not write a sentence without all the hand-waving and qualifications?  Perhaps this is a product of the time he was writing.  Perhaps it is written this way because this was written in a time where these ideas were not just going against the grain, they were moving in the completely opposite direction.  Okay fine, I'll accept this argument, but still it makes the book exhausting to read.

Okay the ranting is over.

The point that he does (eventually) make is a good one.  We should reject the standard usage of Long- and Short-Runs.  Instead, we should focus on decision points.  At each decision point there is a weighing of options and opportunity costs.  The "Long-Run" then becomes a whole stream of decision points.  It occurs "earlier" in a production process.  The "Short-Run" is a decision point "later" in the production process.  Of course, the terms "earlier" and "later" are problematic.  If we are looking at a production process that is a point-input and point-output, then we can make that distinction.  If the production process is a closed, one-time, system, then we can easily see "earlier" and "later."  Unfortunately, most production processes are not like this.  Most have continuous input and continuous output production periods filled with recursive loops. 

Nevertheless, this is a step in the right direction.  When we start to focus on the nature of the decisions, then instead of talking about Long- and Short- production runs, we can look at "Decision Horizons."  A decision horizon can either be long or short.  The point is that it is the entrepreneur (and the rest of the market indirectly) who is determining the time horizon.  The time horizon is then only useful within the context of the decision.  The result is that we can basically jettison the standard terminology and focus on the contexts without all the misleading verbiage.

Chapter Six's main contribution is to drive home the point that best way to judge the "efficiency" of an economic system is by how well it brings together and incorporates information into active plans and then how well it reacts and adjusts to changes as new information is revealed.  Thus, Kirzner makes the point that the absence of coordination is "inefficiency." (See page 216.)  Perfect Knowledge assumes away this problem.  Thus Kirzner is adopting and extending Hayek's argument in "The Use of Knowledge in Society." 

So when we are to examine the welfare implications of a policy, we need not create some fanciful social utility criterion.  Instead, we look to how well information is absorbed and acted upon.  The entirety of profit and loss calculation becomes the feedback mechanism that we use as the benchmark.  Government's incorporation (of information) and feedback mechanisms are slow and imprecise by comparison.  Thus, we (Auistrian economists) have a very different approach to governmental policies to "solve" market outcomes.  Instead of having some omniscient, god-like bureaucrat standing in judgement over outcomes and adjusting players like pawns on a chess board where every move is as correct as the chalk-board allows, we look to how well does the policy absorb new information.  Then we look to see how well it adjusts as conditions, such as taste and preferences, change. 

If the welfare policy criterion was the only point to come from the book, then I would say that it is worth reading.  Luckily there are many more good points in the book. 

One last dig, I find it odd that Kirzner continuously returns to the Natural Resource Monopolist case.  I think that such a case is so rare that one cannot actually list a historical example of one.  My point is that I think that if we edit those sections out, the book would be greatly improved.  In Kirzner's defense, these are my just my opinions looking at it from a perspective from 39 years after it was written. 

Overall, it must be read by anyone who claims to be an Austrian economist.  It can be a challenge, frustrating at times, and a bit of a slog through several sections, but it frames the debate through which the Austrians approach monopoly theory, welfare theory, entrepreneurship and the role of knowledge for most of the past 40 years.  Do not just read summaries like this to understand Kirzner.  Perhaps I have missed something.  Perhaps a $20-bill-of-knowledge is just sitting there.  You may be more alert to it than I, and then, you'll be able to take advantage of your entrepreneurial acumen and show me up.