capitalism

134 Economics, Austrian School of
world of uncertainty. Action is directed at an unknown
future and logically must be; if the future were known, there
could be no way in which human action could affect the outcome.
As Mises puts it: “The uncertainty of the future is
already implied in the very notion of action. That man acts
and that the future is uncertain are by no means two independent
matters. They are only two different modes of
establishing one thing.”
The market process emerges out of the interaction of
human actors. We can conceive of the market process in a
way best explicated by Israel Kirzner in his book The
Meaning of Market Process. There are two sets of variables
in economic life, Kirzner argues. There are the underlying
variables of tastes, technology, and endowment of natural
resources, and there are the induced variables of prices,
profit, and loss. In competitive equilibrium, the induced
variables of the market correspond perfectly to the underlying
variables, such that all resources are utilized in such a
way that the highest value is achieved and the least costly
technologies are employed. When the market is in competitive
equilibrium, it simultaneously realizes production efficiency,
exchange efficiency, and product-mix efficiency. In
short, given the conditions of the world, one could not better
arrange these variables even were an omnipotent being
to do so.
Critics of economics emphasize the highly specific
conditions required for this simultaneous achievement of
efficiency. These critics tend to deny that there is any relationship
among the underlying variables of tastes, technology,
and resource endowment, on the one hand, and the
induced variables of monetary prices, profit, and loss, on
the other hand. Without postulating an intimate relationship
between the underlying and the induced variables, it is
argued, the efficiency properties of the market cannot be
sustained. The Austrians have mediated this debate
between the perfect and imperfect markets by maintaining
that, although induced variables do not perfectly map the
underlying variables, nevertheless they are closely related.
Economics is not a science about exact points, but instead
a science of tendency and direction. A lagged relationship
exists between the two sets of variables. To the extent that
the induced variables of the market do not reflect the underlying
variables, there will exist opportunities for pure profit
for those who move in the direction of narrowing the gaps
between the two. Ironically, if all actors knew of these
opportunities, then no profit would be realized because
profit opportunities that are known to all will be realized by
none. Austrianism postulates that no knowledge is perfectly
known to all. Instead, knowledge is divided among market
participants and must be communicated through the activities
of economic agents and through the institutions of the
market system. In the absence of any change in the underlying
variables, the induced variables of the market will
move in the direction of dovetailing with them. However,
because tastes and technology are constantly changing as
circumstances change, a perfect correspondence of economic
variables and plans is impossible. Nevertheless, economic
analysis is able to inform us on how any state of
affairs outside of perfect correspondence will provide
incentives and information for actors to move in the direction
that would result in such perfection were it not for
intervening changes in the underlying variables.
This emphasis on the mechanics that encourage adaptation
to changing conditions requires not only a different
way to do economic science, but also a different set of economic
arguments that point to the benefits of markets. In
the canonical general equilibrium model, for example, the
plans of economic agents are prereconciled, such that the
market is said to clear. This approach highlights the interconnectedness
of all economic activities and represents one
of the great intellectual achievements in the field of economics
of the 19th and early 20th centuries. Yet the equilibrium
approach tends to preclude from analysis the very
activities that enable markets to emerge and work effectively
to coordinate the plans of economic actors. The most
obvious activity that must be eliminated in equilibrium
analysis is the entrepreneurial discovery of pure economic
profits because economic profits, by definition, are zero
when all aspects of the economy are in equilibrium.
One of the implications of eliminating the entrepreneur as
a central character in economic analysis is that competition is
given a different meaning, as Frank Machovec has pointed
out in his book Perfect Competition and the Transformation
of Economics (1995). The economist’s notion of competition
differs from its common usage. In ordinary parlance, competition
is a term used to connote an activity. Thus, to compete
is used when we wish to refer to two teams vying to win a
game. However, when an economist uses the term, it is more
than likely used as a noun to describe a state of affairs. The
contrast between these two meanings of the term is no more
evident than it was in the antitrust case brought by the Justice
Department against Microsoft. It is hardly the case that only
Austrian economists have supported Microsoft against an
overzealous government. Indeed, perhaps the most able critics
of the government’s case are Stanley Leibowitz and
Stephen Margolis, whose book, Winners, Losers &
Microsoft, argued the case in terms of equilibrium economics.
However, a significant aspect of their analysis turns not
on equilibrium economics, but on human imagination and
entrepreneurial activity.
One of the primary reasons that the Austrians are so sensitive
to these issues in ways that other economists are not
is because of the debates these economists were embroiled
from the 1930s to the 1950s. The Austrian economists, in
particular Mises and Hayek, led the intellectual opposition
to the new models of market socialism and Keynesian
demand management. The Austrians were perceived by
most economists and the general public to have lost both
debates. However, both the market socialists and Keynesian
models failed utterly as guides to enhance prosperity, as