THE DRIVING FORCE OF THE MARKET FOUNDATIONS OF THE MARKET ECONOMY Edited by Mario J.Rizzo, New York University and Lawrence H.White, University of Georgia A central theme of this series is the importance of understanding and assessing the market economy from a perspective broader than the static economics of perfect competition and Pareto optimality. Such a perspective sees markets as causal processes generated by the preferences, expectations and beliefs of economic agents. The creative acts of entrepreneurship that uncover new information about preferences, prices and technology are central to these processes with respect to their ability to promote the discovery and use of knowledge in society. The market economy consists of a set of institutions that facilitate voluntary cooperation and exchange among individuals. These institutions include the legal and ethical framework as well as more narrowly “economic” patterns of social interaction. Thus the law, legal institutions and cultural or ethical norms, as well as ordinary business practices and monetary phenomena, fall within the analytical domain of the economist. Other titles in the series CAPITAL IN DISEQUILIBRIUM The role of capital in a changing world Peter Lewin PRICES AND KNOWLEDGE A market-process perspective Esteban F.Thomsen KEYNES’ GENERAL THEORY OF INTEREST A reconsideration Fiona C.Maclachlan LAISSEZ-FAIRE BANKING Kevin Dowd EXPECTATIONS AND THE MEANING OF INSTITUTIONS Essays in economics by Ludwig Lachmann Edited by Don Lavoie PERFECT COMPETITION AND THE TRANSFORMATION OF ECONOMICS Frank M.Machovec ENTREPRENEURSHIP AND THE MARKET PROCESS An enquiry into the growth of knowledge David Harper ECONOMICS OF TIME AND IGNORANCE Gerald O’Driscoll and Mario J.Rizzo DYNAMICS OF THE MIXED ECONOMY Toward a theory of interventionism Sanford Ikeda NEOCLASSICAL MICROECONOMIC THEORY The founding Austrian vision A.M.Endres THE CULTURAL FOUNDATIONS OF ECONOMIC DEVELOPMENT Urban female entrepreneurship in Ghana Emily Chamlee-Wright RISK AND BUSINESS CYCLES New and Old Austrian perspectives Tyler Cowen THE DRIVING FORCE OF THE MARKET Essays in Austrian economics Israel M.Kirzner London and New York First published 2000 by Routledge 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Routledge is an imprint of the Taylor & Francis Group This edition published in the Taylor & Francis e-Library, 2003. This collection © 2000 Israel M.Kirzner All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Kirzner, Israel M. The driving force of the market: essays in Austrian economics/ Israel M.Kirzner. p. cm.—(Foundations of the market economy) Includes bibliographical references and index. 1. Austrian school of economists. I. Title. II. Foundations of the market economy series. HB98.K558 2000 330.15´7–dc21 99–056937 ISBN 0-203-46597-0 Master e-book ISBN ISBN 0-203-77421-3 (Adobe eReader Format) ISBN 0-415-22823-9 (Print Edition) B’EZRAS HASHEM CONTENTS Preface ix Acknowledgments xi PART I The character of Austrian economics 1 1 Entrepreneurial discovery and the competitive market process: an Austrian approach 3 2 The subjectivism of Austrian economics 41 3 Subjectivism, freedom and economic law 54 PART II The market process: some normative perspectives 75 4 The limits of the market: the real and the imagined 77 5 The ethics of competition 88 6 The nature of profits: some economic insights and their ethical implications 103 7 Coordination as a criterion for economic “goodness” 132 vii CONTENTS PART III Studies in the Mises—Hayek legacy 149 8 Reflections on the Misesian legacy in economics 151 9 Mises and his understanding of the capitalist system 165 10 Hedgehog or fox? Hayek and the idea of plan-coordination 180 PART IV Studies in the theory of competition and entrepreneurship 203 11 Competition and the market process: some doctrinal milestones 205 12 The driving force of the market: the idea of “competition” in contemporary economic theory and in the Austrian theory of the market process 222 13 Creativity and/or alertness: a reconsideration of the Schumpeterian entrepreneur 239 14 Rationality, entrepreneurship, and economic “imperialism” 258 APPENDICES Three obituaries 273 1 Ludwig von Mises 275 2 Friedrich A.von Hayek 278 3 Ludwig M.Lachmann 286 Index 290 viii PREFACE As the twentieth century draws to a close, the Austrian tradition in economics has, it appears, begun to attract a significantly increased volume of attention. Long thought to be a relic of a once-prominent school that had been swept from the professional stage soon after the end of the first third of the century, Austrian economics has recently enjoyed something of a renaissance. Younger economists are discovering validity in Austrian critiques of mainstream, late- twentieth-century economics; they are finding many of the positive Austrian insights to be of substantial help in achieving economic understanding. This volume collects a bundle of papers written during the past decade, which seek either to explicate the Austrian perspective to economists not yet familiar with it, or to use this perspective substantively to pursue our task of expanding and deepening economic understanding. In particular this writer has consistently sought in these papers to deploy the entrepreneurial emphasis of Austrian economics to illuminate key theoretical issues both in positive and in normative economics. Several papers in this volume focus specifically on the work of Ludwig von Mises and Friedrich Hayek. This is no accident. Each of these Austrian economists had a research and publishing career covering almost seven decades in this century. Most of these years were years in which Mises and Hayek found themselves treated virtually as intellectual outcasts offering unfashionable, indeed, old- fashioned, doctrines, based on a thoroughly outmoded methodology. Modern Austrian economists understand, however, that some of the published work of Mises and of Hayek during the mid-century decades were, while certainly consistent with earlier Austrian (and broadly neoclassical) economics, in fact pathbreaking theoretical contributions which significantly deepened and extended the Austrian economic tradition—in ways which decisively challenged the new ix PREFACE orthodoxy which began to dominate the profession at that very same time. It is only now, at the very end of the century, that these contributions of Mises and Hayek are beginning to be appreciated more widely in the economics profession. It is because so much in this book owes a significant intellectual debt to those contributions, that it has seemed appropriate to include, as an appendix to these papers, obituary remarks contributed by the author on Mises and on Hayek, which draw specific attention to their intellectual legacies in economics. A third obituary contributed by the author is also included in this volume. This is the obituary for Ludwig M.Lachmann. Lachmann’s role in the renaissance of the Austrian tradition was a crucially important one. Although this writer differed with Lachmann for many years on many foundational aspects of modern Austrian economics, he believes that his own understanding of the economic process would have been far poorer and far less satisfactory, had he not had the privilege of crossing intellectual swords over the years with that gracious (but remarkably tenacious) scholar. Many of these papers were presented at Austrian Economics Colloquium sessions at New York University. The author is grateful to all colloquium participants both for their critical and their positive comments on those presentations. He particularly recalls the helpful and critical comments of Peter Boettke, Roger Koppl, Mario Rizzo, Joseph Salerno, and Douglas G.Whitman. The research invested in these papers was supported by funding generously provided by the Sarah Scaife Foundation. The author gratefully acknowledges this support (and also the crucially important role played by a great admirer of both Mises and Hayek, Richard M.Larry). Israel M.Kirzner September, 1999 x ACKNOWLEDGMENTS The author and publishers would like to thank the following for permission to reproduce copyright material in this work: American Economic Association for “Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach” from Journal of Economic Literature, March 1997, XXXV, pp. 60–85. Routledge for “The Subjectivism of Austrian Economics” from G.Meijer (ed.) (1995) New Perspectives on Austrian Economics, Routledge. South African Journal of Economics for “Subjectivism, Freedom and Economic Law” from South African Journal of Economics, 1992, 60(1). Nomos Verlag for “The Limits of the Market: The Real and the Imagined” from W.Möschel, M.E.Streit and U.Witt (eds) (1994) Marktwirtschaft und Rechtsordnung, Nomos. Institut für Weltwirtschaft, Kiel University and Mohr Siebeck for “The Ethics of Competition” from H.Siebert (ed.) (1994) The Ethical Foundations of the Market Economy, J.C.B.Mohr. The University of Chicago Press, Robin A.Cowan and Mario J.Rizzo for “The Nature of Profits: