Forty Years After the Hayek Nobel: Thoughts on Israel Kirzner

Yesterday I attended an event at George Mason University celebrating the fortieth anniversary of Hayek's Nobel Prize. There were two sessions open without invitation - a keynote by Israel Kirzner and a panel discussion with Eric Maskin, Vernon Smith, and Ed Phelps. I was very much looking forward to hearing Phelps but unfortunately he was ill and his remarks were read. I'll talk about my thoughts on the Kirzner session in this post, and the laureates' session in another.

Israel Kirzner, professor at NYU, was described by Peter Boettke in his introductory remarks as the leading light of the modern Austrian school. Kirzner's work focuses on "the market process" (essentially how agents get to equilibrium - or at least how they get to wherever they're getting to) and the role of entrepreneurship in the market process. Kirzner is very much in that line of Austrians where, if you tell him you're a subjectivist he'd trump that by insisting that he (and not you) is a radical subjectivist. Indeed, "radical" came up several times in his talk, primarily to describe the advances made by Hayek and Mises in the 1937 to 1945 period. Kirzner presented what he called a revisionist history of thought to explain the lack of appreciation of Austrian economics between the late 1930s and the 1970s and the reason for the Austrian revival in the 1970s.

Kirzner's proposition is that after the debate with Keynes Hayek and Mises both turned their attention to other matters and the result was a "radical" advance in our understanding of the market process through Hayek's work on knowledge and Mises's work on socialist calculation and Human Action. Allegedly the mainstream did not appreciate how radical these contributions were and so they missed the boat until forty years later Hayek got the Nobel (for other work), the mainstream refocused their attention on the Austrians, and economists like Kirzner, Lachmann, O'Driscoll, Rizzo, and others were ready to demonstrate what the fruitful advances of 1937-1945 really had to offer. The lull and revival was therefore not all that surprising, and it mainly rested on the failures of the mainstream rather than the failures of the Austrians (a rather attractive narrative for an Austrian of course!).

I don't entirely buy this revisionist history, but what I do like about it is that it refocuses us on the work on knowledge, subjectivism, and economic calculation. I suspect the lull in interest in the Austrian school had far more to do with the failure of Austrian macroeconomics than the failure of the mainstream to appreciate this other work, but I like the opportunity to put the 1937-1945 work center stage nonetheless.

What bothers me about the revisionist account is that it relies too heavily on an implausible story about how mainstream economics is full of dunces. Kirzner argues that mainstream economists are preoccupied with equilibrium models where genuine competition and discovery doesn't really go on and most importantly nobody talks about how you get to equilibrium. There is a germ of truth to this insofar as mainstream economists don't spend a large share of their time on this problem (Kirzner does), but the idea that the market process is lost on them strikes me as misleading at best and borderline libelous at worst. I had to laugh to myself when Kirzner went through these points because just a week ago when I was covering an intro micro class for my adviser we were talking about market equilibrium and optimal decision making, and I posed precisely this question to them - what do agents do when they're not at an equilibrium that gets them to equilibrium? The students had a much easier time providing sound answers to that question than when I threw the Slutsky decomposition at them later in the discussion, and the answers more or less conformed to what Kirzner presents. What's more I think every economist has these market process stories in mind when they think about why getting to equilibrium (even if it's a constantly moving target) is reasonable.

I've made this point about Kirzner before (and it's worth saying at this point that I haven't read a lot of him so if someone that has has thoughts to add, please do), and often people think I'm denigrating the guy. I don't think my point should be thought of in this way. It's quite clear that Kirzner has thought about the market process in more depth and in different ways than other economists. He definitely deserves credit for that. What I challenge is the idea that these fundamental points are lost on the profession, or that the profession has gone down the wrong path by working with models that include a lot of equilibria. It should also be clear that I'm challenging the idea that any of this is really all that "radical".

So far I have a disagreement in the emphases of Kirzner. But I also had a problem with many of his actual claims. One astonishing thing he said was that it is a disequilibrium situation when one agent subjectively values the production of a good at $50 while another subjectively values the use of that good at $100. The entrepreneur, in pursuit of profit, takes advantage of this "arbitrage" opportunity, but an equilibrium perspective misses this entire dynamic that's at the heart of the market process. This is nonsense (although it's possible he didn't explain it as clearly as he wanted to). Even if we imagine a market in stable, boring ol' equilibrium there are going to exist agents that differentially value goods in this way. We call the difference between those values and the market price "surplus", and there's nothing at all outlandish about this point. When Kirzner calls this a "disequilibrium" he is confusing values with prices. Values never have to be brought into equilibrium with each other. A price establishes an equilibrium of behavior in the context of widely varying valuations that are likely to continue to be widely varying. The only sense in which we can talk about values being brought into equilibrium is in the case of the marginal good sold, but even that isn't really bringing values into (out of) equilibrium (disequilibrium), it's simply a byproduct of the marginal behavior of rational actors. So this was just an abuse of concepts.

Another thing I actively disliked about the talk was the idea that the mainstream relies on perfect competition, fully informed homogenous agents, and zero profits. We teach freshman some very dumb models that look like this, but for Kirzner to indict the mainstream of the profession along these lines is not becoming of a guy that's supposed to be the modern leader of the Austrian school. This is the stuff of internet Austrians.

Kirzner is clearly a very intelligent man, and he was an interesting speaker. I think he's thought more deeply about the market process and the economic function of entrepreneurs than most anyone. If I had the time to work through his writing, I'm sure I'd find a lot of value along these lines. But I think his vision of his own research program is deeply problematic and too easily discounts how interesting and intelligent his fellow economists are.