Monday, July 30, 2012

The Curious Case of Kirzner and Lachmann

Israel Kirzner and Ludwig Lachmann are two very prominent theorists associated with the modern Austrian school of economics. Both are very insightful, creative, and thought-provoking. Both have very distinct, clearly articulated views on the nature of the market process, which are fundamentally opposed to each other. Moreover, as far as I'm concerned, the view of each of them contains elements which are fundamentally opposed to each other as well.

Kirzner, for all his talk about the dynamic and change-oriented nature of the market process, effectively expunges from his analysis the most crucial element of entrepreneurial decision-making - namely, exercising judgment under conditions of uncertainty. Kirznerian entrepreneurs deal with ignorance (synchronic uncertainty), but not with diachronic uncertainty (the "unknown unknowns" of future market conditions), which is the source of both entrepreneurial profits and, equally importantly, entrepreneurial losses. Kirzner's theory of entrepreneurship cannot account for the latter and cannot demonstrate that they are outweighed by the former, and thus fails to establish a logically cogent proof of the existence of a market tendency towards equilibrium.

Lachmann, on the other hand, for all his talk about the heterogeneity, complementarity and multi-specificity of capital, as well as the temporal dimension of the capital structure of production, espouses the view that we live in a "kaleidic" world, where consumer preferences, the supply of consumer and producer goods of various orders, and technological possibilities constantly change, rendering the future essentially unpredictable, which I find incompatible with the possibility of bringing any capital good, let alone a full-fledged capital structure, into existence in the first place. This is because the production and utilization of capital goods presuppose their necessarily time-consuming assembly and successful deployment, which in turn presuppose a requisite, even if minimal, degree of preference stability and correctness of entrepreneurial foresight, neither of which can exist in a genuinely kaleidic world.

In sum, it is interesting to note that in an attempt to address a thoroughly realistic phenomenon of the market process, each of the abovementioned distinguished economic theorists created his own very insightful, but fundamentally unrealistic vision of economic reality, veering too far either in the direction of the neoclassical epistemological Panglossianism or in the direction of the historicist epistemological nihilism, while, perhaps unwittingly, abandoning the original Mengerian research paradigm, focused on, to quote Klein and Foss, "entrepreneurial action under uncertainty, investment, real prices, and the resulting profits and losses".

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