We were talking about Modigliani-Miller in class the other day, and it made me wonder - do any Kirzner-types spend much time talking about this? It seems like they should be very interested.
There's a line that I think is quite vacuous, but that the Kirzner fans love that goes something like "if you've written out a model in equilibrium you've eliminated competition from it", or something like that (the original sounds prettier). I think that's quite wrong for at least two reasons. The first is that it's precisely competition and continual competition in prices that keeps the system pinned down at equilibrium! A balance of competitive forces is hardly the absence of competition.
But of course price competition isn't the only sort of competition. Beyond that, there's always the prospect for competition that Kirznerians would be more interested in, and that's the effort of entrepreneurs to move the damn curves! I've never understood why people get so entranced by this talk about "alertness" and the semi-mysticism surrounding entrepreneurs that gets channeled into bad-mouthing neoclassical models in this literature. There's nothing mystical about it. Entrepreneurs are the guys that say "hey - I don't like this particular F(L,K). I'm going to try G(L,K) instead!". It's critically important to economic growth, and we ought to understand more about entrepreneurship, and that strikes me more as a management/sociology/psychology project. But it isn't absent from neoclassical models. It fits in very nicely with them: the curves aren't stable. Nobody thinks they're stable in real life. Entrepreneurs are the people who move those curves around and keep things dynamic and sometimes succeed and sometimes fail.
Which gets me back to Modigliani-Miller. The stripped down theory (which again, like Ricardian Equivalence, nobody believes but which offers a good place to start), says that firms will be indifferent between taking on debt or issuing stock. As far as that goes, that's fine. But there's one obvious advantage that debt has over equity. He who holds the equity moves the curves in the neoclassical model. You want to go from F(L,K) to G(L,K) - i.e., you want to render that vacuous Kirznerian sentiment mute? - then you have to be holding equity.
Now, maybe the owners don't want that decision. Maybe the owners know they're not particularly talented entrepreneurs and they want to hire someone to make that decision anyway, and then issuing stock might not be as unattractive.
Either way, it just seemed to me in talking about this that Kirznerian Austrians ought to be very interested in the alleged indifference between debt and equity. So have they been? Does anyone know? It may be that they've so thoroughly dismissed the neoclassical model as not incorporating entrepreneurship anyway that they haven't spent much time talking about it.
Noted for May 19, 2013
1 hour ago