Handbook on Contemporary Austrian Economics

Economics as the study of coordination and exchange 15
and the market order is fundamentally about exchange behavior and the
institutions within which exchanges take place. This proposition frames
the study of economics by focusing our attention on purposeful individual
action, the conditions for interaction and exchange, and the process of discovery
and learning. Specifically, the exchange paradigm draws attention
to the process through which imperfect individuals, with differing interests
and ends, enter into cooperative agreements with others. This paradigm
forces economists to focus on the emergence and continual evolution of a
complex array of relationships facilitating interaction, bargaining, agreements,
and trades. This stands in stark contrast to the allocation paradigm
that is void of any uncertainty, human error, or learning. Within this
context, a solution to the allocation problem emerges through a set of
exogenous variables instead of through an endogenous process.
This chapter proceeds as follows. The next section briefly discusses
the main differences between the allocation paradigm and the exchange
paradigm. Section 2.3 discusses the science of catallactics in relation to the
study of economics. Section 2.4 considers two different notions of "coordination"
used by economists. Section 2.5 considers the importance of institutions
in the exchange paradigm. Section 2.6 concludes with a discussion
of the continuing relevance of the exchange paradigm.
2.2 The aUocation paradigm vs. the exchange paradigm
Meir Kohn (2004) traces the allocation paradigm to the work of Paul
Samuelson and John Hicks.l Samuelson sought to restate economic
theory in terms of mathematics in order to provide clarity and precision
in economic arguments. Hicks sought to recast economics in terms of
"value," which focuses on relative prices and the allocation of resources.
The Walrasian framework, which attempts to analyze all markets simultaneously,
is perhaps the best example of the theory of value. As Kohn
points out, while the goals of Samuelson and Hicks were different, they
complemented each other nicely. Hicks's focus on the theory of value
fitted well with Samuelson's desire to mathematize economics. The ultimate
result of this endeavor was that "adherents of the Hicks-Samuelson
research program came to see the theory of value as being economics; they
saw the two as identical and indistinguishable" (Kohn, 2004, p. 305; italics
original). In other words, as the allocation paradigm took hold, the study
of economics became synonymous with the notion of equilibrium with a
central focus on the allocation of resources. The result was that the issues
of exchange, institutions, and the process of coordination were pushed by
the wayside.
For purposes of clarity, it makes sense to review the key similarity,
as well as the main difference, between the allocation paradigm and the