Saturday, February 11, 2012

Kirznerians and Modigliani-Miller

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.

7 comments:

  1. So, are you starting to develop a deeper interest in finance now, Daniel Kuehn? :-P

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  2. I'm not sure if Kirzner ever talks about the Modigliani-Miller model, but Kirzner's price theory is probably closer to the Neoclassical one than you give it credit it for. The way I like to think of it is having the X access also show time, so the movement to MR=MC is one that occurs over time. I mean, the model still has its dynamism problems, but all these models are meant as ideal types anyways.

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  3. "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."

    No, if everyone is a price taker, then there is nothing for them to compete by doing.

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    1. Gene, I'm confused by your comment. Could you elaborate?

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    2. Stickman,

      What I think he's saying is that firms in competition are price setters in the sense that they must set the price lower than their competitors. This is actually somewhat similar to what Böhm-Bawerk says: the price of goods in competitive industries aren't necessarily set by consumers (or preference/demand), but by competing firms.

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  4. I hear pretty frequently that "neoclassicals" already know this and everyone knows the curves aren't stable, etc. But then you look at a list of practices that are considered anti-competitive by neoclassicals, and most of them are bizarre to consider anti-competitive unless you assume we are in equilibrium.

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    1. There's also the issue of the drivers of growth. Sometimes people list technological progress, capital accumulation and division of labour - they don't even mention entrepreneurship. Of course entrepreneurship is tied up in all those things, but they are all closely tied anyway so it makes sense to mention it too.

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